What is a "plan"?

[Guest Jeff Moore]

I am new to employee benefits, and I have some foundational questions.

1. If an organization gives its retired workers lifetime retirement pay when they retire, is that retirement benefit required to be a qualified plan or a nonqualified plan? In other words, can an employer give its retired employees lifetime retirement pay without that retirement pay being considered a qualified plan or a nonqualified plan and without that retirement pay being subject to the rules and requirements of each type of plan?

2. As a related question, what is a "plan"? Not what is an employee welfare benefit "plan" or an employee pension benefit "plan", etc? All of those terms use the word "plan" to define them. Rather, I want to know what a "plan", as used in those terms, is. It seems to me that ERISA is the law of employee benefit "plans", not the law of employee benefits. Therefore, if a retirement benefit is not considered a "plan", it seems to me that it would not be subject to any ERISA requirements.

3. How does the employer report the payment of the retirement benefits to the retiree? I'm not talking about the "ERISA reporting requirements", I am talking about how the payments to the retiree are reported by the employer. Can a 1099MISC be used, or do those payments have to be reported on a W-2 or 1099R? Does it make a difference if the retirement benefits are not considered a retirement "plan", and if considered a "plan", does the reporting of the payments differ it the plan is qualified or nonqualified?

4. What are the withholding (income tax, FICA, FUTA) requirements for (1)a retirement benefit that is not a plan, (2) a qualified plan and (3) a nonqualified plan. There has been no deferral of income in this case; so, I don't think that withholding prior to actual payment is an issue here. I may be wrong.

I would sincerely appreciate citations of authority and sources for your answers, if practicable. I hope that these questions are so foundational that those of you who are well versed in this area can answer these questions off the top of your heads. I would appreciate any feedback anyone could give. Please do not feel compelled to answer all of my questions. Any information will be helpful.

Sincerely,

Jeff Moore

[Guest GregSelf]

Jeff-

Suggested reading:

1. "Tax Facts 1" - National Underwriter, available at Amazon.com for about $20.00;

2. "The Pension Answer Book" - Aspen Publishers (latest edition - click here);

This final suggestion is NOT meant as a pun, I swear!!!!!

3. Dee Lee is a noted consultant with the SEC who has co-wrote at least one of "The Complete Idiot's Guide To..." books on retirement plans. The one I'm thinking about is, in fact, titled "The Complete Idiot's Guide to 401(k) Plans". You can find them anywhere for about $20.00. Very useful for fundamental knowledge.

Hope this helps.

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[This message has been edited by Dave Baker (edited 12-01-1999).]

[david rigby]

Another good source is the ERISA Outline Book, published by

http://cyberisa.com./

[This message has been edited by david rigby (edited 12-03-1999).]

[M R Bernardin]

These may seem like "basic" questions, but they are not. If you were to look at the DOL regulations defining employee benefit plan, you would get some idea of what has to exist in order for there to be a plan subject to ERISA. It sounds to me as though you have a pension benefit plan (something which provides retirement income) whether or not there is a formal document in place. And if you do have an ERISA pension benefit plan without a document, etc., then you may have some problems. There are also a number of court cases which construe whether a plan exists. They revolve around factors such as whether there are discernible benefits and whether an administrative scheme is necessary to pay benefits. As for qualified vs. nonqualified, there aren't really any rules that have to be followed to obtain nonqualified status; the rules that are observed in nonqualified plans are to avoid the effect of having employees recognize income before they actually receive benefits (i.e., avoiding constructive receipt). If no funds have been set aside to pay benefits, and employees have no vested rights to benefits, and no right to currently draw on the benefits, and derive no economic benefit from the possibility of receiving benefits in the future, then the payments should be income as they are received. I have no idea how these payments would be reported, but the instructions to the 1099 and W-2 should be helpful once you can decide how to categorize this "arrangement."

[Guest Jeff Moore]

I talked to a friend (who is also an attorney) of mine concerning this subject, and he thinks that if an arrangement is unfunded and unsecured, it is a nonqualified plan and is not subject to any ERISA requirements. In other words, with an unfunded unsecured arrangement, the employer can completely disregard ERISA. Is this true?

Thanks

[Dowist]

I agree with the other posts that this is a difficult issue , and to really understand it you'll have to do your research.

But in answer to your last question, beware the advice from your attorney friend!

I would say any sort of "promise" to employees could be a plan - the promise doesn't have to be in writing, it doesn't have to be funded, but if you promise your employees benefits, you probably have a benefit plan (which means if your plan is not in writing and not funded, you could be in violation of the law - ERISA).

The primary point of ERISA as I see it is to make employers keep their promises - and part of the way it does it is to require plan documents, and funding in certain circumstances. If employers could get around ERISA simply by not having plan documents and not funding their pension plans, ERISA would be meaningless.

[richard]

There are some nonqualified plans that are subject to SOME of the requirements of ERISA. (e.g., a Top Hat Plan). There are some nonqualified plans that are subject to ALL of the requirements of ERISA (e.g. a Defined Benefit Plan covering all employees of a company that provides for 20 year vesting). And, there may be nonqualified plans that are subject to NONE of the requirements of ERISA (I cannot think of any examples, however).

The appropriate person to answer this is an ERISA attorney (which I am not) -- especially if particular details are involved, and not simply any attorney.