Q under the new 4520/Corporate Tax Bill

[JDuns]

I had a few questions about the JOBS/AJCA bills.

(1) If an employer maintains more than one account based qualified plan and only allows participant direction on some of them, do you think that the investment options for the non-qualified plans are limited to the shortest list for all of the account based plans or the shortest list for participant directed plans?

(2) If an employer has a fiscal year that starts in either the last week of December or the first week of January (e.g., ending on the sunday closest to 12/31) and adopts a bonus plan based on that fiscal year, for a bonus earned for a fiscal year that starts in December year 1 and would otherwise pays out in year 3, must the deferral election be made (a) prior to 12/31 of year 0 or (b) prior to the start of the fiscal year in year 1.

(3) If distribution elections may only be changed if the change is not effective for 12 months and defers payment for at least 5 years, may a plan permit a change to the form of payment that does not push out the payment commencement date. For example, if a participant has elected quarterly installments over 10 years, may he change his election (more than a year in advance) to elect either a lump sum or installments commencing at the same time but paid over 20 years.

(4) May a plan continue to provide for accelerated payout on plan termination?

(5) May an employee who is promoted into an eligible classification during the year still elect to defer a bonus attirbutable to service both before and after the date of promotion if the election is made within 30 days of becoming eligible?

[JDuns]

Here is my understanding of the answers based on the conference version as passed by the house this morning:

1 - non-issue since investment option provision dropped in conference

2 - since election must be made prior to participant's fiscal year start and more than 6 months before the end of the bonus service period, election must be made by 12/31 of year 1.

3 - still open but probably not able to accelerate payment (even though it would accelerate the taxation).

4 - still open.

5 - despite 30 day rule on initial eligiblity, since deferral of bonus subject to 6 month rule and treasury directed to issue guidance to prevent deferral if "timing of such election would be inconsistent with the purposes of the provision", should deferral only be permitted if promoted before 7/1 for bonuses calculated on a calendar year's performance?

All thoughts would be appreciated.

[mbozek]

Cant the restrictions on getting access to plan benefits on termination/hardship be avoided by creating bridge loans for key employee plan participants who are not subject to Sarbanes-Oxley loan restrictions which will be repaid when payments commence from the NQDC plans?

Employee would have imputed income to the extent the interest rate on loan is below AFR but ee will have access to funds.

[Guest Harry O]

I'd think you would need to be extremely careful how you paper such a "loan". It doesn't seem out of the question that the whole thing could be collapsed and treated as, in effect, an advance payment of deferred compensation.

[mbozek]

Why would a bona fide loan be an advance payment of DC? Allowing a loan would not be inconsistent with the intent of Section 885 to prevent executives from withdrawing funds from a corp shortly before it declares bankruptcy. An executive who takes out a loan from a corp shortly before it declares bankruptcy not only will lose his deferred comp benefits but will be a debtor to the corp for the amount of the loan.

[GBurns]

While the executive would become a debtor of the bankrupt corp, the executive would still be better off than if no loan was taken. It seems a clear case of unjust enrichment and even possibly with the use of insider knowledge and special priviliges. Definitely a SOX type and 885 issue.

From a substance over form perspective, making such a loan "close" to a bankruptcy filing or reasonable knowledge of the intent or posibility of such a filing raises many questions including those of fiduciary responsibility by all whether senior employees, officers, approving Directors or Plan Trustee etc.

What would happen if the Bankruptcy Court in looking back determines that the loan was an improper transfer or a transfer made during the recoverable period? A writ of replevin?

What happens is a creditor brings up the issue of the loan being a fraudulent transfer?

From the IRS perspective, I would expect the attitude that such loans were lacking in business purpose and were intended to evade taxation etc and to evade 885.

I also wonder what would be used a collateral security for the loan? The DC account?