Larry Starr

Good questions. The answer is a definite MAYBE. First, it is worth saying that the attorney who was supposed to draft the order is very definitely in a risk for a legitimate malpractice claim by the ex-spouse. Second, depending on which Circuit you live in. Apparently, the Eighth, NInth and Tenth Circuit Court of Appeals allows for QDROs in this circumstance, but it will be a headache that can disappear with a properly drafted QDRO. Lawyers are required! The Third and Fourth circuits continue to reject posthumous nunc pro-tunc orders. https://en.wikipedia.org/wiki/Nunc_pro_tunc It is possible that my listing of the circuits on each side is out of date as my resource is a number of years old and I am not likely to do the research myself at this point. Did I say LAWYERS REQUIRED? If you read the cases, they are VERY MESSY and in all cases you want to shoot the original lawyers for royally f'ing it up! The equity arguments in the cases are always strong, and seems to have spawned a growing number of pro posthumous QDRO cases. Interpleader also requires the plan to incur costs; sometimes its just better to let the parties battle it out until the court issues an order that the plan can then follow. Did I mention that this is now a job for the lawyers???? :-)

You are forgiven my son; go in peace!

With that additional info (why don't people give us all the info the first time).. the answer is obvious. You have a competing claim from two individuals who each are claiming they are entitled. The plan doesn't care who gets paid because it knows it owes the money to someone. That is 100% a job now for lawyers. Either the plan goes interpleader (not a good idea because that usually screws up tax ramifications for whomever wins) or the parties go to court and the plan waits. We have one where the owner die with $1million in his account. Turns out he has an illegitimate child in destitute foreign country. He divorced his wife before he died but did not change his beneficiary designation but the plan has automatic revocation. Ex-spouse is claiming she is the beneficiary; very interesting case since we have tons of lawyers involved. The child has a lawyer in the foreign country and one here representing him. The ex-spouse has a lawyer. The plan has a lawyer. The employer has a lawyer because the guy died and the business is now being run by a receiver. It went to federal court and the parties just agreed to give the ex $300k under agreement and a federal court order. That's what the plan will do, with the balance to the foreign kid via his reps. FASCINATING....

Since I don't do much labor work, I don't know if there are cases on point (though there probably is).This is a job for a competent labor lawyer (I have several) who have an understanding of ERISA or a partner/associate who is an ERISA atty. If it is in litigation, then you should already have counsel involved; I hope you have competent counsel who understand the issues.

I agree that cooperation is needed; but the IRS says it is AUTOMATIC with their language and I say it can't be. They have to SECURE cooperation. For example, assume some minority stock holders in Mr. Y's company. If that company does not take legal action to adopt the plan, they are not part of the plan and no company money can be spent on those benefits without a misallocation of funds to the detriment of the stockholders. I agree that Mr. X SHOULD NOT adopt the plan (but can't? IRS says he can, but they are wrong!). If Mr. X adopts the plan, do the employees of Mr. Y's firm have any enforceable rights to money? Why don't the documents have places for additional members of the controlled group to sign on, and barring that, they are not part and the plan cannot be considered "adopted" by any members of the group. If I were the czar, that's the way I would craft the docs. Just saying that IRS produced a significant problem with their approach and has never (to my knowledge) dealt with these questions. Years ago I brought it up with Jim and Dick of IRS fame in our private Q&A prep meetings in DC; they did not want to even talk about it (I think they understood it was a real issue but they did not cause it). FWIW.

The plan says that the spouse is the beneficiary? Then the spouse is the beneficiary. When he got married, THAT revoked the prior designation. BTW, I think it is absolutely foolish to not have divorce automatically revoke a prior spouse designation. Not revoking is much more likely to cause all kinds of problems. I actually have never seen a plan that has language that keeps a designation in place after divorce, FWIW. In this case, the spouse is legally the beneficiary.

Sorry; wrong. They are not reading it right. The "non-involvement" provision means just that. ABSOLUTELY NO INVOLVEMENT, including as an employee OR (even if not an employee) in providing any management to the business. This is not controversial. Here is the information from Derrin Watson's book Who's The Employer; note condition 2. Q 9:17 What is the noninvolvement exception to spousal attribution? Unless — heaven forbid! — we divorce or are legally separated, I will be deemed to own any stock owned by my wife unless the stock is of a corporation that meets all four of the following conditions: [Code §1563(e)(5); BL 242] I own no stock in that corporation directly. I am not a director or employee and I do not participate in management of the corporation at any time during the year. See Q 12:4 to apply this rule to entities other than corporations. Not more than 50% of the corporation’s gross income (determined for normal income tax purposes) is derived from royalties, rents, dividends, interest, and annuities, as defined in Treas. Reg. §1.1244(c)-1(e)(1)(ii)-(vi). [Treas. Reg. §1.1563-3(b)(5)(iii)] The stock is not subject to restrictions limiting my wife’s right to dispose of the stock which run in my favor or in favor of my children under age 21. Rights of first refusal or the power to block sale are examples of such restrictions. [Treas. Reg. §1.1563-3(b)(5)(ii)(d)] Naturally, these four conditions are the same regardless of the gender of the parties. Example 9.17.1 Emilee owns 100% of Emilee’s Quilts, a corporation which derives all its income from sales of merchandise. Her husband, Steve, owns no stock in the company and there are no restrictions on Emilee’s stock. Steve isn’t an officer, director, employee, or otherwise involved in the company. Steve is not deemed to own the stock. Example 9.17.2 Assume the same facts as Example 9.17.1, except Steve is listed as vice president of the company (so he can sign checks and run the business if Emilee is ill). The noninvolvement exception no longer applies, since Steve is an officer. He is deemed to own 100% of the stock. Of these four conditions, the most problematic is the first, that I cannot own any of the stock directly. What does that mean? It means I do not actually, legally own any stock in the company. No attribution rules apply. If I do not actually own any stock, but I have an option to buy the stock from a third party, I still have no direct ownership in the stock. A question arises regarding community property. Community property ownership is direct ownership. Under the laws of each community property state, if stock is held as community property, each spouse has an equal ownership of the stock. Under certain circumstances, one spouse may have the sole right to manage the stock, but that does not change the fact that both spouses own it. Generally, the title under which the stock is registered or held is irrelevant. [BL 71] Example 9.17.3 John married Mary as John was finishing medical school. He now has a successful incorporated medical practice. All of the stock of the practice is in John’s name. Mary is a prosperous accountant but cannot practice medicine. The couple lives in California, a community property state. Under California law, absent an agreement to the contrary, the stock in John’s professional corporation is community property. If John and Mary divorce, Mary will be entitled to half of the value of the practice. Even without the divorce, she is entitled to half of the income from the practice. It does not matter that she cannot be a shareholder of a medical corporation. Under California law, she has an ownership interest equal to John’s in the practice. This means that both spouses have a direct ownership in community property assets. Their ownership does not come through attribution. It comes by operation of state law, just as any other ownership does. This was the holding of the court in the Aero Industrial case discussed at Q 8:15. Hence, if stock is held as community property, it is impossible for the stock to meet the first condition. Therefore, until there is a legal separation or a divorce [Q 9:16], each spouse is deemed to own 100% of any stock held by either or both of them as community property. Each owns 50% directly, and 50% by spousal attribution. Some practitioners take a different approach, believing community property ownership should not be treated as direct ownership. These practitioners feel that Congress “clearly intended” to create a spousal exception and would not have wanted to make a difference between community and separate property states. The author disagrees. Congress knows how to put community property and separate property jurisdiction on an equal footing and did not do so. [Compare Code §§219(f)(2), 402(e)(4)(D)(iii), 402(g)(5), and 408(g)] The courts have held for years that community ownership is real, direct ownership, sufficient to allow for perhaps the most important tax distinction between separate and community property states, income splitting even without a joint return. Example 9.17.4 Continuing Example 9.17.3, suppose that Mary owns 100% of the stock of her accountancy corporation. If either corporation is held as community property, then the two are a controlled group for ordinary income tax purposes and employee benefit purposes. Because of the community ownership, the noninvolvement exception does not apply. There is a way around this rule for those in community property states. The couple can have their stock treated as separate property. Usually, this is accomplished through an agreement between the parties, signed before or after the marriage. However, such an agreement has serious side effects. If the parties divorce and one corporation is worth more than the other, the agreement will impact what the parties receive in the divorce. The availability of such an agreement is an additional reason community property ownership should be treated as direct ownership. The parties have the ability to put themselves on the same footing as those in separate property states. Why should they have the ability to choose between the consequences of the status of their property? It is either community and attributed, or separate and not attributed assuming the other conditions are met. Truly, entering into such an agreement to clear up a pension problem is a case of the “tail wagging the dog.” Such an agreement should not be considered, even in a friendly situation, unless husband and wife are separately represented by experienced counsel. In some states, such an agreement is potentially invalid after marriage unless each party has separate counsel. Example 9.17.5 Continuing Example 9.17.4, suppose John and Mary enter into a legally binding agreement that each spouse owns the stock in his or her corporation as separate property. As of the date agreement is signed, assuming the other conditions of the noninvolvement exception are met, the two corporations are no longer in a controlled group.

Nonsense; this is not a "problem" when dealing with the underlying question is a normal part of your plan admin. We have hundreds of trustee directed pooled accounts and I firmly believe they are best for participants (but we won't get into that argument here). We make most distributions based on the prior year end value; distributions for terminated employees are made in the year following termination and after the valuation for the year of termination is done. We suggest an interim valuation in two circumstances: 1) if the amount being paid out is a substantial dollar amount or a substantial percentage of the plan assets (and yes, 44% would qualify); or 2) there has been a substantial change in the underlying value of the assets (up or down). The interim val is done AFTER the distribution forms are returned and payment is now appropriate; our interims are usually done and payment made within a couple of days of the interim val. No problem; just one many routine things we have to do to administer plans. In this case, if there has not been a significant change in the underlying assets (and at this point, the S&P 500 from 1/1 until yesterday was less than 1% up), if the trustee elected NOT to do an interim, I don't think he would have any problem justifying that (though we would recommend the interim be done based on our recommendation rules above).

Your information is confusing so it is hard to know the exact answer. It sounds like there is a collective bargaining agreement providing certain benefits. If the benefit it truly tied to a 125 plan in the CBA, then it is up to the employee to elect to participate or not. If the employer's comment is outside of the CBA, then it is not correct that there can be a mandatory 125 contribution. The problem I have with your statement is that it says BOTH that benefit 1 is an employee responsibility through a 125 plan AND that the union has "elected" that benefit 1 is provided to everyone via mandatory employee contribution. It is legal to have a union agreement that makes a certain benefit mandatory and employee paid, but then the language of the agreement must say that. This is one of those cases where an outside labor counsel combined with an ERISA counsel might be needed to hash out what is actually the situation on benefit 1.

John is correct; the SIMPLE document automatically covers all members of a controlled group. But that can be problematic (and maybe illegal). Let's ignore the situation where we have two entities that are 100% owned by the same person. Let's instead look at a situation where we have two businesses A and B. They are owned by two individuals X and Y. X owns 51% of A and 49% of B; Y owns 51% of B and 49% of A. These two entities are controlled as they pass both tests (5 or fewer people own 80% or more; more than 50% is owned identically). Mr X wants a plan for A and sets it up. Mr. Y DOES NOT want a plan for B. MR. X can set up a 401(k) plan for A and it can pass all the nondiscrimination tests (let's just say it excludes HCEs to make the testing easy and obvious). So far, no problem. However, if Mr. X adopts a SIMPLE for A, the plan document says it also covers B, even though the majority owner of B does not adopt the plan and does not want a plan and has not adopted a plan and won't pay for a plan. Under what law can Mr. X force Mr. Y and company B to have a plan? Actually, there isn't any such law. Let's say Mr. X goes ahead and adopts a SIMPLE and Mr. Y refuses to participate. What happens? One argument is that Mr. X must make contributions for Mr. Y's people even though Mr. Y refuses to do so. Two immediate problems: 1) are those amounts deductible (assuming Mr. X is actually willing to make those contributions out of Company A for Company B employees)? 2) How does Mr. X get access to Company B payroll information if Mr. Y does not want to provide it? I have always had a problem with IRS language that automatically covers other business entities that have not actually adopted a plan and might want nothing to do with it. It is quite possibly a constitutional violation IF the IRS were to argue that the plan is a liability of the company that did not adopt it. And it may be a tax problem for the company that did adopt it but has to contribute for employees that are not its employees, as that is not normally a legitimate deduction. An argument is made that the IRS language makes it a legitimate deduction; that is, as noted. arguable. Just something else to bother you when you are trying to go to sleep.......... :-)

Note this from the posting: If an employee does not have the right to elect to receive the amount of unused PTO as income, the dollar equivalent of the unused PTO must be contributed to the plan by the employer as a nonelective contribution. Alternatively, if an employee has the option to receive the amount of unused PTO as a cash payment and the amount is contributed to the plan, the contribution must be made as an elective deferral. In your case, he doesn't have the option of getting it in cash, so it has to be an employer contribution. If the employer only wants to do it for selective employees, the -11(g) works perfectly. If he really want to make this a rule for all employees and has an actual PTO program, he can go this route and amend both the plan and the PTO so this is a regular feature. To me, that just complicates it much more and takes away the employer discretion; it always comes up that "I HATE THIS EMPLOYEE AND DON'T WANT TO GIVE HIM ANYTHING". Using the -11(g) route, we avoid that issue. We do this dozens of times a year, BTW. FWIW.

Austin, you missed my point. Of course -11(g)(2) allows a retroactive amendment to correct minimum coverage etc etc, but that is not an exclusive allowance. It is -11(g)(3) that gives you the CONDITIONS for a corrective amendment, and if you meet all those conditions, the amendment is allowed whether it is for the purpose of meeting the item in -11(g)(2) or not. BTW, this is NOT controversial at all in the industry; it is now routine. So yes, I do an -11g amendment that says "I'm adding $10k to Employee X allocation in addition to the regular allocation he is getting under the terms of the plan" (paraphrasing substantially) and I also have a line that says "it is intended that this amendment be an -11g amendment" (paraphrasing again). Because you want to give the amendment retroactive effect AFTER the end of the plan year, it needs to be an -11g amendment. If you do the amendment prior to the end of the year, it actually gets more complicated because now you do have to tie it in with the regular formula or allocations so that they dovetail and get the results you want. -11(g) is easy solution.

Austin: you surprise me. -11(g) amendments have NOTHING to do with testing! Surprised? You shouldn't be. When you "test" a plan for nondiscrimination and "fail", you actually have no idea if you have REALLY failed. There are hundreds of other combinations of testing parameters that you have not tried and one of them might show a PASS. Thus, the -11g is just one way of proving that, given a certain testing methodology, you can prove that you are non-discriminatory. But what the means is that you can do an -11g amendment FOR ANY PURPOSE YOU WANT and we do them all the time for many other reasons. For example, a client wants to add an extra $10k to the allocation for a particular employee this year; so we do an -11g amendment that does just that. Perfectly OK. You just have to make sure that the -11g amendment meets the requirements of that section of the regs, and it is defacto fine, even if you apply it to a comp to comp PS plan!!!! Now you know our secret. So, would a -11g amendment solve your problem? I think it might.

I started all this when I said there was no reason for a cash balance in a one man plan. I do still stick with that but I have let the prior posters battle it out. Just so it's clear, I agree with Mike Preston 100%, and not because he (and his wife) are dear friends of mine (and my wife), we have traveled together around the world, and he has been my partner in some ventures over the years that were for the benefit of the industry. If I didn't agree with the philosophy, we would argue to the death! But I do agree. The one thing I wanted to comment on is this comment: "You are ignoring the biggest benefit of a CBP for an owner-only plan. The ease of understanding for the single owner." Sorry, but that's just nonsense. They don't understand the DB plan and never will (either the CB or the traditional). All they know is how much money is in the plan and that it's all theirs, and how much they can afford to contribute in any one year (which, as we all know, can wildly fluctuate in many one man plans). Beyond that, they are completely lost and it is our solemn duty to keep them within all the boundaries that are place on DB plans and accumulations and legal restrictions. That's what we do routinely; and that is our most important job here.

Austin, you have hit on one of the very reasons we don't ever use prototypes; all our plans are volume submitter full documents. We don't ever want to be limited except by what is allowed by law. Having said that, and assuming that in no way would this be considered a CODA, and assuming the employees are not HCEs, and assuming that the value of the vacation time added to their normal allocations for a year would not exceed 415, then I would suggest a -11g amendment should work just fine.

Well, this might be one where it is worth asking to speak to the agent's supervisor and have a discussion. Many years ago we had a professional tennis start (name would be known to everyone) and we used an NRA of (as I remember) 35 back when there were NOT the actuarial adjustments for early dates. We got it approved with little trouble after a discussion with higher ups at IRS. If it is really obvious (like a football player or a basketball player) and your age is not obviously unreasonable (like, age 25), then you might be surprised that a conversation with a manager might be an easy solution. And that's because they have probably dealt with the issue before. There are lots of new agents who are just following what it says in "the book" and are not using their heads at all; meanwhile, managers want to get plans OFF their desks (or the desks of their agents) because that is how they are measured. It's worth a shot.

I know of one specifically that got out because he could not continue his business model. Now, he just sells the products and does not provide any administration.

There clearly is a firm involved in servicing this frozen plan since 5500s and Schedule B's have been filed every year and as well as PBGC filings (according to the original posting). The immediate question that comes to mind is why isn't the accountant (or client) asking this question of the existing servicing firm. They know where the skeletons are (usually) if there are any. In most cases, we find it is less expensive for the existing firm to terminate the plan than for us to get involved de novo with this action since we know nothing about its history nor the plan provisions nor the existing frozen benefits. Next question: are you a full service firm with an actuarial operation (the fact that you ask the question you do causes me to ask this question since I would expect an actuarial firm to already know what they would be dealing with)? If you are not, it might be risky to take this on (and again, I would want to know why the existing servicer is not being asked to terminate). Hope this helps.

Unless things have changed drastically from when I developed the cafeteria plan training material for ASPPA, there is no one at IRS who has responsibility for these audits. The only time they seem to happen is when a major company (like, I believe, J.C. Penny) gets audited and then they have specialty auditors who look at everything. I think it was Penny that got in trouble years ago for having an employee pre-tax health insurance (which would be a cafe plan) but never actually adopted the plan. Cost them a fortune as I remember. Luke is right: where you see this as an issue is in the due diligence involved in M&A work more than anywhere else.

xilex: First, you should stop thinking "cash balance" and just think "defined benefit" plan. Cash balance makes very little sense in a one many situation; cash balance is just a particular formula that is used for a defined benefit plan but it has additional complications that a one man situation doesn't need to deal with. The real advantage of a cash balance plan is the ability to put in different amounts for different owners or partners and keep track of those amounts. If you are a solo, that is a non-issue. Plus, a defined benefit plan is NOTHING like the 401(k); you have fixed commitments and required funding that you do not have with your 401(k). If you income is variable from year to year, you can easily get into difficult situations that require funding when you don't have the funds to meet the funding obligation. This is not DIY plan design. You absolutely need to talk with someone who knows this business inside and out (that isn't Fidelity). And while a lot of people may not say it (because they always like to set up additional plans), yes, I would say you are too young to effectively utilize a defined benet at this point in your career.

The EOB reference (I didn't check it) appears to be a statement of what is actually an obvious situation (and the court agreed) If your plan is NOT QUALIFIED (for whatever reason), then you don't have the protection that a qualified plan would bring. Simple. And, if you roll that money over to an IRA but the plan was not qualified, you now have an excess contribution to an IRA and also have no bankruptcy protection. All of which makes perfect sense.

And that's as it should be..... EXCELLENT!

THERE IS NO SUCH THING AS A SOLO 401(K) PLAN. Now for the statement that will floor many of you: there is also NO SUCH THING AS A 401(K) PLAN. All 401(k) plans are simply profit sharing plans (by law) that have a feature called a Cash or Deferred Option. Guess where you find the CODA in the Internal Revenue Code? Give yourself a pat on the head if you guessed IRC Section 401(k)! The "solo 401(k)" is a marketing gimmick; usually with a disabled plan document that has the wrong provisions in it and will immediately blow up if the client actually hires someone. Of course, the client thinks that employee isn't eligible because.. .wait for it.. "IT'S A SOLO 401(K) so only I am in it!" You don't amend a profit sharing plan into a 401(k) plan; you amend the profit sharing to ADD a 401(k) feature (a CODA). OK; off the soapbox......

And, there is NO difference with regard to the protection because there is no such thing as a "solo 401(k) plan". It is a marketing gimmick; I dare you to find it in the code. It is simply a 401(k) plan that does not have (YET) any rank in file employees. The shame of it is that those entities that market these with "bare bone documents" have no clue what happens when the employer actually does hire someone and they have to become eligible but the deficient plan document no longer works and just screws up the client.

Years ago, bankruptcy was an issue for assets moved into an IRA; it is no longer. Basically, the same protection is available to the assets, whether in a qualified plan or rolled over to an IRA. It is just that simple now.