External Compensation

[AndyH]

Employer with final average pay (5 year) DB plan allows employees to work for unrelated employer for one year as an "externship". Employee is paid 1/2 salary by employer and 1/2 salary by temporary employer.

Employer is concerned that "externship" will reduce final average compensation in some cases, would like to credit compensation at full rate in effect prior to "externship", or at full rate counting both 1/2's.

The plan is integrated and it is preferred that the plan remain a safe harbor.

Can this be done as a safe harbor?

If not, can it be done outside of safe harbor rules, and if so, what is tested?

The program would cover almost exclusively NHCEs, but there is a possibility that a HCEs might qualify.

Thanks for any thoughts.

[Everett Moreland]

The imputed compensation rules in 1.414(s)-1 might help. I've not looked at them in any detail.

[mwyatt]

Actually this is a pretty good question with applicability to all types of plans. A good friend of mine was working his way up the ladder in the litigation department of a big law firm. It was common practice there for the associates to spend about 6 months at some point of time as an Assistant District Attorney (both to help out the state and to get some seasoning in court without having to learn the ins and outs of courtroom behavior at the firms' clients expense). Not sure who covered what as far as salary goes, but this may be a more common situation than first contemplated.

[AndyH]

Everett's cite seems to indicate that this can be done as an alternative definition of compensation, subject perhaps to 414(s) testing of some sort, but the fine print is not easy reading.

[Kirk Maldonado]

Are you comfortable that allowing employees of unrelated companies to (continue to) participate in the plan does not raise any multiple employer plan questions?

It seems like it shouldn't be a problem, because it is well-accepted that past service credits don't raise this issue. However, this situation is arguably different, and I must admit that I've never really thought through this issue.

[mbozek]

There used to be a practice called 'secunding' in the financial services industry where employees would be loaned out to an unrelated business for a period of time. The employee's salary & cost of benefits would be paid to his/her employer and the employee would continue to accrue benefits under the various retirement plans while secunded to the other business.

[AndyH]

Kirk, your point is a very good one, and yes, we are concerned about that, and don't know how to get beyond it.

Any elaboration would be welcome.

The regulation raises the standard of whether there is a "Legitimate business purpose" for the treatment of the imputed compensation. In my situation, yes, there absolutely is.

But the fact is it is being paid by an unrelated employer or employers.

[Guest Harry O]

"Seconding" is a common practice for multinationals. The US company transfers the expatriate to a separate US company (part of the controlled group) whose sole business purpose is to provide employment services to overseas affiliates. The overseas affiliate and the US service company enter into a services agreement which has the standard recitals that the expatriates remain employees of the US service company which retains the right to hire, fire, etc. the expatriate. The employee is then "seconded" to the overseas affiliate and the affiliate is billed for the compensation/benefits costs of the expat.

That said, it is all pretty much a fiction since the expat is really a common law employee of the foreign affiliate. Nevertheless, the IRS seems to look the other way and so do most foreign jurisdictions.

P.S. "Second" comes from the British military -- it described a procedure where a military officer was temporarily released from his normal duties for assignment to another unit.

[AndyH]

What is the best way to get an answer to something like this, a PLR or is this an FDL issue?