Linda Wilkins

Whenever a plan terminates, it must be amended pre-termination to reflect all required amendments due to statutory or regulatory changes, as well as amended to reflect its termination. This puts the plan drafter in a bit of a bind because there may be no "required amendments" list and no sample plan document language provided by the IRS (yet), so you would consult with counsel to determine what amendments are needed. It would be helpful if prototype sponsors could provide an amendment for the SECURE Act (and hardship withdrawal changes if implemented) for plans terminating this year. Good luck!

I think your question about whether there is a distributable event is addressed in the definition of a severance from employment - see Code section 401(k)(2)(B)(i)(1). This discussion is from IRS Notice 2002-4: Under Code § 401(k)(2)(B)(i)(I), as amended by § 646 of EGTRRA, amounts attributable to elective contributions may be distributed upon the employee’s severance from employment with the employer maintaining the plan. For this purpose, the employer includes all corporations and other entities treated as the same employer under Code § 414(b), (c), (m), or (o). An employee does not have a severance from employment if, in connection with a change of employment, the employee’s new employer maintains the section 401(k) plan with respect to the employee (for example, by assuming sponsorship of the plan or by accepting a transfer of plan assets and liabilities (within the meaning of Code § 414(l)) with respect to the employee). Thus, for example, if all employees of a controlled group of corporations (within the meaning of § 414(b)) are covered by a section 401(k) plan and a transaction occurs such that one subsidiary corporation in the group is no longer aggregated with other members in the group under § 414(b), (c), (m), or (o), and in connection with the transaction no assets are transferred from the section 401(k) plan to a plan maintained by the former subsidiary corporation, then, participants in the section 401(k) plan who continue employment with the subsidiary corporation will have a severance from employment with the employer maintaining the section 401(k) plan and may receive a distribution of amounts attributable to elective contributions from that plan. However, if the subsidiary corporation maintained a section 401(k) plan for its employees before the transaction and continues to maintain the section 401(k) plan following the transaction, the employees who continue employment with the subsidiary do not have a severance from employment with the employer maintaining the plan. As you stated, the Plan document doesn't mandate that there be a spin-off/transfer of assets to a new plan maintained by the employer leaving the controlled group. However, the Plan document includes the severance from employment definition. If the employers agree on a spin-off/transfer, then it is not a distributable event when the subsidiary (?) leaves the controlled group. Otherwise it is.

The issue is whether the plan has in fact terminated. IRS website provides that in a plan termination, "All assets are distributed as soon as administratively feasible, generally within one year after the date of plan termination." https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-termination

I agree with XTitan that the addition of a new payment event for existing accounts would have to satisfy the 1 year/5 year rule on subsequent changes to the time of payment. This means that the new payment event cannot apply for 12 months. It also means that you new payment date must defer the payment for a period of at least 5 years from the date it would otherwise have been paid. My question is, how can you satisfy that rule for a payment that is only made upon Separation from service, Disability, Death, Change in control ?

I believe that the employee who is the owner of the policy (assuming this is a collateral assignment arrangement) would be taxed. Although the tax exempt employer receives the funds, there is a loan on the policy and the employee/owner is using the distribution from the policy to repay the loan. Have you checked whether the MEC is grandfathered? Issued before June 21, 1988?

For anyone interested in looking at case law which contradicts this IRS position (a position that I believe is contrary to the statute), I found a Baker Botts article with a footnote citing Borst v. Chevron 36 F3d 1308, Borda v. Hardy, Lewis Pollard & Page, 138 F3d 1062, and Artz v. Fairbanks, 112 F.R.D. 59.

In connection with the spin-off, the employees could negotiate with B to require that it create a rabbi trust and fund it at least with the amount of their elective deferral accounts.

I have a different but related question for the group. Is an Alternate Payee’s right to get an immediate distribution under a QDRO a protected benefit (i.e., could a plan be amended to provide for payment at the earliest retirement age for QDROS)?

On Larry Starr's comment about making it automatic in most cases, just disagree and think it should always be pointed out that it is not required. I once got a new public company client solely because the HR director was steamed that legal counsel had not pointed out that it was optional.

In choosing between the IRA and leaving the money in a qualified plan (or rolling to a new business' qualified plan), I think significant consideration should be given to the risk of prohibited transactions where investments are made in "alternative" (non-publicly traded) investments. A PT in an IRA is a nuclear bomb (see the Ellis decision, T.C. Memo. 2013-245 (2013)), whereas it is a penalty tax/disgorgement issue for a qualified plan. Qualified plans can also invest in "qualifying employer securities" with no similar exemption for IRAs. In bankruptcy, you can be sure that creditors will be examining every IRA investment to find any PTs they can.

I'm trying to wrap my head around this as well. If it is a stock option awarded at the FMV exercise price at date of grant, it is an "exempt stock right" not subject to 409A. It is not a short-term deferral. The option is exercisable at will once it is vested, so there is no "payment event" governing the option. The question does not make sense.

Although this will not help in your situation, I recommend that a Plan provide a definition of separation from service that utilizes a "less than 50%" of the average level of services in the prior 36 months, as is permitted. This would allow your situation to constitute a separation. I have a question about how you determined a 25% to 35% level of hours worked for an executive, obviously not an hourly-paid employee. Did you ask the executive how much time he spends on company business (which could be, for example, 80 hours per week)? I have suggested being conservative and limiting the hours worked to 40.

If it is a substitution, the new LLC could still offer an equity program so long as it "mirrored" the payout terms for the phantom shares, and there would be no prohibited acceleration or deferral of payment. In an LLC, I'd typically use profits interests instead of options, but I don't see how those could be structured in the operating agreement to meet the payout timing requirements. I'd use restricted LLC units instead.

No one has mentioned the rules of code section 411(a)(10) regarding amendments to vesting schedules. The amendment could not apply to any participant with 3 or more years of service unless they elect it. That means as to both current and future accrued benefits.

In 2004, the JCEB discussion with the IRS addressed this topic. (Perhaps you submitted the question?) The IRS position was that it would violate the "employer securities" provisions of §409(l) with respect to these employees because Notice 2004-11 does not list 409(l) as treating leased employees as employees of the sponsor for this purpose. (The Notice specifies which sections of the Code would apply by treating the recipient employer as the employer, and it does not list 409(l).) I am curious whether there is any more recent or published guidance on this question.

The IRS provides a "fix it" guide for SARSEPs which describes the safe harbor correction for failure to cover eligible employees (should be equally applicable to a SEP), as follows: Revenue Procedure 2016-51 provides different safe harbor methods for correcting improperly excluded eligible employees. For SARSEPs, the plan sponsor must generally make corrective employer contributions because the plan assets reside in IRAs. This contribution method requires the employer to make a corrective contribution to the excluded employees’ SEP-IRAs. The corrective contribution is calculated using each excluded employee’s compensation. Adjust this amount for earnings through the date of correction. This fix-it guide is at https://www.irs.gov/retirement-plans/sarsep-fix-it-guide-eligible-employees-were-excluded-from-participating-in-the-plan

Chip Brown, I agree with your comment, this will typically be the case in a well drafted Plan that participants whose accounts were forfeited (including 0% vested deemed cash-outs) would not have to be vested in a subsequent partial plan termination. The original question dealt with this scenario where the terminated participant had already taken a distribution so I think Chip's comment answers the question.