Linda Wilkins

I would check on Plan language absolving the Plan Administrator from any duty to take any actions as described so long as it acts reasonably and not arbitrarily or capriciously. Continental Airlines tried to investigate a bunch of Texas pilots getting sham divorces (in order to access their DB benefits through QDROs and then immediately re-marry). In a 2011 decision, the Fifth US Court of Appeals ruled that the administrator COULD NOT consider or investigate why employees get divorced or whether the divorce was genuine. See https://www.nbcdfw.com/news/local/pilots-win-sham-divorce-case-against-continental/2121509/ Even assuming that an administrator even has this authority, I would not want to put an administrator through intrusive activities outside the scope of the Plan document to confirm a beneficiary designation when it has never sought such evidentiary proof previously.

"would buyback of the shares held in the plan by the plan sponsor be an option?" BZorc, be very careful of this alternative. I'm assuming the plan is a KSOP, in order to permit the fiduciaries to offer an un-diversified investment fund. Under the ESOP regulations, a purchase by the plan sponsor (a disqualified person) from the plan is required to be priced at the FMV as of the date of the transaction, not at the price determined by an annual valuation. Otherwise it is a prohibited transaction. jsample's approach of having the employer contribute cash to retire the shares upon a distribution is safe. This scenario is described in an NCEO publication on ESOPs called "Don't Do That!"

Sometimes legal counsel drafting the client's plan must educate the client whether a client's idea of "time saving" approaches really makes sense. Here I don't think it does.

I agree with all of the comments in the scenario where the funds remain in the retirement plan. However, if the funds are transferred to an inherited IRA (for any beneficiary other than the spouse), I think the creditor may prevail. Clark v. Rameker (U.S. 2014) found that inherited IRAs are not considered “retirement funds” as defined in 11 U.S.C. 522(b)(3)(C) of the Bankruptcy Code. Therefore, inherited IRAs do not have the same protection from creditor claims as other retirement accounts.

Beiser, the options were exercised in exchange for restricted stock subject to Code section 83(b). The options weren't "modified" before exercise so I don't see any impact of 424(h). If the executive is to obtain additional stock compensation, rather than grant more early exercisable options (with a new FMV exercise price), I'd recommend granting new shares of restricted stock (although the 83(b) election may be cost prohibitive). Your idea to accelerated vest the existing restricted shares (or improve the vesting schedule) is feasible although it wouldn't increase the overall equity compensation for the executive.

I think this should be drafted as an incentive or bonus plan. It's not an ERISA pension plan because it does not "systematically defer" payouts until termination of covered employment which is the ERISA pension plan definition under section 3(2)(A). There's a good blog on this topic at https://www.winston.com/en/executive-compensation-blog/guest-blog-is-your-bonus-plan-subject-to-erisa.html Analyzing this as a deferred compensation arrangement or bonus plan, it fails to comply with Code section 409A because it allows payouts upon request, rather than fixing payment dates by reference to events (separation from service or change in control) or fixed dates.

I agree, Carol, that this is not the kind of plan design that 409A was intended to regulate. Generally, 409A cares only about the timing of payments and not the amount of the payments. So I think that EBECatty's bullet point 2 is the better analysis. His example assumes that you pay the benefit as an annual amount on 12/31 each year. If the plan so provides, that seems workable within 409A. Even if the payments are to be made "during the calendar year" without specifying a date within that year, I think that would meet the timing requirements of 409A.

IMHO, this is an operational error (failure to follow the plan document) and the sponsor should investigate correction through EPCRS or risks plan disqualification. Sounds like it may not be eligible for self-correction because of how long this error occurred. It would be corrected by reallocating all forfeitures in the plan’s forfeiture suspense account to any participants who should have received them had the forfeitures been allocated on a timely basis. In VCP, the plan sponsor could also ask for correction through a PS allocation to current employees.

Having reviewed the IRS correction Notice 2008-113 recently for a client, my recollection is that, if the participant is an "insider," then the amount that should have been distributed in a prior year (even if corrected in the very next year) will incur the 20% penalty tax (but not the premium tax, and the entire plan benefit is not deemed taxable when vested). Also the amount that should have been distributed is taxable for the year in which it should have been distributed, not the year paid. Part VII.D. of the Notice applies, I believe. Please check me on this! I think EBECatty's suggestion on how you calculate his payouts sounds like a reasonable reading of the plan provisions.

His 2021 season salary is payable in a lump sum in November 2021. (Presumably this is after the season is over.) This creates a short-term deferral arrangement (not 409A deferred compensation), because it is paid no later than November of the year it is earned and vested However, Bauer can opt out of the contract after the season ends (anytime until the November payment date??), and if he does, $20M of his salary is deferred and paid in $2M installments over the period 2031-2040. This creates 409A deferred compensation. You cannot have an elective deferral of a short-term deferral arrangement unless you comply with the one year/five year rule. Here Bauer is not required to make the election more than 1 year before the salary is otherwise payable. (The 5-year rule is met, because he defers the initial installment for at least 5 years, until 2031.) I expect there may be more to this contract than we know, I'm pretty sure his tax advisors would not design a non-compliant deferred compensation arrangement! If anyone finds out more about it, please post!

I have two questions. First, ESOPMomma states that individually designed ESOPS MUST be amended to allow diversification elections to be made until after the updated valuation is known. The cited LRM-5 states that the plan "MAY provide" an extension until 90 days after the date that the value of the shares is provided to the participant. Am I missing something? Second, the post assumes that participants who are eligible to diversify are entitled to a notice. That is not in the Code or any published guidance that I have located. What is the authority for this?

I know that the ABA Employee Benefits Committee (ESOP subcommittee) worked extensively with the Treasury on the development of the volume submitter plan document, so I expect it to have a good chance of "fitting" most custom plan designs. (I think Erin Turley at McDermott Will worked on this.) I have my fingers crossed.

The IRS will begin approving prototype and volume submitter ESOP plans shortly, and many sponsor will want to consider adopting one so that they can have an updated current D letter. Does anyone know whether these plans will be approved for adoption and which firms will be sponsoring volume submitter ESOPs?

I understand that the IRS has expressed the opinion that a COC is NOT a substantial risk of forfeiture unless you condition that it must occur within a fixed period such as 5 years. This is on the theory that, at some point in the indefinite future, it is substantially certain that a company will undergo a COC. This is NOT a concern, for example, if the vesting condition is an IPO. It is not substantially certain that every company will have an IPO. Don't see any problem with this director compensation being deductible by the company.

Luke, your answer brought to mind a question. Many award agreements that I review include the statement that the payment upon exercise or vesting will not be counted as compensation for purposes of benefit plans. Period. I would think that language would be ineffective because it would be "trumped" by the typical safe harbor W-2 compensation definition in the 401(k) plan. What say you?

Thank you Kevin. I see that none of these have been released. Can you tell me when they will be available for adopting employers?

Announcement 2020-7 (PDF) opened the 3rd cycle submission period for employers with eligible defined contribution (DC) plans to apply for a determination letter using Form 5307 starting August 1, 2020, through July 31, 2022. The 3rd DC cycle includes Employee Stock Ownership Plans (ESOPs) for the first time. I have a question: where can I find a sponsor of a prototype ESOP document? I have not seen any offered but I believe there must be some out there. Appreciate any recommendations.

I agree with Luke and I'm not a CPA either. However, the NASPP newsletter (Barbara Baska) has a good example of how accounting works if a partially vested option upon termination of employment is accelerated and becomes fully vested. It's not treated a a new grant as to the portion of the award that has already vested. It is a new grant as to the newly vested portion. Here's her example: "Sa that an employee terminates while holding an award to purchase 10,000 shares that is 75% vested, and the company modifies the terms of the award to accelerate vesting on the remaining 2,500 unvested shares. Further assume that the fair value of the award at grant was $10 per share, and the fair value at the time the modification occurs is $16 per share. The fair value of the vested portion of the option is $75,000 ($10 per share multiplied by 7,500 shares); this expense has already been recorded and is not reversed. The original fair value of the unvested/accelerated portion of the option was $25,000 ($10 per share multiplied by 2,500 shares). Let’s say that the termination occurs after one-fifth of the last vesting period has elapsed, so that the company has already recognized $5,000 of expense for this tranche (assuming straight-line accrual and that the company accounts for forfeitures as they occur). The $5,000 of expense that has already been recognized is reversed and the remaining $20,000 of expense is never recognized. The fair value of the unvested/accelerated portion of the option after the acceleration is $40,000 ($16 per share multiplied by 2,500 shares); this amount is recorded as expense in the period in which the acceleration occurs.

We'd wondered how long the IRS is taking during this pandemic to process VCP applications, and thought others might be interested. Here is data from one of ours: January 23, 2019 submitted June 11, 2019 acknowledgement from IRS April 17, 2019 IRS requests additional information May 18, 2019 We respond May 19, 2020 VCP compliance statement (1 year after last contact)

In a similar situation, we worked with a client to file anonymously with the IRS program to permit it to disqualify the Plan. It had never been administered properly (despite the TPA's instructions) and the client did not want to pay for correcting all of the errors. We got the IRS to approve the application, and the non-HCE participants in the Plan were permitted to rollover their accounts to IRAs so they were not harmed (although it appears in this scenario that perhaps there are no non-HCEs with accounts. I agree that an ERISA attorney should be involved to maintain attorney-client privilege.

There is a lot of information on the IRS website regarding orphaned plans. In one case, which involved a Chapter 7 where no one remained with knowledge of the Plan (not an orphan plan), the 5500 was filed late and without an audit. Significant penalties were proposed, and the Plan appealed to the Office of the Chief Accountant at the DOL. Ultimately we were able to get the penalties waived as well as the audit requirement. Had the chapter 7 liquidation concluded before the plan was terminated, it would have fallen into the IRS and DOL definitions of an orphan plan. In KHN's case, the Plan fiduciaries continue to have responsibility for the Plan and could be sued for breach of that responsibility by a participant or the DOL.

Response time seems to be all over the board. We submitted a VCP in January 2019, and mid-April 2020, we just had a reviewer assigned to the file contact us. It is a late amender, very straightforward matter.

Geez Louise guys. Can't we all be civil to each other? Sure many of us are going stir crazy and driving our spouses crazy. But it's time to be patient and compassionate. Do your best!

We are dealing with this issue now, and a DOL investigator arrives to review the Plan (and timing of deposits) in 30 days. The conversion data was imperfect, the new TPA would not accept deferrals for a period of 3 months. The client was unaware of how to handle this, or that it was a problem because the TPA did not advise them, or even suggest that they consult ERISA counsel. We hoped there would be an argument that the deferrals were segregated to an account titled in the name of the Plan's trust, but they were not. (The Plan auditors were willing to include the segregated account in the audit of trust funds if they had been.) When the late deposits were made to the trust, the client credited earnings on the late deposits at the highest rate of return of any investment option. (The client was not eligible to use the DOL's VFCP program because it had been notified of a DOL investigation.) The TPA is preparing Forms 5330 to report the PT.

This employer appears to be thinking that the "timely mailing is considered timely payment" rule applies to the funding of withheld 401(k) plan contributions to the trust. It definitely does not, check out the statute at U.S. Code section 7502. It only applies to a return or document or payment under the internal revenue laws. Here, the employer is acting as a fiduciary handling plan funds, and has a duty not to use them to benefit itself (i.e., borrowing from the plan). I agree with all of the other recommendations. If you use a check, you should be able to produce a paper trail to prove deposit dates just as well as you can with wires or ACH deposits.