Only Owners in the Union

[austin3515]

This strains the imagination, but it is so.  The only employees covered by the union are owners (albeit of a very small percent). The owners make hundreds of thousands of dollars each.  They are covered by some union multi-employer plan getting benefits.

Has anyone seen this before? I see nothing that suggests that I am prohibitted from maxing them out in this Plan.

I assume I have to comply with the 415 limits taking into account both "my plan" and any DC plan maintained by the union.  But let's say the union plan is defined benefit.  I can give them all the 415 max in this plan and nothing to the employees.

If it's true, then yeah for my clients.  But this seems to fall into the category of too good to be true.

Has anyone seen anything like this??  I went through the regs and found nothing in the definition of collectively bsargained employees that would be problematic. 1.410(b)-6(d)(2).  So disaggregation appears to be mandatory.

 

 

[austin3515]

I'm thinking some of their comp must be covered by the union and some of it not.  So management responsibilities, profitability bonuses, all not covered.  Hourly rates for working on covered employment in the trade would be union and eligible for union benefits.

Do people think I have that rigth?

[ETA Consulting LLC]

42 minutes ago, austin3515 said:

I'm thinking some of their comp must be covered by the union and some of it not.  So management responsibilities, profitability bonuses, all not covered.  Hourly rates for working on covered employment in the trade would be union and eligible for union benefits.

Do people think I have that rigth?

That was my first line of thought; at the very least, differentiating the Compensation Received as a Union Employee from the Compensation received as non-union.  I, personally, never delved into getting an understanding of how benefits of an owner can be derived from good-faith bargaining.  At any rate, your initial line of thought does seem to address the mandatory disaggregation of union and non-union for compliance purposes.  I'm sure others have more detailed insight.

Good Luck!

[ESOP Guy]

I go to church with a guy who owns his company and he is in the union and all the plans.  From what he tells me the union is more then happy to have more people paying into the plans. 

I had at lease one client that also had the owners in the union.  Once again the impression I got was the union was more then happy to have more people paying into the plans. 

My client the owners said all their comp was union comp.  I never really challenged it  They paid due to the union were covered by the plan the union had with the company which included a company specific PSP.  Everyone in the TPA firm took the position there was no coverage testing as it was all union employees.  You might be over thinking it.  Of course we might have been under thinking it way back .

[Larry Starr]

Austin,

While the owners might be paying union dues and getting benefits, they are NOT union employee (as determined for plan purposes) subject to the union exclusion BECAUSE their employment is not subject to the terms of a collective bargaining agreement.  That is obvious when you note their income level. This is key: YOU DO NOT GET TO COUNT THEM AS UNION EMPLOYEES FOR THE ERISA EXCLUSION.  Just read the actual definition in your plan document; you will see the standard language of employees whose employment has been subject to good faith negotiations blah blah blah.  That does NOT describe the business owners.  The union does not set their compensation levels, their benefits, nor their working conditions.  You need to be very careful here.

In fact, it is even possible that the union can renege on their retirement benefits some day if they get into a dispute with the union; the union will declare that they were never eligible for the retirement plan since they are not subject to the collective bargaining agreement (they most likely will return any money paid by the participants into the plan, but not the dues!).

You did not explain enough about the business; are there employees other than the owners?  I assume so.  You haven't told us what "YOUR PLAN" is or what  it is you are trying to do.  You mention "maxing them out in this plan" but it is not clear what "this plan" is.

But be VERY CAREFUL with these situations.  We had some owners in New Hampshire who got burned; a labor lawyer suggested getting a separately written statement from the union saying that they understood that the owners were not subject to the CBA but, nonetheless, the union retirement benefits would not be revoked by the plan for that reason. Even that does not absolutely guarantee it, but it provides something called equitable estoppel if they have to go to court to enforce the benefit. 

Larry

[austin3515]

That all makes perfect sense and is basically the spirit of this sentence in my OP.

On 3/4/2018 at 9:44 AM, austin3515 said:

If it's true, then yeah for my clients.  But this seems to fall into the category of too good to be true.

But is there anything I can point to that speficially says Owners cannot possibly negotiate for their own retirement benefits and can therefore never be excludable?  It seems to me that this obvious point must be addressed in some literature somewhere. I agree it is a logical conclusion, but it doesn't seem to be one that bears out in a plain language English reading of the document.  Their employment is indeed covered by the collective bargaining agreement because of how the agreement defines covered employment.  I'm being told this is not so unusual, so logic dictates this question should hav been answered somewhere in an authoritative way.

[Larry Starr]

This is labor issue and, I'm afraid, not well documented.  It is a facts and circumstances result.  What I quoted above is the basics of the legal opinion I drafted in the later 1970's for a major insurance company (Ct General; now CIGNA) and vetted by our corporate legal staff before it was adopted.  It is an issue that I have revisited over the years and something that, when I was in charge of the IRS Q&As for ASPPA annual conventions for a significant number of years, discussed with our friends at IRS and they were of the same opinion but were not willing to commit it to writing because they also felt it was a labor issue.

I can offer you the following from Sal Tripodi's ERISA Outline Book, but it is more concentrating on the other side of the issue and is not really dealing with our direct issue here, but it is the best I can find.

3.e.1) Union status of supervisor/owner/officer. Sometimes the identity of an employee as a union employee or nonunion employee is ambiguous. The employer may need to consult with its legal advisor regarding labor matters to resolve the question. A situation that comes to mind is the supervisor, owner, or officer, who “carries a union card,” but does not enjoy all the benefits that other union members do. Is this person a collectively-bargained employee or a non-collectively-bargained employee for coverage testing purposes? The question is raised particularly when this individual participates in the so-called “nonunion” plan, but other union employees are excluded from that plan. The union contract may shed light on this. Ultimately, the plan administrator (usually the employer) will have to make the final decision on how the plan language is interpreted. If it is determined that the individual is a non-collectively-bargained employee who is eligible for the plan (with respect to all or a portion of his hours), it follows that the individual is also a nonunion employee for coverage testing purposes with respect to the hours for which he is covered by the nonunion plan.

There has been IRS rulings on sham union negotiations for so called "owner unions" where the unions were set up for owners so they could be provided benefits without taking into account the rank in file employees.  These don't work. Again, from the EOB (but we are assuming this case is NOT a sham union):

¶3.g.(6)(a) Definition of egregious. An egregious violation is an Operational Failure that is considered too severe to be resolved under SCP. The IRS gives as examples: (1) a plan that has consistently and improperly covered only highly compensated employees, (2) a plan that provides more favorable benefits to an owner based on a purported collective bargaining agreement, where there has in fact been no good faith bargaining (see Notice 2003-24 with respect to welfare benefit funds), and (3) a defined contribution plan to which a contribution is made on behalf of highly compensated employee that is several times greater than the dollar limit set forth in IRC §415(c). See section 4.10 of the EPCRS Procedure. The reference to owner benefits provided under a purported collective bargaining agreement is in response to a growing number of sham collective bargaining arrangements designed to provide “union-negotiated” benefits to owners that purportedly are deemed to satisfy the coverage and nondiscrimination testing requirements.

Here is some definitional items regarding what is a collectively-bargained employee (but again, it is not definitive on the owner situation, just makes clear that a union that is not primarily non owners will NOT qualify.

COLLECTIVELY-BARGAINED EMPLOYEE

A collectively-bargained employee is an employee who is included in a unit of employees covered by an agreement that the Secretary of Labor finds to be a collective-bargaining agreement between employee representatives and one or more employers. The qualified plan rules include some special exceptions that apply with respect to collectively-bargained employees. In particular, the coverage testing rules under IRC §410(b) and the nondiscrimination testing rules under IRC §401(a)(4) make provision for special testing requirements with respect to collectively-bargained employees. These special rules are discussed in more detail in Chapters 8 and 9.

Part A., Elements of the collectively-bargained employee definition

1. Good faith bargaining on retirement benefits is required. An employee is not considered a collectively-bargained employee for qualified plan coverage testing purposes unless there is evidence that retirement benefits were the subject of good faith bargaining between employee representatives and the employer.Treas. Reg. §1.410(b)-6(d)(2)(i). It should be noted that under the Labor-Management Relations Act of 1947 (LMRA), benefits are a mandatory subject that must be considered in the collective bargaining process. Thus, if there was evidence that benefits were not the subject of good faith bargaining, the certification of the collective-bargaining unit could be jeopardized and the employer could be subject to sanctions under the LMRA.

2. Members must be primarily nonowners. If more than 50% of the members of an employee representative (union) are owners, officers, or executives of the employer, the organization is not treated as a proper employee representative for tax code purposes. See IRC §7701(a)(46). In such case, an agreement between the employer and the organization is not treated as a collective-bargaining agreement, and the employees are not treated as collectively-bargained employees for purposes of applying the qualified plan coverage tests under IRC §410(b). See Treas. Reg. §1.410(b)-6(d)(2)(i).

3. More than 2% of the collective-bargaining unit cannot consist of professionals. For purposes of applying the qualified plan coverage tests under IRC §410(b), an employee is not a collectively-bargained employee if more than 2% of the employees who are covered by the collective-bargaining agreement are professionals. Treas. Reg. §1.410(b)-6(d)(2)(iii)(B). In such case, all of the employees covered by the agreement, including the nonprofessionals, are treated as nonunion employees for coverage testing purposes. "Professionals" for this purpose are highly compensated employees who, on any day of a plan year, perform professional services for the employer as an actuary, architect, attorney, chiropodist, chiropractor, dentist, executive, investment banker, medical doctor, optometrist, osteopath, podiatrist, psychologist, certified or other public accountant, stockbroker, or veterinarian. This definition appears in Treas. Reg. §1.410(b)-9.

Finally, here is something from the quoted regs that you might find helpful, since it says that someone that is in a "union plan" by agreement but really isn't represented by the union (which is almost always the case with these owners) is NOT a "union employee".

(iii)Covered by a collective bargaining agreement -

(A)General rule. For purposes of paragraph (d)(2)(i) of this section, an employee is included in a unit of employees covered by a collective bargaining agreement if and only if the employee is represented by a bona fide employee representative that is a party to the collective bargaining agreement under which the plan is maintained. Thus, for example, an employee of either a plan or the employee representative that is a party to the collective bargaining agreement under which the plan is maintained is not included in a unit of employees covered by the collective bargaining agreement under which the plan is maintained merely because the employee is covered under the plan pursuant to an agreement entered into by the plan or employee representative on behalf of the employee (other than in the capacity of an employee representative with respect to the employee). This is the case even if all of such employees benefiting under the plan constitute only a de minimis percentage of the total employees benefiting under the plan.

[austin3515]

Nice! Thanks Larry! That;s exactly what I was looking for!