Luke Bailey

RockyMountain, I think Bob the Swimmer is correct that the plan language would be important, but in general this can be done either way you can do either way. It looks like here they want the employees to have similar terms to the investors, which may make sense, but every deal is somewhat different.

Linda, good point. I think I had heard that too at some point. But that just takes you out of the short-term deferral rule, right, assuming you were in it to begin with, because payment would be a lump sum within the short-term deferral period? As long as you pay only on a c-in-c, then even if you have deferred comp (because indefinite time-frame for c-in-c means no SRF), you would still have 409A-compliant deferred comp, I think.

Depending on rest of document and facts and circumstances, you could take the position that this was meant to say that payment would only be on an actual c-in-c, . I mean, once you're a party, you would have to breach to get out of it. May be grasping at straws, but I would like at all of the facts and circumstances. Was there any disagreement about whether the amount was payable? Was there something else of benefit provided to the service provider? Was the company unable to pay without jeopardizing its existence as a going concern?

We have done similar where client wanted and agree with all above comments. Would add that unless the c-in-c is imminent, you might to try to cap the value at whatever it is when the director leaves. Also, I have heard the argument (but never verified myself) that unless you say that even if a c-in-c has not yet occured, the interest will vest within a life-in-being plus 21 years, the agreement would violate rule against perpetuities. I guess it might in some states. More practically, you might want to provide for vesting at death, at least for some reduced benefit amount, since dealing with the contingent benefit as an asset of estate could get very complicated.

Austin3515, Section 4979 imposes a tax, not a penalty. I don't think there is anything in the Code or regs that would authorize a waiver. However, For VCP, Section 6.09(4) of Rev. Proc. 2019-19 does say: (4) Section 4979. As part of VCP, if a failure results in excess contributions as defined in § 4979(c) or excess aggregate contributions as defined in § 4979(d) under a plan, in appropriate cases, the IRS will not pursue the excise tax under § 4979, for example, where correction is made for any case in which the ADP test was timely performed but, due to reliance on inaccurate data, resulted in an insufficient amount of excess elective deferrals having been distributed to HCEs. The Plan Sponsor, as part of the submission, must request the relief and provide an explanation supporting the request. Looks like you would not fit the stated criteria, but it is discretionary and COVID is a pretty good reason. But it does not appear relief available outside VCP.

I get that, A Shot in the Dark. But what both the Code and regs are at least arguably saying is disregard the stock (if held by an exempt trust) if the 50% test is met by other shareholders, but how can you say the 50% is met here, if you disregard the 80% held by the ESOP, since then the other shareholders only have 20%? Also, I just have a hard time thinking that if one ESOP owns 2 corps, they're not in a controlled group, e.g. for nondiscrimination purposes. But maybe that would make sense, because then you would have a multiple employer plan, and unless the two corps are essentially the same business and only separated for formal reasons, e.g. licensing in different states, it would probably make sense to run as a multiple employer plan. But what would probably make even more sense in that situation would be to have a separate ESOP for each company. Interesting situation.

Yes. And that does not implicate the point that MWeddell was making, but rather just the statutory rule of 411(a)(10)(B). Because in your example you have 3 or more years of service (i.e., you have 5 YOS), the plan can't change the vesting schedule on you, even as to future accruals, without giving you a choice. But in this case the choice (do I want 100% or 80%) is pretty pointless, so the plan would just have in the amendment that all persons with 3 or more years of service are 100% vested, and no choice would be solicited. The point MWeddell was making, I think is this: Suppose in your example you had 2 YOS as of the date the plan is amended. Per the guidance described on IRS website, which goes beyond the words of the Code, if you make it to 3 YOS a year later, you should be fully vested in the portion of your account attributable to your first 2 YOS. But everything accrued after first 2 YOS would be subject to 6-year graded.

OK. I see what you're saying and agree with you. It's a great catch, but your statement "The IRS position is that one can't make a vesting schedule more restrictive for existing participants," is misleadingly overbroad. The example at the url says that as to they participant's accrued benefit as of the date of the amendment, you have to give them the vested percentage they would have under the old schedule, if they complete the required service, even if they are < 3 yos. So you can make the vesting schedule more restrictive for existing participants with < 3 yos, but IRS is saying you need to protect those participants' vesting expectations for their accrued benefit as of the date of the amendment, as well as their actual vested percentage in the accrued benefit.

Why don't you just draft a formula match that says each person's match for the year is, e.g., dollar for dollar up to 4% of comp, less whatever they got in the first quarter. That way everyone ends up with 4% for the year.

In the past I have put provisions in the spinoff documents themselves (e.g., board resolutions and/or plan documents) that state that the existing enrollment and beneficiary designation forms will be assumed by the spun off plan until new are obtained. Never had a problem with that. Needs to be communicated to the participants of course.

MWeddell, not exactly, and of course the issue is the law, not IRS position. The url you reference explains the law, and is consistent with my statement. This is not an issue like partial termination where there are open questions. To be more specific, and consistent with BG5150's comment, IRC sec. 411(a)(10)(A) prohibits any reduction in the vested percentage of any participant's accrued-to-date benefit, while 411(a)(1)(B) protects the vesting expectations as to future accruals only for participants with 3 or more years of service.

Robin Wilson, David Rigby's and ESOP Guy's advice above is practical and may be what you want to do, but to spell out the options, you could say that everyone with 3 or more years of service is 100% existing balance and future contributions and everyone with less than 3 years is 100% vested in what they have, and under the new vesting schedule for new contributions. It's been done.

I don't think you can have parent-sub, because the common owner is a trust, not a corporation. As for brother sister, I don't necessarily think you would need to look through to the beneficiaries, because you have a trust owning 80% of each corporation. Boom. Except... 1563(c)(2) tells you that if 50% of the stock of an entity is owned by 5 or fewer individuals, estates, or trusts, stock owned by an employee benefit plan is "excluded stock" and you disregard it. So based on the statute (or my quick reading of it), you can argue either that because the ESOP owns 80% of each entity, its 80% is disregarded, so there is no CG, or you could argue that if the stock owned by the ESOP is not treated as stock under 1563, you cannot use its ownership to get to the 50% needed to get into 1563(c)(2) to disregard the stock. I think I looked at this 30 years ago and did not find an answer. Maybe there is guidance on it now. Or maybe I'm missing something in the statute. Anyway, this gives you something to think about for the analysis.

I'm not taking a position as to whether that is correct or not, but can you provide a cite for the 1563 analysis?

I agree with Belgarath (and the others who agree with Belgarath). I would certainly want to review the documents, but it seems almost inconceivable that there would be anything in them that would cause the beneficiary designation for his account (which he does not have anymore anyway) to apply to the interest passing to him (or his estate) directly from her account. I am clueless as to what an "RK" vendor is, but you say the plan is not subject to ERISA. Some states have statutes that ignore a beneficiary of a first-to-die spouse if he or she dies within a certain period of time after the first-to-die, so you should probably check that as well. Also, often spouses will have "mirror" wills to the same effect. Under ERISA, this would simply go to his estate and then under his will, trust, or intestate succession.

I would add to the above that the DOL's loan regs came out in the very late 80's, when, rounding up to keep the math simple, the prime rate was around 10%. Adding 1% was a 10% premium, 2% 20%. Today, with a prime (rounding down this time to keep the math simple) of around 3%, 1% is a 33.33% premium. Everything is relative, and I'm thinking 1% is very conservative for our current interest rate environment.

A balanced fund. There is a temptation to think that a generic, old-fashioned balanced fund that does not take age into must violate fiduciary duty, and maybe someone will claim that, and even claim that successfully (some courts will do anything), but how can that be? Before the 404(c) regs in the late 80's, many plans had just one fund, and ERISA really assumes there will be one fund, with 404(c) being the exception that has swallowed the rule. Amending a plan to make it self-directed is at least traditionally viewed as a settlor function, not fiduciary, although if someone wanted to pay me to do it I might try to argue that given the easy of implementing self-direction in today's market, and its obvious advantages for a diverse labor force, the decision not to be a 404(c) plan was fiduciary.

One of the employees should read his/her SPD that says at the back that if they have an issue that employer does not resolve they can contact DOL and provides contact info.

No problem, JOH. The Code is a thing of real beauty, isn't it.

Yeah. Know the feeling, BG5150.

OK. I missed that, Bill. Thanks for correction You aggregate all DC plans of same employer and have just one limit. 1.415(f)(1)(a)(2). 1.415(j) provides rules for aggregating plans of same employer that have different limitation years, but here if there was no contribution for LY of plan 1 ending 4/30/2020, you would get a pass under 1.415(j)(c)(2), so I think you are right, Bill.

AndrewZ, the CPA's explanation as to why this is compensation income and not capital gain (if he or she has one, which I doubt) might be important to the classification of the compensation for purposes of the plan document and Section 415 regs.

Personally, I always recommend a crystal ball.

AlbanyConsultant, when you changed the plan year, I assume (but you should check the amended plan document to be sure) you also changed the limitation year (i.e., you probably did not keep the 4/30 limitation year). That means you created a short limitation year for the last (old) limitation year, preventing overlap. See Treas. Reg. 1.415(j)(d).

Excellent point, Lou S.