Is this a CODA?

[Guest zora]

An independent contract is a debtor of a plan sponsor of a defined benefit plan. The plan sponsor intends to hire the independent contractor as an employee. This (new) employee will waive participation in the DB plan (assume the waiver is legal and valid). In exchange for the waiver, the plan sponsor will forgive the (new) employee's debt to the plan sponsor.

Is that a CODA? Are there PT issues? Do you see any other issues?

[Guest rsm]

The cancellation of indebtedness generally results in taxable income to the debtor. Have you considered whether this proposed debt cancellation (even with the waiver of participation as part of the facts) will trigger income to the debtor?

[Guest zora]

Thanks for that info.

Any thoughts on whether this is a CODA or a PT?

[jpod]

Whether it's a CODA or not is determined under the 401k regs. I don't think it's a CODA, assuming the waiver is made immediately upon hire and is permanent.

No pt.

I do have what might be a silly question, but I'll ask it anyway. What happens if the contractor comes to work, signs the db waiver, thereby triggering the debt cancellation, but quits within a year or even a couple of years? I doubt the employer would have saved much money, if any, on account of the db waiver over such a short period of time, especially if the contractor is very young.

[austin3515]

I don't think you can do this. Can't tell ya why, it just doesn't sound right. I'm not sure you can have someone repay a debt by sacrificing ERISA benefits??

A deemed DB CODA - there's first for me! I do think this could be construed as a CODA though.

[namealreadyinuse]

Ok, I'll bite - sure it is a CODA. He has a choice between taxable compensation or a tax qualified deferral. Can it really be a voluntary waiver if the debt is hanging over his head?

[jpod]

austin and namealready: The 401k regs expressly contemplate a participant's election to give up DB benefits as not creating a CODA. In my view zora's fact pattern fits nicely within the regs. Why is waiving DB coverage in exchange for debt cancellation any less voluntary than waiving coverage in exchange for a higher salary? On the other hand, zora could remove all doubt by simply amending the plan to exclude this individual by name and reach the same result. Either way, presumably this individual would be a non-excludable employee for 410(b) and 401(a)(26) noce he satisfies the eligibility requirements, but I have the impression that zora is on top of that issue.

[Guest zora]

Thanks. This is great. It doesn't smell right to me either, but I can't say why. In fact, that is the reason I posted this in the first place.

Nonetheless, JPOD is right, the regs do address this, but not the debt angle. The issue of whether it is voluntary is important, but I think we can get past that one. If I had my way, the plan would provide that it can be amended by such a waiver, but I don't thank I'll get that. Discrimination is also an issue, but, again, we can get past that one. Also, good point on the ability of the new hire to cut and run. We've addressed that so the right to discharge of the debt is subject to an SRF. I've also got 409A covered there.

My biggest concern is the nagging PT issue. I guess if on the date of hire the employee had an accrued benefit, and then waived that benefit in exchange for debt cancellation, it could be a PT or a 401(a)(13) violation. Maybe that is what has been bugging me. But with no accrued benefit, no problem?

[401(k)guru]

Ok, I'll bite - sure it is a CODA. He has a choice between taxable compensation or a tax qualified deferral. Can it really be a voluntary waiver if the debt is hanging over his head?

CODA stands for Cash or Deferred Arrangement. A CODA must have a cash option. Since there is no cash option there is no CODA. I am not addressing the general question of whether this is a legal arrangement.

[austin3515]

Sure there's cash! The participant received a cash distribution equal to exactly the amount of the outstanding debt, and immediately wrote a check to the employer It happened so fast, even his bank didn't notice!

[GBurns]

What sort of corporate structure (if any) was this "independent contracor" using when the debt was incurred?

Was there a business, business name, FEIN etc?

[ak2ary]

Its not a CODA as long as it satisfies the requirements for a waiver, such as the waiver is irrevocable and adopted upon initial eligibility for any plan of the employer.

It's also not a CODA unless the waiver of benefits impacts his COMPENSATION, in this case it doesn't.