Still a Non-ERISA plan?

[J Simmons]

Situation: H & W own 100% of Corp. H & W are Corp's only 2 EEs. Corp has a QRP. It's only asset is a loan on which H & W are obligated (possible 72p problems are being explored separate and apart from this post). While loan is yet outstanding, H & W divorce. H receives in the divorce split of assets all of the stock of Corp. W no longer is an owner of Corp directly or by attribution, but yet has benefits in the QRP.

Question: Has the non-ERISA QRP become subject to ERISA by reason of the divorce since W is no longer an owner of Corp but has benefits under the QRP? If so, what steps need to be taken by the fiduciary (H) to diversify the assets and establish the liquidity to be able to pay benefits (specifically, W's benefits)? It would seem if ERISA applies that the small employer exception to independent audit by an accountant is also blown by virtue of the loan being the QRP's only asset.

[Guest Sieve]

Under DOL Reg. Section 2510.3-3(d)(2)(ii)(B), W remains a participant "covered under the plan" until, basically, all distributions have been made to W. So, the Plan becomes subject to ERISA at the time of the divorce.

Since you mention IRC Section 72(p), then the loan presumably is a participant loan. If it is the plan's only asset, then an audit will be necessary if it violates ERISA Section 408(b)(1) (see DOL Reg. Section 2520.104-46(b)(1)(ii)(B). If the loan exceeded 50% of the account balance of the appropriate individual when it was made (and it must have, if there's only one loan of the full amount of the combined accounts), then an audit would be required since there is a violation of DOL Reg. 2550.408b-1(f)(2).

If all money was loaned to another entity in which H & W own interests, so that it was not a participant loan, then I don't think you'd meet the -46 audit exemption requirements unless the trustee was not an individual. Of course, then you'd have PT issues.

As to benefits, I guess you'd assign W a portion of the note (assuming it's not a participant loan).

[J Simmons]

Thanks, Larry.

[J Simmons]

Under DOL Reg. Section 2510.3-3(d)(2)(ii)(B), W remains a participant "covered under the plan" until, basically, all distributions have been made to W. So, the Plan becomes subject to ERISA at the time of the divorce.

Larry, I agree that W would meet the definition of 'participant', but what about 'employee'?

Take a look at Treas Reg § 2510.3-3(b), specifically

the term "employee benefit plan" shall not include any plan, fund or program, other than an apprenticeship or other training program, under which no employees are participants covered under the plan, ... .

Treas Reg § 2510.3-3©(1) then excludes from the definition of 'employee'

An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, ... .

So W wouldn't be an 'employee' while married to H and (NEW FACT) she's not worked for the Corp since the divorce. Do you think that might entitle the Situation to exemption under Treas Reg § 2510.3-3(b)?

[Guest Sieve]

With your new fact (W not working for Corp. since divorce), there are no employees: W not a common-law employee, and H is not an employee as a result of being the sole owner of the corp (DOL Reg. Section 2510.3-3©(1)). Since there are no employees, then how many participants there might be in the plan is of no consequence since "no employees are participants covered under the plan" (DOL Reg. Section 2510.3-3(b)).

Hence, no ERISA coverage now.