USERRA - a little OT

[mwyatt]

Figured this was the best place for some help here, so I ask my fellow actuaries for some advise. Unfortunately, what we all considered a hypothetical is now emerging as a reality to many participants in plans across the country.

I'm running a plain-Jane profit sharing plan with a 1,000 hour/last day of year requirement for contribution (although I think that the questions posed will also apply to accruals in DB plans).

Situation is that the sponsor had two participants who were called up for service during the last plan year, although both were back by plan year end. One completed just under 1,000 HoS, the other over 1,000.

My questions, after reading USERRA:

1) Think that we need to project these participants as if they were hypothetically there for full period of time (so both get contribution for year).

2) Compensation used? Do I annualize salaries actually earned as if they were there for full year? These are hourly workers. Would taking last hourly rate multiplied by 2080 be a reasonable amount to use?

3) Vesting service (1,000 Hour requirement): For first participant, if I do treat as if working over 1,000 HoS for contribution, do I also impute this service for vesting service?

4) In my situation, length of deployment occurred during plan year. For future situations, what if they came back after plan year end. My cursory reading of USERRA seems to imply that makeup contributions are made in plan year in which the participant returns to employer (so say if deployed in 2002, but comes back in 2003, makeup contribution for 2002 is taken into account in 2003, or do I make this in 2002?).

Thanks for any help (and I guess these questions apply for benefit accruals in a DB plan also) as I just want to do the right thing in this situation.

[mbozek]

I thought the purpose of the act was to restore the military personnel to the benefits they would have received had they not be called for military duty. Why not project the comp the employees would have received during their absence along with any raise they were entitled to.

[mwyatt]

That's what we're trying to do. I guess without resorting to arcane IRS mumbo jumbo, what one should do after further research is put the affected person in the same position as if they had never been called up. Am talking to HR to figure out a reasonable figure for the participants based on their historical hours worked (more than 2080/year) and factoring in any raises during the year. I'm assuming that erring on the side of too much is probably a better result than too little in the eyes of everyone involved.

My only thought is what if leave overlaps a plan year end. would you allocate imputed contribution at plan year end while they are still out or do you wait for them to return to employment and then bump up additions at following plan year end (and I would presume earnings/losses). Fortunately in my situation, both participants were back by plan year end, but just wanted to know what we should do in that hypothetical case.

Obviously the DB side is much easier to deal with as you are just talking about accrued benefit calcs, but the DC side can get a little messy since you're dealing with allocated monies as you go along.

[QDROphile]

Subject to plan terms, which should not be to the contrary, contributions are not made for a year if the person has not returned. For any number of reasons the person might not return and no contribution would be required (and for a highly compensated person might not be permitted). The contribution for a prior year is made after the person returns, but is attributed for all compliance purposes to the prior year. Earnings need not be imputed.

401(k) plans provide some wrinkles because the deferral amount must actually be delivered within the permissible period, and the make up match depends on the make up deferral. We don't have guidance on where the make up deferral amounts can come from.

I think certain leveraged ESOPs present problems because allocations are made according to basis and it may be impossible to put the returning employee in the same position with a subsequent allocation unless plan terms get tortured or more cost is incurred to provide the benefit later than if allocation had been done with the employee there for the year.

[Kirk Maldonado]

I disagree with QDROphile.

Allocations from the suspense account of a leveraged ESOP are made in terms of number of shares, not basis or even fair market value.

Thus, the returning veteran gets the same number of shares that he or she would have received had the participant not gone on the military leave, regardless of whether the stock has appreciated or depreciated during the interim.

[QDROphile]

Leveraged ESOP allocations are made according to units (shares) in some proportion to loan repayment. The number of units is established relative to the loan at the time the shares are allocated, so the allocations are essentially made with respect to basis (the cost of the shares) and not the value of the shares at the time of allocation. A certain loan payment will release a certain number of shares for allocation. Generally, the same loan amount payment will release the same amount of shares (and the same basis) each time. In the case of the principal only method, the same amount of principal payment releases the same amount of shares (and the same basis).

The point is that what gets released with a loan payment of a certain dollar amount is NOT the value of the share. So the question under USERRA is whether the employer contribution in DOLLARs must be the same as if the participant were employed in some prior year or the number of SHARES allocated to the participant must be the same as if the participant. Making up the same number of shares could be more or less expensive in a later year.

You say the the measure is shares. In all other types of DC plans, the measure is contribution dollars and consequences of investment earnings or loss is not taken into account. If the measure is shares, investment earnings are effectively taken into account. I am assuming that the shares cannot be obtained from the ESOP suspense account because the allocation terms do not allow suspense shares to be allocated for a prior year. I have seen no authority one way or another. Please share the reason for your conclusion that the measure for ESOPs is equal shares instead of equal contribution.

[Kirk Maldonado]

I never said anything about equal shares.

I only said that allocations from the suspense account must be in terms of the number of shares, not in dollar amounts, based on the following authorities.

Treasury Regulation Section 54.4975-11 provides in relevant part as follows:

As of the end of each plan year, the ESOP must consistently allocate to the participants' accounts non-monetary units representing participants' interests in assets withdrawn from the suspense account.

Treasury Regulation Section 54.4975-7 provides in relevant part as follows:

For each plan year during the duration of the loan, the number of securities released must equal the number of encumbered securities held immediately before release for the current plan year multiplied by a fraction * * * If collateral includes more than one class of securities, the number of securities of each class to be released for a plan year must be determined by applying the same fraction to each class.

[QDROphile]

You said that the returning participant would get the same number of shares as the participant would have received had the participnat not gone to military service. So the make up is the number of shares equal to the number that would have been allocated (equal shares). Another alternative is the make-up of the value of the contribution that the participant missed (equal value). Pardon my shortcut terminology. Why do you think an equal number of shares is the correct altnernative?

[Kirk Maldonado]

Because the ESOP regulations focus upon the number of shares, not the dollar value.

However, the IRS has informally taken the position with respect to the repayment of partially vested distributions that the amount that is restored is the dollar value; not the number of shares. While not entirely on point, it does support your position.

Until there is authoritative guidance, I think that either position should be permissible.

[Guest jwill]

I think QDROphile and Kirk Maldonado both got off track somewhat. A leveraged ESOP has a finite number of share and a release formula specifiying how many shares to release each year. Suppose a called up participant is not there at the plan year end, but returns in the next plan year. If you wait until the following plan year to allocate his/her shares, where are they going to come from?

What about including the person in the first year allocation, but maintining the shares in a non vested suspense until they return. Since the regs are silent about ESOPs do you think any reasonable action would be acceptable?

[QDROphile]

The discussion was not off track. It simply did not discuss that aspect of the problems, and the multiplicity of the problems was the reason for the mention in my first post. Your point is well taken. Some ESOPs are intended to be a closed system. All available shares are allocated each year within the ESOP and the Company does not intend to issue additional shares for extraordinary contributions. Unless you can live with tortured plan terms, you can't squeeze any make up shares out of the leveraged suspense account because that would reduce the expected allocation to others for the year. Maybe you can't partially prepay the loan to cause more shares to be released because of the loan terms. If you can prepay, the earlier discussion addresses how you measure -- by shares allocated or by make up contribution. But then you must have adequate allocation terms to give the extra shares to the returning participant.

The problem with providing in the plan for a suspense account to capture shares for future allocation is that it offends most general principles governing allocations. Military service can extend for more than a year, which is outside normal suspense tolerance. How will you allocate if the particpant does not return? For the year of release from the leveraged suspense account or the year the make up rights expire? For which year do you count the allocation for testing and limitation purposes?

We need official guidance and until we have it the solutions are uncomfortable.