ERISA Class Notes

01/11/11
Tips: 1. Good consumers 2. Know what fiduciaries are 3. From a professional standpoint, know when you have an employee benefit issue Most Important Benefit Type/Plan? Life History: ERISA was passed in 1974. (1) Did employee benefit plans start then? No (2) What types of benefit plans are we talking about? Welfare Plans & s Welfare Benefit Plans are plans that, essentially, dont defer compensation, but rather provide benefits currently, ex. (i) Health , (ii) Group Term-Life (hope you dont get currently not a good day for you), (iii) Long-term disability. s- provide retirement benefits. Broad definition of ERISA- any plan, program, scheme, arrangement, or course of conduct that, by its express terms or operation, defers income to termination of employment or beyond Which started 1st: Welfare Plans or s? Welfare Plans- genesis in Philly. Ben Franklin started mutual benefit societies that were fire houses. Groups got together to pull their $ to fight fires. Some of these became Ins Co still around. DeToqueville: U.S. 1st society where people cared about each other & took care of each other. Industrial Revolution- people moved to cities, & we quit taking care of each other. Some Cos had death burial funds: Grew out of tradition of people coming together & passing a hat around when families could afford a burial Would Co have these benefits for Execs? No. VEBA (voluntary employees beneficiary assn)-dissolved it in 1992. Formed in 1868 by the N.Y. Central R.R. Employees (became REMA Railway Employees Mutual Assn). Volunteers would go around on Saturdays & collect nickels for 1 of 4 types of benefits (in 1860s). People working on RRs in 1860s died a lot, lost limbs, got sick. 4 Types: 1 Death benefit 2 Sickness / accident benefit (short-term) 1

3 Disability benefit (disabled & couldnt work for longer period of time) 4 Dismemberment benefit (lost limb) As time went on, they developed other types of plans Who were these benefits for? 1 Rank & file workers they started them themselves 2 As time went on, Sr. MGMT thought some of these benefits would be helpful to their families Welfare plans started at grass-roots & worked way up. Workers ManagersExecs s- started w/ Execs & worked way down. Husband & wife. Farmers. 1820s. North Carolina. Husband is youngest. Older brother takes over family farm. You start making chairs & cabinets & other furniture. You & your wife go off. People start buying, you become successful. Now its 1830s. you have 5 kids. 3 boys want to innovate & modernize your business. We buy dad out. Pay him his salary, but he stops working & goes off you retire. Fast forward. None of 3 boys kids wants to go into furniture biz. One is lawyer, One goes to France. One goes to farm. Its now 1870. 3 boys want to be pensioned off now. Now there are 3 drawing & not working but its good biz, & it can more than afford to do it well now all managers want to pensioned off. In 1875, Am-Ex Co. formed 1st in U.S. Pensions started at top & worked way down through several generations Retirement Benefit Plans- legislation dealing w/ s going back for 80 yrs. Prior to passage of ERISA, a referred almost exclusively to Defined Benefit provided stated dollar amount of benefit to participant, payable for his life; did not include profit sharing plans or stock bonus plans. $ Purchase (even though it was individual account plan) instead of having mandatory, fixed benefits at retirement, it was deemed b/c it had fixed & determinable contribution. Profit Sharing s- came-out of profits or accumulated profits. Not-For-Profits couldnt have profit sharing plan. Stock Bonus Plan- like profit sharing plan, in all respects, other than when it came time to pay-out benefits. Major identifying item of stock bonus plan was that, no matter what plans assets, how they were invested over a period of time (except for fractional interest in Cos stock) at termination of employment, when termination was made, it had to be made in form of employer stock. Today, this isnt true, contributions can be made out of something other than profits.

1928, employers were permitted to get current 2nd-Tier: mandated retirement system analogous deduction for contribution to or stock bonus plan or to our system (private) but benefit was mandated, profit sharing plan, that was for future benefits. Up until but it could be either maintained through British then, you got deduction only for current services not govt (like 1st tier) or employer could maintain its for projected services (like defined benefit ) own separate plan (but benefits are mandated) 1939 code expanded requirements to qualify a plan 3rd-tier: usually only provided to Execs (though carried over in internal revenue code of 1950 & 1986, there were exceptions) & it can be anything. Many which is current version. people who received this benefit were on Fleet Some of different meanings of funding? Street. Back then, Execs & newspaper industry 1) Who puts $ in? wore top hats. Dept. of Labor coined term. 2) Who provides $? In U.S., Top-Hat Plans Criteria: 3) Where is $ put? (1) Must be for select-group of highly compensated a. Is it your $, & Co puts it in for u? Is it Cos $ they employees, MGMT, or both. put into plan for u? What does highly compensated mean? depends b. Put in stocks? Bonds? Real estate? (2) Benefit must be unfunded- cant be funded by , 4) Vehicle used to provide those benefits? annuity , trust, etc. a. Is $s put into trust, & invested by trustee? (3) If youre going to get out of reporting & disclosure b. Or invests it through K. requirements of ERISA, which apply to all plans, u 5) What about trust or that manages $? have to file Top Hat Exemption Election w/ D of Labor. a. This is another concept of funding a. When you file these elections, you file them via - One little word in this area can mean a lot of certified mail return receipt. When the receipt comes different things. Why does this matter? back, you staple it to your copy, & put it in the vault. - Need to be precise w/ language. b. This is probably your only proof of filing the thing - When layman talk about funding, you need to (4) A top-hat plan cant be funded. But he funds them understand what theyre talking about when all the time how? w/ Rabbi Trusts (Grantor Trust) someone says theyre going to Fund a plan. a. 1st Rabbi Trust was for Rabbi where synagogue wanted to provide retirement benefit for rabbi, Biggest Violations of ERISA in terms of employer under economic benefit doctrine (constructive noncompliance (if you know ERISA governs all types receipt doctrine) qualified or notof pension or welfare benefit plans)? b. 2 Doctrines to bring into income $ that you dont Answer: 90%+ of s dont comply w/ ERISA. have & cant get. Best example is savings account. How is that possible? You have to pay taxes on it even though you dont (1) ERISAs definition of : Any plan, scheme, take it out program, whether by express terms or in c. Doctrine of Constructive Receipt: taxed on 08 operation, defers compensation till termination of income b/c you couldve taken it out, but you didnt employment or beyond d. Synagogue didnt want Rabbi to be taxed. (2) Do most Execs have employment K? Yes Synagogue was tax exempt, so they dont care about (3) Do Ks have incentives (do good job, get X)? Yes getting deduction). Came up w/ idea of using a (4) Does that make K providing benefits a ? Yes. grantor-trust. (5) Do people think of employment K as ? No, but e. Who owns assets in Grantor Trust? Grantor. they are by definition, although theres relief for so f. Who gets income? Grantor. called Top Hat plans i. Synagogue was going to keep assets, include (6) Top Hat Plans: When ERISA was passed & this term income, & didnt want constructive receipt or was coined, may have worn top hats? Blame the economic benefit doctrine to apply to Rabbi British. British system, when ERISA was passed, ii. As long as assets of trust are subject to credit was 3-tiered system. W/ mandatory system much of grantor. akin to our social security system. g. IRS published this as revenue ruling. Everyone 1st-Tier: Fixed pension for everyone, no matter since then has been using Rabbi Trusts your salary 2

h. If youre a that goes into bankruptcy, your creditors in bankruptcy will take everything. So theres a real risk. g. Its not income or assets of the trust for IRS purposes & it wont be for ERISA either Use grantor rabbi trust to fund these benefits. h. Top hat plans must be solely for benefit of highly compensated or MGMT, cant be funded & must file exemption letter w/ DoL to get-out of reporting disclosure requirements. Can fund it using a Rabbi Trust.

01/12/11
Background: Am-Ex had 1st formal in 1875. Prior to 1870s, it was informal arrangement (fathers being bought out by sons, etc.) So if you had a from 1921 to 1926, income from that was actually taxed. Act of 1928 allowed employers to take deductions for plans for past service costs. From 1875 to crash of 29, there were 421 private sector plans established in U.S. & Canada, & 28 had been discontinued In 1929, 393 plans were in operation In 1935, Roosevelt signed Social Security Act. Is this legislation dealing w/ employee benefits plans. (a) Well, its social legislation Its not dealing w/ employee benefit plans. It provides retirement benefits & disability benefits, & employers & employees contribute to it, but its not employee benefit plans of s themselves i. Later, Congress passed a law stating Assets cant be diverted from plan &, once contributions were made to or profit sharing plan/trust, they were irrevocable j. By 1940, how many workers do you think were covered by a retirement plan? Legislation Affecting s: Securities Acts of 1933 & 1934- (a) If employees had $ invested, their contributions were likely (b) Both of these, along w/ Investment Advisors Act, are legislation that impacts employee benefit plans Investment Advisors Act of 1940- Did affect s. Check out a timeline from DoL. Selective Service Acts (1940 & more)- People who are drafted are treated as still being working for purposes of contributions & seniority. 3

Revenue Act of 1942- Tightened coverage requirements 1946- NLRA at this time didnt require to bargain over issue of retirement benefits 1947: NLRA- Big issue in 46 & 47 was the Longshoremans Strike. Very violent, & led to Taft-Hartley Amds. (a) Taft ran for president; lost to Eisenhower. (b) Sen Brewster & Pres Truman. (c) Who was appointed in Sen Brewsters place? Justice Burton 1948: NLRB issued a ruling that said Congress intended pensions to be a part of wages, & they fell under conditions of employment in NLRA 2 yrs later when GM established a for its employees, they did so b/c they wanted to fund their contributions w/ stock. So, 1950: Goodyr established plan pursuant to collective bargaining w/ rubber workers (a) So at least by 1950, s were actually bargaining w/ unions to establish s for union employees (b) By this time, 9.8 mil private sector workers (25% of all private sector) were covered by . 1958: Welfare & s Disclosure Act- Established disclosure requirements to limit fiduciary abuse 1960- Went from 9.8 million to 18.7 million private sector workers covered (41%) Questions: (1) What type of workers were covered by all of these plans he mentioned? (2) How many do you think were self-employed? Zero (3) What about selfemployed people who had retirement benefits? Kio Act 1962- Kio Act (Self-employed individual retirement act) (H.R. 10) (a) Made qualified s available to selfemployed persons, (b) While Execs could get contributions of 10k, 20k, 30k per yr back then, (c) If you become partner in law firm, you will be self-employed. Ex. Partners & individual proprietors are self-employed, (d) you dont pay FICA, you pay self-employment taxes State of Law: (a) Today, legislation says youre treated equally w/ r/e to retirement benefits, Shaw says that youre not(b) Back when you were permitted to make contributions to self-employed individual plans, you were only allowed to make a $2,500 contribution per yr, (c) Today, if youre partner in firm & make 10% contribution to employees, your contribution is determined based on compensation that, 1st, takes out 1/2 of your equivalent social security taxes (which you pay 1.5 times amount of employees) before contribution is made, & then amount of contribution

deducted from your compensation. So, if employee earns $100k/yr, they get $10k contribution You as self-employed person make $100k. of your social security taxes & amount of your contribution is deducted from this. Forget about self-employment taxes for a while. If you put in $10k, youre down to $90k. So your contribution is based on $90k. You get a $9k contribution. Congress says this is equal treatment of self-employees & statutory employees. (a) By 1974, when ERISA was passed, there were 26.3 million private sector employees covered by s (45% of all private sector employees) (b) Kio, you could argue, is tax legislation. But it establishes right to have a plan. So Shaw says that its both tax & non-tax related What is Employer? (a) Well talk about state law concept of employer. But its different from ERISA, income tax, & labor law standpoint fed definition for plan purposes are different as well (b) State law concept of employer? Sears, K-mart & Target. For ERISA & Code purposes (for employee benefit plans), there are only 2 employers (Sears bought Kmart) But do employees of Sears agree w/ this? No (c) Concept of Employer under Title I of ERISA & for purposes of Title II (code provisions): for all members of same control group of businesses, for vesting purposes, qualification purposes, etc. for all members of same control group, theres only 1 single employer. HYPO: So if you rep in Germany that has ops & subsidiaries in Sweden, England, France, & U.S. In U.S., Swedish owns 2 major Cos German bought a British w/ major U.S. ops, while German had major ops: ANSWER: all of these s are 1 for ERISA purposes (401k plans, non-discrimination requirements, s, etc.), even though these people all think of themselves as working for different s. HYPO: New Age (well get to this later). L has 1 of these. It has over 100 (85% out of 150) employees earning over $150k (in 1990). A & D dont have these. But all 3 s have same parent corp. had only 3 people who earned over $100k. Over 80% earned under $50k. D had different scale, its irrelevant though ANSWER: Rules say these s, b/c they all have same control group, are all 1 employer. So instead of 4

having 85% of people being highly compensated, you have 88 of 10k employees earning over $100k. These guys all got about 50% of their salary when they retired. Other 9,912 got about 20%. Thus, they were discriminating in favor of highly compensated individuals. Hypo: You worked for a for 10 yrs at A . Then you go to law school & go to work for L . You work at L for 3 yrs, & have benefit that has 5-yr vesting period. After 3 yrs, you leave & go to a Dallas law firm. You forfeit your benefit b/c you werent vested. ANSWER: Since you worked for same employer for 13 yrs. They didnt know it, but you worked for Co for 13 yrs. When you left L, you should have been given your benefit & you werent (since you worked there for 13 yrs; more than required 5). Uniformity: All members of same control group of employers are treated as 1 & same employer for ERISA purposes, Title II qualification purposes, & for some other purposes Fiduciaries have to operate plan according to its terms. If you bring in employee from a different group, that may disqualify a plan. Social Goals: Rules made trying to accomplish social ends, sometimes cause employers headaches b/c social goal sometimes doesnt square w/ real world facts HYPO: If you do something on Dec. 31, but correct it on Jan. 2. ANSWER: Corrected excise tax is 15% for Dec. 31, & 15% for 2 days in Jan (not each). So you have 30% excise tax for 3 days People who do this for 5, 6, 7 yrs its 75, 90, 105% & theres interest on excise tax; Yikes. Rule: When youre 70 , if you dont take youre benefits, youre subject to 50% excise tax if you dont take it. Answer: If youre owed 10k. Whats excise tax? $5k. 2nd yr, owed $20k; owe another $10k. etc Plus you get under-payment penalties, plus interest on each yr And income taxes on $40k youre owed So, you owed 58k. Youre only getting 40k. Uncle Sam wins What Types of Entities are in Control Group? 2 types that are important (you can have LLCs, Corps, pships, etc.) under 1563 of the IRS code, you can have Corps. Under ERISA, under 414(b) applying to corps & 414(c) applies to all biz entities & treats them as Corps. Can have parent-subsidiary arrangements- 1 org owns either directly or indirectly at least 80% of either stock or other ownership indicia or profits of another org.

Can have brother-sister Corps. (complicated)- 1563 at 1st blush, looks like if you own more than 50% of stock of 2 or more entities (owned by 5 or fewer people), youve got a control group. (For surtax exemption, this is probably true) Congress has limited this definition only to this exemption For ERISA purposes, theres 80% element. 80% of stock is owned, & same stock or same elements of stock are owned by 5 or fewer of more than 50%... Translation. (a) A, B, C, D, & E are individuals (b) 1, 2, & 3 are s. A B C D E 1 50% 50% 2 10% 10% 20% 30% 30% 3 20% 10% 30% 20% 20% In all 3 cases, 5 or fewer people own 100% of stock QUESTION: Do same 5 people own more than 50% of stock in each of respective s? A & B own 100% of Co. QUESTION: What is common btwn Co. 1 & Co. 2 though? (a) A & B have common interest in 20% of stock in Co. 2. (b) They have 30% common in Co. 3, Co. 2 & Co. 3 have 90% common ownership. (As 10-20 is 10% common. Bs 10 & 10 is 10% common. Cs 20 & 30 is 20% common. Ds 30 & 20 are 20% common & Es 30 & 20 are 20% common). ANSWER: So Co. 2 & Co. 3 are members of a control group & are treated as 1 employer s 267 & 318 of the Code- Hes not holding us responsible for these. (we need to know 1563). (a) These are other s that deal w/ constructive receipt of stock ownership & he raises them b/c 1563 makes brother/sister or parent subsidiary, if you own directly or indirectly 80% or more in latter rship, what is indirect ownership? You can own stock by attributionIf youre married w/ minor children. Hypo 1: Husband owns 20% of stock in a . Wife owns 20% of stock. Trust for your (husbands) benefit owns 20% of Co. Each of your 2 minor children own 20% of Co. What % of shares does husband own? 100%. Hypo 1 Explanation: you own 20%. You have attribution to your spouse. So you both own 40%. You had trust that you were beneficiary of that owned 20%. So you have attribution to that 20%. You have minor kids that own 20% each. You & your wife are deemed to own their combined 40%. So you owned 100%. Your wife 5

owned 80%. (she doesnt get attribution from trust & attribution rules dont go double attribution). Hypo 2: Another couple, husband owns 20%, his wife owns 20%, & each of their 3 adult children owns 20%. What % of the stock does husband own? 40% Hypo 2 Explanation. Husband owns 40%. You have adult children. So you dont have attribution unless you have 50% of stock in your own name (w/o attribution). But, once you hit 50%, you get attributed ownership of your adult children. Hypo 3: Husband in hypo 2 owns 50%. Wife owns 10%. 2 adult children own 20%. 3rd has been disinherited & owns 0%. How much does husband own? 100% Attribution rules are funky. In: Multi-Employer s Act of 1980. It puts liability for members of the control group at 100% of Co. See also COBRA statute

01/19/11
2 Control Groups: (1) Parent subsidiary, (2) Brother sister F. Multi-Employer Plans vs. Multiple-Employer Plans Multi-Employer Plans- (a) 2 or more employers that are not members of same control group who make contributions to same or welfare plan in accordance w/ a collective bargaining agreement; a.k.a. Taft-Hartley Act Plan (b/c its governed by Taft-Hartley Act). (b) Requires these plans to be managed by equal # of MGMT & union trustees/committeemen/board members whatever, (c) Some are funded by corporate trusteeTaft-Hartley Act aspect of it is run by a retirement board, 2 MGMT & 2 union guys (for ex), (d) Many T-HA plans are run by trustees, (i) But there has to be an equal #, (ii) This is what got Jimmy Hoffa thrown in jailhe was running plan exclusive of the trustees (e) Its a THA plan. Big difference between this & multiple employer plan is that they have 2 or more nonrelated control groups that contribute to them, but 1 is pursuant to a CBA, the other is not Multiple-employer plans- 2 or more employers that are not in the same control group. 2 or more employers that are the ERISA definition of employers. 1. Could be a parent, plus 10 subsidiaries = one employer 2. They make contributions to the same plan (can be either welfare benefit or

pension) & they make these contributions not because theyre required to make them in accordance w/ a collective bargaining agreement MEPPA (Muli-Employer s Amendment Act of 1980) Prior to passage, members of control group (if you withdrew from a multi-employer ) could be assessed up to 30% of their net worth to pay-off their proportionate share of liabilities of plan. After passage of MEPPA, withdrawal liability was increased to up to 100% of net worth of control group. (a) PBGC, of its own motion, can take into liquidation a multi-employer , (b) Mature business: Those that payouts from plan are greater each yr than amount of contributions to plan Single employer plan- Co owes for your employees. Multi-Employer Plan- lot of different s contribute for employees of different s that contribute to plan Ex. liabilities attributable to your employees might be $500k. But b/c youre in an industry that has a lot of failures, you might have withdrawal liability of $2.1 mil If 1 employer doesnt pay its contributions or its share (b/c of bankruptcy or whatever) that obligation falls on other employers. Hypo: Assume unfunded liabilities of multi-employer are $30 mil. B/c all of other s have gone out of biz, if PBGC thinks plans funded status is in jeopardy, they can go to court & force plan to close down, or force employer to pay inEx. We need to have plan liabilities down to $6 mil by x Rule: If a withdraws from a , all members of control group are liable. Hypo: But lets say plan isnt underfunded, & theres no withdrawal liability & youre an employer (member of control group) who just doesnt make contributions. You have 3 s, A, B, & C . A has a CBA to pay into Teamsters plan. A fails to do so. Can trustees of Teamsters plan sue A? what about A & B? or what about A, B, & C? or just B? or just C? What about just the one w/ CBA? (so, A) Answer: It is. Only CBA plan is liable. Even if you were withdrawing from multi-employer plan & your whole control group is liable If you owe $, & you havent withdrawn while its underfunded, they can only sue you. State-law definition of employer is thus now controlling, & A is only one they can sue. 6

Hypo: Say you owe $500k of contributions. Under a de minimus rule, you owe nothing for withdrawal liability. Your withdrawal liability is zero. You only have control group liability for withdrawal liability; not for failure to make contributions Commentary: This makes no sense, but thats the rule Withdrawal liability= you pull out of plan, & plan is underfunded. If plan is 100% funded, theres no liability. If you withdraw during plan yr, & theres underfunded liability on last day of plan & you withdraw. You owe it. You still have to pay, even if by time you withdraw, fund has gained back losses from prior yr. Notation of Sale of Assets Issues Under MEPPA you can have 2 types of withdrawal (1) Complete, (2) Partial- This one is complicated & people often play games w/ it to avoid withdrawal, (3) Sleeper one, however If youre ever dealing w/ transaction where youre buying assets of , (or, more importantly, if youre selling assets), if you dont want to have your client have withdrawal from a multi-employer plan, you need to follow some very specific steps to avoid a withdrawal (& withdrawal liability). (i) You must put a provision in purchase agreement that says youll pick up plan & that purchaser will put up a bond/escrow guaranteeing their compliance w/ this, (ii) If you live up to provision for 5 yrs, seller of assets has no withdrawal liability. Mass Withdrawal (A) If within 3 plan yrs after employer has withdrawn from plan, if all other employers say were not going to be able to continue this, & if you have somebody who left early, you can claw them back, if they withdraw w/in 3 yr period theyre clawed back if theres mass withdrawal. Hypo: Say unfunded liabilities are $100 mil. After the 2 s were out of it. Answer: Under the pension protection act of 2006, you have to reorganize or adopt a plan to become whole if youre underfunded. Hypo: Say 3 yrs into your CBA, your pension cost jumps from $85 to $1k. You have 2 yrs left, & theres no reopener clause in . How is employer going to pay that increase??? Answer: Bad scenario So these employers, in effect, couldnt do anything but have mass withdrawalThis is what triggers claw back, so you can fund the plan. Hypo: Say you have 15 employers. Answer: (a) A had 1k employees. $20 mil + an additional $80 mil, (b) Our employer had 100 employees. $2 mil + additional $8 mil,

(c) 5 have 50-100 employees. Still liable for $80 mil out, (d) 8 went into bankruptcy. Their share of liability is $10 mil. (e) Prior to withdrawal, these 8 employers share (their unfunded portion) is redistributed among 5 that are left w/ mass withdrawal & other 2. (so its spread over 7), (f) Their $10 mil is added back & shared by other 7. Hypo: Say our has a defense built into it. Say Co w/ 20 mil did same thing. & assume court goes along w/ us. & say 2 more (w/ $2 mil in liability total) file for bankruptcy So who pays $90 mil of $110 mil? If your defense is successful in getting out? Answer: You spread un-assessable amount to Cos who can pay it ($90 mil) & then you make your demand your re-determination of withdrawal liability on each of employers. Any employer w/ escape clauses arent paying withdrawal liability, you take reassessment amount & determine how much they have to pay quarterly. So who pays the rest? NOT remaining employers. DoL regs say they shall not be assessed. Participants make up rest people who have benefits. They get benefits cut to make up difference btwn what they have accrued & what PBGC guaranteed benefit is. (i) Under multiemployer plan, differential is usually 80%, on average. So participants end up w/ about 20%... In a mass withdrawal, all remaining employers agree to simultaneously withdrawal at same time. Regs may proscribe a minimum # or % required to qualify. Hes only been involved w/ 1 mass withdrawal. Types of Employee Benefit Plans Prior to passage of ERISA, there were 3 types of plans in pension area. (1) s- A defined benefit or a $-purchase . (2) Profit-sharing plan (3) Stock-bonus plan This is all there were. You can still see those definitions under contribution deduction provision of 404(a) of the code. Senate Finance Committee & Ways & Means had jurisdiction over qualified plans until ERISA (b/c these were tax provisions) Title IV is the PBGC. When Labor Committee started working on ERISA provisions, it was House Educ. & Labor committee & Senate Labor Committee. They could care less about tax implications. They were trying to achieve social goals through tax laws. Title I addressed 2 Plans: s & welfare benefit plans 7

(definition is broad)- Anything that either provides for a pension, or by terms or course of conduct, has effect of deferring compensation to termination of employment or beyond Corp exec bonuses paid upon departure thats a . Then they started to define different types of s. (1) Individual Account Plan, (2) Defined Contribution Plan. These 2 are exactly the same thing. $ is put into a trust/account & allocated amongst different participants & their account balance goes up or down based upon earnings of fund. Of defined benefit plans (old s)- Qualified defined benefit plans are only kind of plans guaranteed by Pension Benefit Guaranty Corp (PBGC). You can have a multi-employer defined contribution plan & it would not be guaranteed by PBGC & it wouldnt be subject to MEPPA. 3 Defined Benefit Plans(1) Unit Benefit Plan- accrued benefit is determined by multiplying whatever plan defines as unit of measure by the yrs of service. Ex. If you worked for a for 5 yrs, & unit is $20, you have an accrued benefit at end of 5 yrs of $100. But its what youve earned at that point (not what you will earn if you stay w/ Co till your 65). It determines moly benefit$100. This type of formula is typical in plans that cover only hourly employees or bargained employees. (2) Career Average Plan- series of annual accruals added together. Say accrual rate is 1%. If 1st yr you work for Co, you earn $10k, whats your accrued benefit? $100 / yr. Its 1% times your annual salary. This is to be differentiated from normal unit benefit plan (which is $10 times yrs of service, that determines moly benefit). Need to spell out that it accruals in 1/12 increments. So it provides it as a moly benefit. Say next yr you earn $20k. You have a $200 annual benefit. 3rd yr you earn $25k. You get $250. After 3 yrs, youre at $550. Divide by 12, its $49.80 per mo. (3) Final Average Pay Plan- Plan can say that final avg pay is 3 consecutive yrs out of last 5 that give highest avg pay. Or it could be five consecutive yrs out of last 10 yrs. Shorter # of yrs, usually higher pay, on average. Must be consecutive yrs. You divide it by either the 3 or the 5. Then you multiply it by a factor (say 1%). Times yrs of service. If you use an annual (many use moly) youll get an annual benefit. Which you want to divide by 12.

Accrued Benefits- In a defined benefit , accrued benefit is amount participant has earned at any given time, that is payable commencing at normal retirement age & payable solely for life of participant. Accrued benefit under a defined contribution plan is account balance that person has under plan at any time. If youre in a 401k plan, your accrued benefit changes every day If its a daily valuation plan, even if you dont put in anymore $$$, whatever market does, will change your accrued benefit. Hypo: Say youve been working for a for last 5 yrs. You started as backroom sweeper; then stock boy; then you graduated college & you get another job. Now you graduate law school & youre in Corp legal dept. Say you become president of Co. Your last five yrs, you get 200k per yr. Would you rather be covered by that has a career average formula or a final average formula? Answer: Final Avg. Rather than taking $100 accrual 1st yr, plus all lower accruals, you get average of your last 5. For long term service employees. Career Avg Formula will hardly EVER be higher than Final Avg Formula HYPO: Say you have $50k in your defined contribution plan & you die. How much do you or your beneficiary get? Answer: $50k. Hypo: you have accrued benefit, but you dont meet eligibility conditions, what do you get? ANS: Nothing.

01/24/11
3 types of Defined Benefit Plans (1) Unit benefit (2) Career average (3) Final average pay Defined Contribution Benefit Plans --3 types of plans prior to ERISA- (1) profit sharing (individual account), (2) stock bonus (individual account) & (3) pension (generally defined benefit plans 1 exception being $-purchase ) Why was $-purchase considered a rather than an individual account plan? Fixed & determinable contribution but term individual account plan wasnt coined until passage of ERISA . Individual account plans were part of new verbiage that came along when ERISA was passed in 1974. Why is $ purchase a ? It provided defined benefit. There was fixed contribution & determinable 8

contribution. Pre-ERISA it was age 65. Now its defined at normal retirement age. A $ purchase was considered a not b/c it didnt have a defined benefit, but b/c it had a defined, mandatory contribution. The concept has been carried over under ERISA in 412. Which is minimum funding standards requirements for defined benefit plans & $ purchase s. (a) If employer doesnt put in defined minimum contribution for yr, it has to pay govt an excise tax, based upon amount you failed to contribute. (b) In a $ purchase , the required minimum contribution is a finite # each yr its whatever covered compensation of plan is for covered employees times a % set forth in the plan (c) If it says employer will make a 10% per yr contribution, then its 10% of covered compensation etc. etc. Whats maximum? If you add up all amounts & compensation for yr is $100k at 10%, min contribution is $10k. What is max contribution? $10k. If you have a defined benefit , contribution can be made in a range. $ purchase plan has single, absolute #. Profit-Sharing Plan Pre-ERISA, these were a lot different. (a) Contribution to plan could ONLY be made out of current or accumulated net profits, (b) So, a not for profit org couldnt have a profit sharing plan. Even though they have retained earnings (remember, this is pre-ERISA) Digression: a 401k plan is a profit-sharing plan. W/ a cash or deferred arrangement under 401k of code. So not-for-profits couldnt have 401k plans. So today, profit sharing plan can have them b/c Congress took away requirement that contributions to a profit sharing plan be made out of current or accumulated net profits of Co. This began the deathknell of $ purchase sCurrently, profit-sharing plans need not come out of retained profits. Now, 501(c)(3)s can maintain 401k plansA 403(b) plan is a tax-sheltered annuity (another aside). Stock-Bonus Plan Historically: This was kind of like a profit sharing plan, in sense that contributions had to be made from profits. Those contributions in earnings, like a profit sharing plan, could be invested in just about anything (stocks, bonds, etc.), but difference btwn this & profit sharing plan (historically) is that any distribution from stock bonus plan in form of employer securities (except for fractional shares which could be paid out in $).

HYPO: Say you have 100 employees. Every employee had, on avg, $1k in plan. Employer doesnt have one share of stock in plan. This meant plan had to go out & buy stock to pay off someone that was leaving their participation in plan. Sometimes, this was difficult if there wasnt stock available to buy. AND, if participant waives this & says theyll take cash instead, then that disqualified plan since they couldnt get stock to pay people out. Today, its different. Plans can be amended or provide that stock wont be distributed. And, even if it is to be distributed, participants have the right to get it in the form of cash ESOPs (Employee Stock Ownership Plans) Usually a stock bonus plan that has been designated as an ESOP under 4975 of code & is permitted to invest all of its assets in employer securities Otherwise, such an investment would breach a trustees fiduciary duties. This is also opposite of stock-bonus plan (which invested in wide range of securities). 401k Plans- Is misnomer; no such thing as 401k plan. Called this by marketing people & employers, but they are really just profit sharing plan w/ cash or deferred arrangement. (not a feature but an arrangement) History: Used to be thousands of major employers who from WWII on had a profit sharing plan theyd put in a profit sharing contribution (say, 5% of pay) & then they would give another 5% to employee & say, via letter, that they were going to put in 5% into plan in employees name, & there would be another 5% that employee could take in cash. But, if they dont want it in cash, employee could elect to have employer defer this other 5% into plan. These used to be called cash or deferred arrangements. Its not arrangement today where you get to put part of your salary away When they passed ERISA, these old cash or deferred arrangements became illegal. You had to deduct part of your salary. Congress at one point passed a moratorium saying that IRS couldnt disqualify these arrangements until Congress took further action. Congress eventually took further action. But none of them thought Congress further action required you to reduce your pay Salary reduction (not deduction)Deductions refer to taxes. Reductions- IRS takes position that any lawyer who doesnt pay their taxes goes before a disbarment committee. & they now have, like FTC, INS, SEC, etc. 9

lawyers that are admitted to practice before them. If you file tax return, youre admitted to practice before them. They now have reciprocity w/ every district in U.S. So every state has reciprocity w/ IRS. So if youre disbarred by IRS, you get disbarred by rest of States in the country. ESOP is a plan designed to invest primarily in employer securities. In theory, a stock-bonus plan is designed to distribute participants account balances in the form of employers securities. This form of distribution isnt a problem if youre BP or K-Mart or Goodyr What about a small or thats harder to value? How do you value them? Fair market value how do you determine this? The IRS has some standards Independent & qualified appraisers Statute defines these. A person whos an independent qualified appraiser is person that can value piece of property for gift tax deduction purposes (this is where youll find it defined in code). Independent causes all kinds of problems. It means you have no other relation w/ employer. So, even if you are competent to appraise, if you have been previously hired as Cos accountant, or their lawyer, or auditor, or you have some biz rship w/ them, it destroys your independence for this purpose. Theres a problem w/ even having same appraiser do it twice If you retain them, & keep retaining them, IRS seems to say this is okay. If you use him in 08, 09, & 10, then this is okay. But if you use him in 06, 07, skip 08, & try to use him again in 09, thats tricky Shaw isnt sure how long you have to wait. So if youre going to get rid of your appraiser, youd better intend to get rid of him for a significant period of time You have to have this independent appraisal once a yr independent appraisal firms that look at this stuff charge btwn $25k - $100k per yr to do these Hypo: Say youre both in same ESOP. You leave in Oct. 10. I leave in July of 10. Should you get your $$$ at same time? Or mo after each person left? ANS: Under prohibited transaction rules (s 406, 407, & 408 of Title I of ERISA & 4975 of code) (these are thou shalt not rules), if you have multiple participants, DoL will impose excise tax (b/c statute says its on each fiduciary) on each employer involved. (a) You have to have FMV of every qualified plan once a yr, (b) Prohibited transaction rules say that if you have a transaction btwn a plan & a party in interest, So, when do you want your stock? When you leave.

But should plan pay appraisal fee each time somebody leaves plan? If you want your $$$ out of cycle, you have to pay for appraisalSo you write your plan doc so distribution is made to everyone w/in window after appraiser has made appraisal each yr. One of things w/ ESOPs is that people dont leave very often When you pay these prohibited transactions taxes, you have to reverse transaction to stop tax running. So not only do you have to pay excise tax on total value of transaction, but you have to pay transaction back How does profit sharing/individual account plan work? Defined Benefit Plan- Employer has big pot of $. Contributions come in & they grow. Sometime out in future, when your employee turns 65, you start paying out moly benefits. Individual Account Plans have pot of $. It goes up or down. Each time you have valuation, you adjust accounts of participants by additional contributions, by any amounts paid out to them, & by their proportionate share of gain or loss for period. When these plans were 1st started, most had 1 valuation date as law required Say it was 12/31/05. When would next valuation date be? 12/31/06. etc. Would assets from 01/01/07 through 12/30/07, be exactly the same as they were on 12/30/06? Probably not. What happens if you leave on Mar. 15, 2007. I leave on Nov. 15, 07. Theres no issue w/ employer securities (so theres no prohibited transaction requirement that stock cant be distributed to you at FMV. In fact, plan says youll get it on last day of mo in which you leave.) so you get your $ on Mar. 30, 07. I get mine Nov. 30, 07. What do we each get? If assets on 12/31/06= $1 million. & employee 1 (you) has $100k on that day. Employee 2 (me) has $10k on that day. When are we going to revalue the plan? 12/31/07. On 12/31/07, the plan is now worth $2 mil. So now, employee 1 is worth $200k. Employee 2 is worth $20k. In an individual account plan, what is accrued benefit? Account balance at any point in time. So when youre paid out on 12/31/07, you get paid out $100k. Balance-Forward Accounting- When you have account balance that is valued once a yr (or twice, or 4 times). Whatever balance is as of last valuation date, that balance is carried forward & used for all distributions & other plan purposes until next valuation date. This is the way they used to do it for almost every plan (until 401k plans came along) balance-forward 10

accounting. This caused lots of problems & led to insertion of language into plans to hedge this theyd trigger interim valuations if plan drops by more than a certain % Abuses of this system, led to 401k plans use of Daily Valuation- valuation of plans assets every day NYSE is open. Most of these plans are run using mutual funds & mutual funds are valued everyday. 2 concepts are balance-forward accounting

01/26/11
50-55 essay questions for the final exam:answer briefly: should take about 5 minutes per question: should be able to finish it in about 4 hours. At $10k level: to have qualified plan, all kinds of antidiscrimination rules. (a) you cant discriminate in favor of highly compensated or shareholders, & if you do, plan is disqualified. (b) part of working s down, was legislation which spread base to more rank & file employees, (c) govt got so aggressive for a while, that not worth it so terminated many of them in hundreds & thousands. Effective 1975? Qualification provisions 1976: by time to qualify plans on jan. 1, 1976, had terminated 350 plans. 4 Different New Comparability Plans, including (1) Cash Balance Plans: AARP challenged s which converted defined benefit plans to cash benefit plans. Its when benefit is stated in terms of lump sum cash balance, payable in form of annuity at normal retirement age. Adversely impacted amt of increase in benefits for people 55-65. AARP challenged under age discrimination rules, & several class actions filed and employers were finally allowed to convert cash balance plans. Cash balance jail: would not make determinations that plans were qualified. All cash balance plans that IRS had on hold since 97/98/99 except for 3 or 4 have gotten determination letters by November of last yr (2) PEP plans: pension equity (though you would say retirement equity). Few have determination letters, shaws doesnt. Govt now thinks that b/c most people didnt write them the way the regulations said, & they have agreed to settle these cases on basis of working backwards from the h-plan documents, we have to work forward to their solution, so everyone is treated equal

Tangent: Shaw argued_____ did everything regs did, & may end up in ct. May cost $500k to fight this out in ct. L moral issue tangent (think about amt of 4 client has). (3) Target Benefit Plan: type of MPPP: individual acct plan, [get acct balance when you leave] contributions are allocated to each participants acct. Contributions unlike a traditional MPPP, ex. 10% to all participants, HYPO: if you have employees at time it goes into effect that are 21-61 yrs old, & 55 is normal retirement age, what is going to happen to 61 yr old? Only 4 yrs contributions w/ earnings if only worked until 65. What if 20 yr old: will get 10%, & maybe only earning 15k, but will have 10% each yr think about how much they will have: about $3 mil. --So person near employment will get about $40k, while other will get a lot more Target Benefit plan says that want a benefit payable to a person at 65, & takes at least 5 yrs: If 5 yrs to fund, & want to give person a benefit that was social society gives them 50% of their final 5 yr avg pay. Take whatever was earning w/ SS: ex. 30k/yer & final avg pay is $100k So how much do you want them to get? $20k, for a total of $50k. how much $ to put into plan so that a person when gets when they retire SS (a) if you need $100k a yr to do this: then for the guy thats 60: put in $100k a yr: which is 20% of his salary/yr, (b) MPP is 10% or 15% of pay for everyone, but for old guy, youre putting in 20% of his pay. What about young guy? (a) Putting in 6% of his current pay this yr so have a target, & look at funding for each person, & each & every person is different (this is assuming that going to grow at 7%), (b) what if 1st yr plan earns 4%; would next yr you put in 11%? Nope, 7% assumption says, you get investment gains, & set up for investment losses. (c) if a -24% loss 1st yr, next yr assumption is that from then until retirement will be 7%. But if 7% & earns 15 to 25%, still no decreasing, still assuming that 7%. If you outperform market, you benefit, this is only for how calculated for going in. so highly compensated employees get more than younger people Cross-Testing Plans: the way you test for qualification: DB plans is based on benefit that person gets, whereas way you test for qualification purposes for DC is amt of contribution. cross-testing plans is either a d.c. or d.b. plan thats tested opposite way that youd normally test it. So if a defined benefit plan, you test it on basis of cost 11

of contributions to provide benefit. if a D.C. plan, look at accumulated benefit that you have in acct, & see what it will provide testing for qualification, its a methodology to see whether plan is qualified or not. Qualified Plans: all that we have talked about so far: have been, but next plan is a tax sheltered annuity. a.k.a. TSA: many requirements NOW that plans have but still not qualified plans, & they have requirements so they valid tax deferred annuity that arent applicable to an XX. PBGC: created under Title IV of ERISA & it was created b/c Studebaker-Packard promising 40 yr employees, that theyd have a guaranteed pension benefit. And when they went into bankruptcy, there werent any assets to pay the benefits. So when congress was looking at erisa & passage, they had retirees coming in & saying that promised pension & didnt get it. Should pension benefits be guaranteed? No, b/c many are individual accts that go up & down, & if they down they are at your risk, & if up, to your benefit. PEP, cash balance, & X qualified DB plans, so there benefits are guaranteed by PBGC. 1980 Amd Act: all assets of all members of control group are at risk to fund whichever employer was contributing to that pension fund. (a) single employer pension funds amd act: but there only your employees that you are guaranteeing, but 100% of assets are at risk. (b) if a contribution, to a DC plan, benefit is participants, (c) DB, you have guaranteed a benefit, & to a lesser amt from PBGC (doesnt guarantee entire amt), (d) Kind of misnomer to say theyre guaranteed, b/c they arent guaranteed that greatly & if a participant in a multi-employer plan, guarantee rate is even less. 2. If so by whom? 3. & what type of pension benefits should be guaranteed? Now moving onto welfare benefit plans: Title I: (a) in addition to definition of : should know: welfare plans, as part of definition, should not be a pension benefit, (b) & enumerate what welfare benefit plans are: most s in 3-1 & 3-2 are on BB in the selected ERISA statutes, (c) But they include death benefit plans: what is biggest type of death benefit plan? LI plan --Hospital/med plans: including eyes, hearing, dental. Vacation plans Each Welfare Plan Come in Different Varieties: Health, hospital & medical plan: 1st to look at: (a) Insured medical plan & indeminating plan is usually the same thing: we will consider them the same:

Indemnity plans are indemnitified against claim for cost of benefit: what most does (b) PPOs & HMOs: (i) PPO: preferred provider Org: much like an HMO, (ii) HMO: (Health Maintenance Org) Kaiser Permanente: have to go to their facilities & use their Docs While a PPO: BCBS or others, get cheaper rate than indemnity, for that preferred rate, you go to one of their preferred providers, & your benefits are covered (c) Self-Insured: 2 Types: (i) An employer that says just going to self-insure our costs, not going to pay a premium to anyone kind of risky, & this & w/ the 2nd method is that you probably better than an umbrella policy for catastrophic loses. Say that you pay the benefit when claim comes in. (ii) VEBA: voluntary employees beneficiary Assn VEBA are exempted from taxation: formed for benefit of employees or by employees themselves, & provide different types of welfare benefits, including vacation, life or death, or medical In both the case where $ is put into an ASO (Administrative services only ks). Dont insure benefit, only administrative services. Both ASO or by employer paying it out of its owns funds, or VEBA, you should have umbrella policy: policy which provides coverage over & above our other coverage: excess overage under home owners, cars, boats, etc. Beauty of umbrella coverage: *costs very little, b/c umbrella carrier is a me-too carrier; whatever you negotiate w/ big guys, agree to automatically In this area, it is View of payouts under a policy? Where do majority of costs are on largest numbers of claims? --Investigating, processing, many are settled for a small amt of $. Cost any more to settle a $100k than $1k? Probably only if it goes to ct Much of cost in any policy is cost of administering policy. Car policy: if $100k policy, what are odds it will be paid out to its limits: if there are 50 claims probably wont hit that, b/c there are many claims that are small, & dont go anywhere near this Umbrella policy is designed to take care of 1 person out of $100k that hit a refrigerated semi: worth $450k, filled w/ Colby beef; That is when you want an umbrella policyCost of umbrella policy: cheap investment you will want to have.

If you believe that concept about why umbrella policies are cheapsame principal is true for medical: most of claims are small claims. --employer is very dumb not to have one: ex. open heart surgery, cancer: $4.5 mil. not only did they not have umbrella, but self-insured vendor was VEBA that went belly up. Life : insured or uninsured death benefit plans: uninsured death benefit plan is through a VEBA; But may want to have death benefit policy in case there are some execs on same plane one reason employers have VEBAs is that most states have an premium tax. all $ paid to an co. is taxed If a large employer, should a small employer, ever have a self-insured plan? The way works: Shaw: at 500 not enough, 5000 maybe, at 10000 look into, but want a pool of people that reflect what is going to happen generally. B/c look at administrative costs, agents commission, investigators, & if you are large enough you can say that you will pay for these yourself. Got to spread risk over a large enough body that spread the risk. Group term life : (Some small employers still do by categories: secretaries: 10k, or everyone put top 3 classes get 50k) If group term life : 1. employer gets deduction for contributions, premiums 2. First 50k of group term life , cost of first 50k is excluded from gross pay 3. Amt in excess of 50k in 100k increments, you are charged a rate per mo, based on 5 yr age increments * the amt in excess of 50k & starts low; like 3 cents a mo/1000, & more like a $1/1000 for his age Employer is probably paying 3* for an cost. Not included in gross income true contribution. If work & get , & 1* your salary & salary is $150k. And get a job & work june-october: & start june 10, end oct. 9: If rate is set forth in table i of IR Code, for your age is 25 cents --Worked 1 day less than 5 mos FML --How much income reported $1.25 --If you worked a day more than a mo, you are charged --Employer gets a deduction --If you name a beneficiary, so that moly goes to someone specifically other than your estate, proceeds to beneficiary are exempt from tax alsoIf take out $10 mil policy: name anyone, that person on receiving the proceeds, has the $ excluded from their gross income from the Code 12

Life for private loans- Your estate will pay income tax though.

02/07/11
(a) 1st $50k of group term life coverage is free of income tax under provisions of 79 of IRC. Costs of amounts in addition to that 1st $50k in $1k increments (so if you have $50,001, its same as $51k) is taxed at very favorable rate, known as a Table I raterate per thousand, per mo HYPO: So if you have $100k of group term life , & you start working for law firm, or AGs office, etc. on June 25, 2011, you would have, included in your gross income, how much? Answer: $50k is tax free. So youre down to $50k. So 50k times how many mos did you have $100k? 7 mos (June 1, through Dec. 31 doesnt matter if it was June 30, its still 7 mos). HYPO: Or if you get a raise, & go into a different raise group. Answer: So if you have extra amount, for even one day, it counts. 50 times 7, times .05 (hes giving out five cents for each of us) = $17.50 would be what is on your W-2 as cost of your $100k of group term life for the 7 mos. This is a pretty big benefit (b) Under 101(A) of Code, a named beneficiary of any type of life (travel/accident , self-funded policy, or any other that is payable on your death) is excluded from gross income of beneficiary. HYPO: Say you have $20 mil policy & you name your wife as your beneficiary, it is free of income tax. Can this be used to your advantage in any way? Name a beneficiary. You cant name your estate, or cant let it go to your estate by default. Now, its included in your gross estate & subject to your estate taxes, but estate is subject to income taxes on proceeds of the policy. Is there any disadvantage? Say you have student loan & that your spouse or your parents co-signed on that loan. Say you want to protect them. You get job w/ Ohio AGs office, & they have a $75k group term life policy. Youve got $75k of loans. Say you have group term life payable to your estate so that you can pay off debt. Well, if you do this, youll have, in addition to your gross income, income from your policy will be counted towards gross income. This will bump you up to higher marginal tax rate. So your $75k is now only $45k (after taxes). So $30k are going to taxes, & somebodys going to have to make that up. If, however, you made your wife or your 13

parents the beneficiary of the policy, they get the $$$ tax free This is true for any life (travel/accident , policy on your individual life). (c) What other types of death-benefit plans are there? (i) Group term life (ii) Split-dollar plans- Dont worry about split dollar life . Split-dollar is a concept where Corp would buy policy, & whatever their premiums were, whatever costs were, theyd get back that amount of $$$ under policy & then you, employee, would get difference. IRS has outlawed these. (iii) Travel Accident Plans- You work for employer, & they give you policy that, when you travel on biz, you get double indemnity, in addition to your group term policy. This is a life policy that IRS doesnt charge a Table I premium on But, you can name a beneficiary, & he would recommend that you do it b/c 101(A) says that any payment made under life policy payable to named beneficiary, proceeds are not includable under gross income (iv) Under permanent , there are a lot of policies called New York State Policies- Under these, agent would get 50% of 1st 2-yrs premium. Think about this they get 50% of 1st yrs, & 50% of 2nd yrs premium. How much did they get as an commission? 100% of 1 yrs premium. That $$ wasnt going to , so cash values didnt add up very fast. Then theyd get maybe 20% of next 5 yrs premium, etc. etc. There were agents who, every 2 or 3 yrs, would write a new policy Theyd always come up w/ reason why policy they just sold you didnt have some feature you now needed So, basically, consumers were paying 1 yr to Co, & 1 yr to salesman. Short-term Disability Plans 2 classifications: As long as its a plan, its not a payroll practice Payroll practice is where employer just pays you off payroll b/c they havent developed a plan. Theres sickness & accident policy (may be for only a few days). Can be form of short-term disability. Usually, its either a 5 or 6 mo period of time where employer, off payroll, pays you a portion of your salary. For instance, 1st week you might get 100%, 2nd & 3rd weeks you get 90%, 4th & 5th weeks you get 75%, 6th week through end of 30th week, you get 60%. Many long-term disability plans will give 50% (or sometimes 60% if youre a professional). So many employers wont take you below what theyd give on a long-term disability basis when youre on short-term

disability- payment by employer, fully taxable to recipient. Long-term disability is almost always a plan- If its a plan, its subject to ERISA. Its going to be insured. If employer pays premiums, employer gets deduction for premiums (just like they did in group term life & travel accident plans) Unlike group term life , there is no tax leveled on employee, until you become disabled & start receiving benefits. Then, benefits are included 100% in your gross income. HYPO: As professionals (or if youre representing pros), what do you think, under current tax laws, your income tax rate will be as a successful professional? Answer: ballparks it at 40%. Includes city, state, & fed income tax. Many, if not most of policies Shaw sees on pros, provide for 60% of your annual income as replacement income. HYPO: you earn $100k per yr. Whats your after tax income? $60k. You become permanently disabled. Whats your after tax income youre going to live on? $36k. If youre @ 100k, & your replacement policy is 60%, that gives you 60k. Taxed at HYPO: You earn $300k per yr. Answer: 60% of that is $180k take-home pay. If your tax rate at $180k, youre still going to be 40%. So its going to be 60% of 180k will be after tax if you go on long-term disability$104k. Which will be only 36% of your income before you became disabled (a) What did we learn w/ concept of umbrella policies? Why is umbrella policy so cheap? (other than me too feature?). Its rare anyone scores under it you have thousands upon thousands of people paying premiums in at very low rate, but they very seldom pay a claim. This is true under long-term disability as well its very rare they make LTD claim Have Pros (b/c premium is comparatively cheap) paying own premiums. HYPO: Does employer of Pro get deduction for premium? Answer: Yes. B/c they paid salary thats taken & buying premium. HYPO: Do you get deduction as employee? Answer: No. HYPO: Say premium for $200k policy is $400/yr. Thats less than $700 you have to earn to pay taxes on it. But, what then happens? Answer: You get this income at 60%, but instead of paying taxes, its tax-free to you b/c you paid premium; And if youre getting $120k, youre basically getting everything you had before after tax w/no taxes If you pay premium, you bought policy yourself, therefore its tax free 14

Only if your employer furnishes policy & pays premium, is it taxed. If you buy policy yourself, youre paying w/ your own protection w/after-tax dollars. So theres nothing to tax Most short-term disability benefits are paid pursuant to payroll practice. It is a benefit paid to you by employer as if it were a salary. The employer could actually write a plan document & fund it & pay for it pursuant to a plan (probably a Voluntary employees beneficiary associate (VEBA) trust), but if they do so, its a plan subject to all of provisions of ERISA Just know there is a difference btwn payroll practice which isnt subject to ERISA, & a plan that IS subject to ERISA (when he uses plan its subject to ERISA). Long-Term Disability (LTD) Have carve-out periods --Historically, social security benefits were paid out only after they were on LTD for 6 mos. This has been changed to 5 mos. LTD plans have kept 6 mo carve out period, by & large. A carve out period is period where you get no benefits under LTD plan, until youve been disabled for specified period of time. --If you compare # of people who are sick or break leg or miss work for a period of a few days or weeks, or even mos is about equal to # of auto accidents. People who are disabled for 6 mos or more are more like umbrella period. So carve out period is where they either get nothing, or short-term disability benefits (or salary continuation, maybe) but they get nothing under plan. Tax planning reference in outline was to employee paying for this benefit & not having amount included in gross income (so you get full 60%, & not after tax 36%). Cafeteria Plans- Misnomer, really more like funding vehicle. 125 of IRC deals w/ cash or deferred arrangements somewhat akin to 401k plans. (i) You can reduce your pay, thereby avoiding taxation on your pay, & have amount paid into a cafeteria plan (or a 125 plan). (ii) But these 125 plans basically dont provide benefits themselves. It can be a document that tends to give you a selection of different benefits (which is where name came from) (iii) Name came from concept, originally, that an employer, instead of reducing your pay & have you as employee pay benefit (be it , LTD, etc.) employer said we will give you, employee, equivalent of $500 worth of benefits (iv) Each employee may have different needs, so they could select coverage/benefits that best suited their needs (v) No exchange of $$$. (vi) Once you got to your $500 a mo, you couldnt get

anything else (vii) After a few yrs, employers started charging employees for benefits (i.e. requiring co-pays) (viii) There was concept of letting employees reduce their pay by $100/mo & letting them cafeteria w/ that. Most employers dont have cafeteria plans in original sense. Now they use either Flexible Spending Accounts (FSA)You can put $$$ in & use it to pay off co-pays, or use it to pay your employer portion of your contribution to the plan. These types of plans are use-it-or-lose-it plans. Either use benefits during allotted period of time (usually yr & 3 mos) or you lose them & employer gets them back. HYPO: On other hand, say you put away $100/mo & you have an orthodontist bill in January for $1100. Youve only put in $100 in January. Does employer have to pay whole $1100? Or does it have to pay the $100? Answer: No. employer has to put out whole $1100, even though its January & youve only put in $100 so far. HYPO: Say you leave, $1000 ahead on your FSA. Can your old employer collect on the $1000? No. employer cant. But remember, if you dont use it, you lose it So it kind of works out Why do you think IRS rule is use it or lose it? HYPO: What if this were an insured plan? If that plan had been on insured dental plan & you paid $100 at beginning of yr. Would have to pay out $1,100 bill? Answer: Yes. Well, if 125 is supposed to mimic , youd expect it to have same role, right? Yes. Regs actually talk about treating this as if it were . In this area, logic doesnt carry day. Many of rules make no sense Whats difference btwn 401k & 125 plan? (i) 401k plan is a qualified plan. A 125 plan funds welfare benefits. 401k plan, $ can be deferred to termination of employment or beyond (its retirement plan). No $ from 125 plan can be used to defer compensation (you have to use it or lose it) (ii) 401k plan, w/ few exception, wont allow you to use $$$ while youre employed (iii) So even though these 2 are somewhat similar in that theyre cash or deferred plans, theyre very different. Severance Pay Plan: (i) Paid when you leave. What is it? Its a (deferral of compensation to termination of employment or beyond right?). (ii) Employers have been doing severance pay plans for yrs (long before ERISA) & nobody in their wildest dreams thought of them as s (iii) Used to be that, in addition to their pension benefit, youd give departing employee a cash-out-the-door 15

check. In the 1950s & 60s itd be $50 or $100 (iv) IRS said, under ERISA, these are sUnions & employers (everyone other than Congress) understood severance pay plans were not s(v) So, several employers said, if this was going to be IRSs position, theyd stop providing them (vi) DOL came up w/ some rules after they found out it was going to put enormous burden on people who were terminated Came out w/ regs: (a) 3 Criteria: If payment: (1) wasnt conditioned on retirement, for (2) more than 2xs current annual salary, and (3) for a period of greater than 2 yrs, then its not a but rather welfare benefit plan. (i) Still have to have plan document, file 5500 (if you cover 100+ people), do a summary annual report, but as a welfare plan & not . So severance pay plans are ERISA plans, but if they meet those three criteria (1. Not conditioned on retiring, 2. Amount paid is not more than 2xs current annual salary, & 3. Payment is not made for more than 2 yrs), theyll be a welfare plan & not a So you could essentially give someone their current salary for more than two yrs (i) Or one payment equal to 2 times their salary, or any one of a million things in between that, & it would be a welfare plan & not a . Vacation Plans: Kind of like short-term disability youre getting paid for a short period of time that youre not working & it can be done either as a payroll practice or subject to ERISA. (i) Anything that is a payroll practice is not a plan (ii) Anything that is a plan is subject to ERISA In Cal law says, 1st day youre hired as employee, you accrue 1/365 of your annual vacation. Some places accrue them by pay period. Most employees have to work for a yr before they begin accruing vacation days. HYPO: You start on June 15, 2011. You cant take your two weeks until June 15, 2012. If you leave before then, some employers will give you a pro-rata vacation that you can take. Answer: Some will say you get nothing. Cal gives you 1/365 of your vacation every day (if you quit after one day, employer in California has to write a check for 1/365 of your vacation pay). If youre national employer, w/ employees all over country, your employees that work in Cal & earn exactly as much as rest, are getting paid extra amount that none of rest of your employees are getting. (ii) Since vacations are a payroll practice (term & condition of employment) theyre subject to state law.

What can employers do about this? Create plan & fund it w/ a VEBA. Tell state of Cal to go screw off. How can you do this if state law says you have to pay 1/365th of their vacation to your employees each day? Its a plan. A plan is subject to ERISA. ERISA preempts state law. Whoopidy do. (i) It costs client a fairly large amount of $ b/c you have to do a plan & a VEBA & a ruling from the IRS that the VEBA was exempt from taxation under 509(1)(c) of the code. & because its a plan w/ several thousand 1000 employees, financial records need to be audited each yr. But amount of $ they save is way beyond cost (if you have any sort of significant employee presence in Cal) (ii) Here is a case where normal payroll practice (& most of you will never see vacation plan unless other states start to behave like CA). but we took provisions of ERISA & used them for employers benefit Each one of these guys, one way or another, has a statutory provision that deals w/ them History: One of laws that deal w/ employee benefit plans that was in existence when ERISA came into being was Taft-Hartley Act (Sen. Taft lost Republican nomination to Eisenhower). Says that MGMT & employers cant give contributions or $ or anything of value to union & MGMT & employers cant be voting members of union. & it establishes rules for Taft-Hartley Act plans, which requires plans to be managed by joint trustees made up of equal # of union & MGMT personnel Of all different types of plans, theres one thats not created by statute: VEBAs are under 501(c)(9) of code. Charities are 501(c)(3), etc. but one plan not created by statute are joint apprenticeship funds- arent specified by code, but yet they are form of plan benefit (or benefit plan). (i) actually established by revenue ruling. established by the IRS, whereas they have a joint board requirement (labor & MGMT) but IRS says that joint apprentice plan is union, & is therefore exempt from taxation (ii) Well, if its a union, the Taft-Hartley Act says that unions cant be managed by management. So this is one of those little quirks of the law, that seems to fly in face of labor laws & general laws dealing w/ tax exempt Orgs

02/09/11
Payroll practices are subject to state law requirement; not ERISA. Plans are subject to ERISA; not state law (b/c of preemption). 16

Exception to Org being exempt from taxation via 501 of code? 501(c)(3) non-profits Whats difference btwn 501(c)(3) Org & any other Org exempt from taxation under 501(c)? You can deduct contributions you make to it Churches, hospitals, United Way, etc. What Org is tax exempt, but not by statute? Apprenticeship Fund; Its exempt through revenue ruling designating it a labor Org, which exempts it under 501(c)(5). But Taft-Hartley says labor Org can have no control by MGMT. Apprenticeship fund is required by law to have an equal # of MGMT & labor trustees Long-Term Disability Plans have Carve-out AreasProfessional employees would be wise to pay premiums on their own LTD policies. Whos taxed on LTD & when? If employer pays premium, its not taxed until employee receives benefit. If employee pays premium, its taxed upfront (you purchase it w/ after-tax $$$). They arent taxed on proceeds then Even if youre at 40% tax bracket, if youve got 60% disability benefit, youre earning $600k per yr. You get $360k in benefits. That premium will cost you less than $1k a yr. How much do you have to earn, before tax, to pay $1k? About $1,400. So youre paying $400 in taxes a yr. You work for 20 yrs. $8k in taxes over 20 yrs. What if you score on LTD plan? Avg payout for Pro who actually becomes disabled is about 15 yrs. So youre getting $360k per yr for 15 yrs tax free Otherwise youd be paying 40% on that $360k. LTD is income stream that replaces your salary if youre unable to work If youre self-employed, you dont get a deduction for health care; you have to pay for it w/after-tax dollars If youre an S Corp shareholder you lose deduction b/c its included in your gross income. As associate in law firm, theyll pay your HC & theres no tax to you (under IRC 105 & 106). If youre a partner or a shareholder, youre going to pay w/ after-tax $$$ or have cost included in your gross income one way or other youre going to pay for it VEBAs (501(c)(9) of code)- (i) Funding vehicles to provide a variety of welfare benefits. (ii) Cant provide pension benefits pursuant to a VEBA. (iii) Cant provide supplemental unemployment benefits pursuant to VEBA. (iv) If youre going to do this, trust has to be exempt under 501(c)(17) of the code (v) If it has indpdnt

trustee, its a voluntary Org (vi) But employer cant establish VEBA w/ individual trustee (then it wouldnt be a VEBA). So its not really voluntary. History of VEBAs- Employers back in late 70s & early 80s, bunch of lawyers & accountants were selling VEBAs as tax shelters & they became listed as abusive tax shelters. Ex. Doc would have ski house in Colorado. He would donate cabin to a VEBA. Doc would then take a deduction for fair market value of property. Then Doc would say to his employees: you can use ski house whenever, so long as you pay your way out there (none of them could really afford to do it) & doc would just go out there w/ his family VEBA Current Status: This got knocked-out in tax reform act of 1984 s 419 & 419A were added to IRC. VEBAs are still used for welfare plans that are Taft-Hartley Act welfare plans Almost every Taft-Hartley Act welfare fund in U.S. is exempt from taxation under 501(c)(9). Can also be used to establish & fund vacation plans in California. CA has weird statute that requires you to give employees 1/365 vested vacation for each day they work. Natl employers hate this Tax Exempt- To be exempt from taxation, unless youre a church or synagogue or youre a qualified plan (usually ask for rulings on this, so that you dont take chance on it), if youre a United Way, social service, club, supplemental unemployment benefit plan, or VEBA, you have to go in on form 1024 & ask for determination that youre tax exemptYou are not tax exempt unless IRS says youre tax exempt. If youre a VEBA youre tax exempt, but youre not a VEBA until govt says you are VEBAs are still viable for multiemployer plans & single employer plans, but theyre probably not viable for multiple-employer plans 3 terms: (1) Single employer plan- All members of control group (2) Multiemployer plan- 2 or more different control groups that contribute to plan not subject to a CBA. (3) Multiple-employer plan- Contributions to plan by 2 or more unrelated employers pursuant to a CBA. (1) One of things to happen in employee benefit area is a lot of people viewed it as way to make $ coming up w/ wild schemes (like VEBA ski house thing) (2) Another was when 419 & 419A were passed, restrictions were put on funding of VEBAs & funded welfare plans so that you couldnt fund your ski house there was exception if plan was maintained by multi-employer group. So now youve got lawyers running around setting up VEBAs for 17

multi employers kind of like mini s that arent subject to state law b/c of ERISA preemption. State commissioners got Congress to pass an amendment that says if you are a MEWA (Multi Employer Welfare Arrangement) youre subject to regulation by the state departments of . (i) Doesnt apply to multiple employer plans & doesnt apply to single employer plans (ii) Cost of becoming an regulated VEBA put all these guys out of business If you have qualified plan, who pays cost of plan? (i) Govt picks up large cost of s After 1st gulf war, Pension & welfare benefits were 2nd & 3rd largest expenditures in fed govt budget. Why? (ii) Employer gets current deduction for pension contributions. Employee isnt taxed on pension contributions until distribution (which is 30 to 40 yrs down road). Theres budgetary cost to this. (iii) Trust that contributions are made to earns $ (billions of dollars a yr). These arent taxed. Theyre tax exempt entities. So those earnings arent taxed until employee gets retirement benefits. Theres a budgetary cost to this as well. What about health benefits (i) Employer gets a deduction, (ii) If its insured benefit, employee isnt taxed on health premium The corollary to pension benefit is when medical bill is paid. Are you taxed then? No. So in this case, govt is subsidizing health plans by giving current deduction to employer for contribution & never taxing benefits. Look at life - Employer gets a deduction. Employee gets to exclude first $50k of group life &, after that, its taxed at about 2.5%...And if you name a beneficiary when proceeds of any life are paid out, its free of income tax to beneficiary. Look at 401k plans, employee might be paying part of cost. Generally not for s or profit sharing plans: govt & employer pays for these. But 401k plans reduce your salary to fund benefit. Health : Theres co-pay, so you pay part of cost as employee. And if its pursuant to a cafeteria plan, employer is reducing your pay (dollar for dollar reduction in pay). Any other plan w/ cafeteria feature (be it co-pay or purchase of extra , or LTD (dont do this; pay for it w/ after-tax $$)). Exception to rule is uninsured Med reimbursement plans- 105(h) of code- If highly compensated employees get disproportionate benefit compared to rank-and-file employees, benefits received are taxable

to participant. Shaw has had 2 of these much to chagrin of 2 people involved. What does this mean? Well, what is taxed? The value of benefits received. Ex: paid $500k benefit pursuant to uninsured medical reimbursement plan. HYPO: Guy to a 1099 for benefits received (no taxes were received b/c there was no $$$). He had to include in his gross income the $500k. HYPO: rare cancer patient. Cleveland Clinic tried some experimental drugs on him. $480k bill. You dont want to be in this type of situation Obamas HC reform bill has turned insured plans benefits to be covered & taxed under 105(h). Theres a bill introduced today to undo this There are going to be a lot of people, Test is: were benefits paid to HCEs (highly-compensated employees) disproportionate to benefits paid to nonhighly compensated employees? (yr-to-yr test) If youre HCE & you get sick in yr & have benefits paid to you in yr when other people who arent HCEs are relatively healthy, itll be included in your gross income If youre not an HCE, & you have benefits, its never included in income of non-HCEs So you could have non HCEs 5 yrs in a row w/ majority of benefits. 6th yr, 2 HCEs (one gets cancer & one has open heart surgery), those 2 Execs will likely get taxed on full value of benefits Other thing bad about these 2 exs: 3 Rates At Hospital (1) Rate for the procedure, (2) Mcare reimbursement rate, (3) insured reimbursement rate (pursuant to ). Mcare & insured rate are roughly 50% of established rate for procedure 2 people in examples, b/c you get charged rate thats set by hospital as fair market value rate (not Mcare or insured rate, but artificial rate), thats what got included in their gross income Basically, HCEs are those who earn around & above $165k. Rationale behind the law was to try to force employers to cover everybody but they didnt understand how 105(h) worked (b/c its a yr-by-yr test) Uninsured/self-funded death benefit plans: (i) Plans that either Co says well pay a death benefit if an employee dies, but we wont insure it (ii) Theres no cost to employer (b/c theres no premiums) Is there a table 1 cost to employee? No. When someone dies, does employer get deduction for its payment? Yes. 18

Is entire payment included in gross income of recipient? Yes. Its not , so its not excluded under 101A. So its no different (from govt perspective) from salary. But to beneficiary, it makes quite a bit of difference. They pay ordinary income taxes on it Laws in existence prior to passage of ERISA that dealt w/ employee benefit plans What were they? (besides tax laws, aka revenue acts ) (1) Taft-Hartley- Effects multi-employer s & multiemployer welfare benefit plans. (2) Selective Service Act- (i) Say your # gets drawn. You either join or youre drafted. One joins. Ones drafted. & ones a reservist who gets called up. All 3 have reemployment rights. Your employer has to rehire you w/ same pay & benefits (as if you were on a conveyer belt & you were pulled off belt at point A, but when you come back, belt is at point B, you have to be put back on belt at point B. so for seniority, pension credit, etc., its like you never left). (ii) If you join active army & youre gone for 3 yrs (it might be 4 now) it applies to you. You cant go to army for 20 yrs & then come back (3) Securities Acts of 1933 & 1934- Applied to employee contributions to plans which were much more prevalent in profit sharing plans on an after-tax basis in 30s & 40s & if those contributions were used to purchase employer securities, securities had to be registered on Form S-8. (4) Labor Laws- (pension & welfare plan disclosure act of 1958) (5) Investment advisors act of 1940 (6) Some state laws came up & had very specific disclosure requirements (7) NOT NOT NOT social security act

02/14/11
ERISA (Employee Retirement Income Security Act of 74) 4 Titles Title I- Labor Provisions, Title II- Code Provisions, Title III- Mandates about studies & updating Congress (no need to worry about), Title IV- Established PBGC (Pension Benefit Guaranty Corp) Guarantee is spelled guaranty PBGC guarantees qualified defined benefit plans. They arent guaranteed if they werent qualified in 1st place, or if you do something that causes plan to become disqualified, benefits arent guaranteed Defined benefit plans are subject to 204(h) of ERISATheyre subject to 412 of Code (minimum funding standards accounts) $ purchase s also have same requirements.

Title 4 & PBGC guarantee benefits of $ purchase s as well What is $ purchase ? It is individual account plan. A defined contribution plan. This is another anomaly where certain things apply to them but not PBGC benefit Title IV is a direct result of Studebaker debacle. (i) Establishes requirements that all plan assets be held in trust (ii) Establishes fiduciary duties under 404, (iii) 402 is provision that deals w/ plan documentary requirements (iv) 403 is in trust requirements. One of s in Title I that you should be most concerned w/ if youre not ERISA lawyer is 405. 405 (its on Blackboard) is co-fiduciary liability. If youre getting paid, not for your investment advice, but for your advice as an accountant, they can go after you under 404. What happens w/ lawyers & 405 is that your client will begin to do what you suggest. Say my advice is that you need to do x or y, but I am not fiduciary w/ respect to plan, I only give legal advice He gets several judgments against lawyers under 405. 405 says you are liable as fiduciary for a whole magnitude of things that a co-fiduciary does. If you look at 409, youll see that if you breach your fiduciary duty, you are personally liable (bankruptcy wont protect you) Why is 405 a bigger risk to non-ERISA attorneys than 404? Look at 404: if youre a fiduciary & you know youre a fiduciary, wouldnt you do everything that a fiduciary should do? Sure. 405 can make you liable even if you dont know youre a fiduciary So you might not be worrying about (or even know about) what your cofiduciary is doing What does ERISA mean to you? If you look at our plan docs (ABC , Max Savings Investment play, & XYZ retirement income plan) youll find that in both of these plans, Shaw refers to the code as a term of art for IRC. He also refers to Employee Retirement Interim Security Act as ERISA is this ERISA same as act that was passed in 1974? No. hes referring, & most ERISA lawyers, are referring to Title I of ERISA (when they use it in a plan or in a lawsuit) When he talks about it from standpoint of a layman or in this course hes talking about whole act As a non-ERISA lawyer, youll be faced w/ statements from businessmen, co-workers, accountants about ERISA. And what they mean when they use that term is not necessarily what you think they mean Either inhouse corporate counsel or some partner will ask you to do a research project involving some aspect of ERISA 19

(sooner or later). Clients dont like a young associates bill for wasted work Theres a whole alphabet soup of statutes that have been passed amending ERISA ERDA, REA- Of these, a good 1/3 of us will be effected by REA (Retirement Equity Act of 1984). One provision deals w/ quadros REA: was passed in 84 when Dems nominated Rep. Ferarro as candidate for V.P. (to run w/ Mondale). She introduced a bill that was passed 3 days later that gave spouses rights under s & theyve been goofed up ever since. (i) Women thought they got 50% of all mens benefits but it works both ways men get 50% of wives benefits too (ii) Quadros are domestic relations orders issued by a court of competent jurisdiction that meet requirements of REA (for a quadro) & have been approved by plan administrator as a quadro So if a court issues a quadro, & plan administrator approves it as a quadro, its a quadro until plan administrator says it is, its not a quadro (why is this important? problem is that both ERISA & Code say that a persons benefit cant be alienated & giving something that is yours (your retirement benefit) to your ex-spouse or your children is alienating it) If you dont go through steps, it can disqualify plan And IRS looks for these things. B/c they get a lot of $$$ if they get disqualified plans. One plan was worth $900k got assessed a $3 mil penalty (after it was bought for $600k). This plan had been in existence for 13 yrs so when you add up penalties, interest, put back in deductions you took & contributions, & then their assessment is 80% of that # HYPO: What if you had child support order & husband doesnt pay it. It goes unpaid. He doesnt work for employer, so that his kids arent getting food & clothes. So county child support agency issues an order against his former employers profit sharing plan to pay amount that is owed (say its $20k & that he has $500k in plan). How many of you think that employer can honor that order & pay out $? No. its not valid. You cant honor it Why not? Well, can plan administrator even approve it? No. say it even meets requirements of statute (REA). What did he say Quadro was? Quadro has to be issued by a court of competent jurisdiction a child support agency is not a court Is a juvenile court a court of competent jurisdiction? No. You need either a probate court or a common pleas court or a domestic relations division. What about a federal court? Nope.

If they honor an order that isnt a quadro, it disqualifies the plan. And plan qualification is at plan level, not participant level. It adversely affects employer, trust (all trust earnings are subject to taxation if plan becomes disqualified), & each of employees & beneficiaries. COBRA: one nice thing about COBRA, one bite & itll kill ya (i) If you violate continuing medical coverage mandated by COBRA (ii) Think about control groups all Cos that are owned under same control HYPO: Lets say you have that has 100k employees. This is why they normally centralize benefit administration. Say you have little subsidiary in Cleveland w/ only 100 employees & their own medical plan. Say one of them leaves. Youre manager of Co & you dont like this person & youve been wanting to get even w/ them they leave & you dont give them a COBRA notice (which says that you can elect continuing coverage for either 18, 27 or 36 mos). Say this employee has brain tumor shortly after leaving, & their med bills are $500k Answer: (1) Co has just become guarantor of medical bills, (2) theres a per/day fine for each COBRA notice you havent given out (capped at $50k/day) (3) all members of control group lose all their medical deductions for yr (their medical contributions are probably in neighborhood of $100 mil remember its every member of control group of 100k person Corp) (i) NEPA: , (ii) GATT: Uraguay Round Agreements Act Implementing the General Agreement on Tariffs & Trade, (iii) HIPPA, (iv) HERO: the Heroes Earned Retirement Opportunities Act (for reservists called up in the Middle East Conflict), (V) HEART (Heroes Earnings Assistance & Tax Relief Act of 2008) Most of statutes, if theyre code provisions, are set forth in D1. D2 are ERISA provisions. One is ERISA Title I itself. In parenthesis, he has set forth corresponding U.S.C. provision. Its U.S.C. provision thats on Blackboard ERISA preempts state laws except & laws of general application. Not divorce statutes, not state criminal statutes. Shaw would argue that, if it has to do w/ an employee benefit plan, when law of general application effects employee benefit rights, its preempted by ERISA (even though statute says it likely doesnt) Hypo: Youre married, each have will leaving everything to your spouse. Have life policies naming each other as beneficiaries; trust naming each other beneficiaries. Each work for different s that give you $100k of group term life & named each other beneficiaries. Under 20

REA, shes beneficiary of your 401k since shes your spouse, as you are of hers Ohio & other state laws say if you get divorced, & dont change your will, trust, life beneficiary, each of 2 parties respectively will be treated as having predeceased other. So you get divorced. You get run over leaving court & die. Statute says she predeceased you. What does she get? (a) life policy b/c that was individually bought & is governed by statute, (b) She doesnt get group term policy, trust, will, b/c its all preempted, (c) 401k plan, it depends- If it was automatic provision & you hadnt named her (it just says your spouse shes out b/c shes no longer your spouse), If you named her, she gets it. HYPO: Married guy has gf whos pregnant. Wife finds out, files for divorce. Gets it. Decree said that hed name as long as his kids were alive (not till they were 18 or 21 as long as they were alive) would name her as beneficiaries of policies. Corp policies totaled $3 mil. After divorce, w/o Co knowing what divorce decree said, he went in & changed it to his g/f who he then married. So he dies. Now, we have divorce decree that Co has never seen that says as long as kids are alive, ex-wife gets life proceeds (clearly legal order). He didnt follow it, so hes in contempt of court. His ben eficiary designation on all policies is new wife/widow. Who do we pay it to? Those policies are governed by ERISA, not court order (you can now do quadro post death, but that wouldnt even apply b/c they only apply to qualified plans, not welfare benefits). So court order is out window. Unless you get court order that says you have to pay it to ex-wife, theyre not going to pay it.

02/16/11
Prenuptial Agreement: protect rich girls assets; keeps everything from her family & every she earns, & same for him. Pre-nup gives up all rights to retirement or spousal benefit of W & she gave up yours. Retirement Equity Act: work for a firm, & earning $1 mil/ yr. father-in-law threw you off cliff, who is going to get your $4 mil pension? GF is listed under Erisa, prenup waiver of spousal death benefits rights is just void. Have to sign spousal waiver of benefits, (1) knowingly & (2) have to be spouse. Have to have language that varies from state to state that you will waive them under any plan that will be in future & both have to do that if that is what they want. Have to sign other . ? more than 1 way to skin a cat. Exs of how erisa affects (seems that making beneficiary

revokes waiver) so b/c wives needed to consent to give up $, which of marriages is going to be one who gets $? The one the law recognizes Dealing w/ Fs: Who or what is a F? Definition in 3 of ERISA: See multiple ways where a person can become F. Pg. 429 USC 102 21 a: (1) To extent he exercises any discretionary authority or control respecting MGMT of a plan Or you have control w/ re: to assets of plan (2) Render investment advice for a fee or other compensation, directly or indirectly *be careful w/ this & even if you arent charging for a 5 min period of time, youre charging indirectly (& Shaw says lawyers do this all time) Way to protect is *but Im not a F w/ re: to plan so thats why he said scariest part isnt 404, but 405 rather. 3. Any discretionary authority or discretionary responsibility in admin of plan. Duties are a F are defined in 404 of erisa: in part 4 of title I:requirements of plan under 402: says what a plan document doesnt have. If you dont have, in violation of erisa, including a designation of how plan can be amended or terminated 6th cir: lots that say, for ex. if you have retiree medical coverage, now that retiring medical costs have gone from $50 - $2000 a mo, cos. have tried to change plan, put in co-pay provisions, or terminate, & 6ths says that w/o a plan doc that meets this s requirements, cant change or amend plan. 403 deals w/ in trust requirements: all assets of plan must be held in trust, except those held by co. licensed to do biz in any state 404 forth duties of Trustee: if looking at 404, you will see duties may look little familiar if having taken trust & estates: but state law requirements of prudence: in employee benefit area are super-cedent by super-X duties would act in same way that professionally trained F would act in the same circumstances & if you breach: personally liable for injuries. 405: co-F liability: only get out of it if you go blow the whistle to DOL or ct or maybe IRS.*real estate: has to be geographically dispersed: DOL reviewed file & said 407 & 406 are prohibitive s: DOL isnt forgiving on these, unless either statutory exemption under 407 or 408, or you have administrative exemption that is a class exemption that applies to anyone that meets certain facts. Or individual exemption, you dont want to 21

engage in a prohibitive transaction. 15% per yr penalty for engaging in a prohibitive transaction: & per yr means 4975 of IRC: code provision is actually one that combines in different words provisions of 406, 407, & 408, plus adds excise tax, all in one of code but prohibitive transactions can include things like loans to participants from a plan. 401k: prominent features: has loan borrowing provision: but he did just say that this is prohibited: any loan btwn party in interest or disqualified person is prohibited one allowed in 408 are loans to plan participants, as long as they are made available to rank & file employees on same basis as highly compensated employees & theres not discrimination. DOL can assess penalty against all parties who are involved in violation. Have to charge market rate of interest when you have bad credit. *** Someone independent of co. to make it in best interests. If DOL gives you exemption, they will give you piece of paper that sets forth terms. 409: if a F & you breach your F duties, youre personally liable; area can be a trap for unweary. All kinds of landmark cases in this area: firestone: lead to many plan amendments. unless plan admin is given discretion in plan doc that a trier of fact in a lawsuit challenging admins decision can review matter de novo. If however, plan has firestone type discretionary language, that have discretion to decide issues & its final, then can only review on whether there is abuse of discretion. He puts this language in everything: ex. nonqualifed plans, put it in anything thats plan under erisa; largest area of noncompliance w/ erisa issues: having s that you dont file as top hat plans this case is very important for non-erisa Ls

02/21/11
ERISA Preemption cases Under Louisiana law, a Usufruct is equivalent of common law surviving spouses benefit or right in propertycase went to Supreme Court, but ERISA preempted the Usufruct Boggs v. Boggs- Any passage of state governed will is preempted by ERISA. What s of Code deal w/ fiduciary duties? You would think ERISA would govern fiduciary duties but there are parallels under code Code 401(a)(2) for plan to be qualified, you must operate plan in accordance w/ its terms. If you look at

fiduciary duties under 404 of ERISA; one of requirements of fiduciary is to operate plan, do defray expenses, etc. in accordance w/ plan docs ii. Shaw is waiting for a case to come down some day where they say if you DQ a plan b/c it wasnt operated according to its terms (which is the net effect of not operating a plan according to its terms) then that means youve breached your fiduciary duties under 404 or a co-fiduciary under 405 (b) What other impacts fiduciary duties under the code? a. If you engage in a prohibited transaction (which is also arguably tantamount to breaching your fiduciary duty) (prohibited transactions are 406, 407, & 408 of ERISA, & 4975 of the Codethis is the parallel provisionand 4975 also imposes the excise tax for violation of the prohibited transaction rules. How many days do you have to violate it before it becomes a prohibited transaction for the yr? i. One day in a yr 1. Now if you start your prohibited transaction on Jan. 3, 2010 & correct it by Dec. 29, 2010, how many excise taxes are going to be assessed against you? a. Just one. Situations where you could violate your fiduciary duties (c) What if you want to fund benefits going into the future in a so you can get rid of the plan (terminal funding). You have an uncle who is a licensed agent for Met Life (5-star rated ). You turn over all your $$$ to Met Life. Your cohort brings in consultants & picks, after all kinds of due diligence, Empire Life . He turns over all his $$$ to Empire. Both are funded to the exact same level. The amount of benefits are the same. But because Empire is a believer in using junk bonds, & therefore gets about 2 to 3 % higher interest rates than Met Life, you get back for your $1 million (pay 40% excise 22

tax & income tax on the $1 million). rewards you w/ a bonus. A yr & a half later, Empire goes belly-up & the states of California, New York, & New Jersey take them over. Their benefits are funded to the extent of about 12%. Meantime, 25 yrs later, Met Life is still in business, still paying benefits, you got no bonus from your . On these facts, weve got the good guy & weve got the not so good guy a. Who goes to jail? i. Nobody b. Who is barred from being a fiduciary in the future? i. You are (the guy who turns it over to Met Life) c. Who gets off Scott-free? i. Second guy (who did the diligence & farmed out to Empire) (d) Second guy got it all wrong (the plan lost everything, he got a bonus, the participants are all out b/c they got DQd etc.) but he went through the right steps a. In looking at whether you breached your fiduciary duties, we look at how the decision was arrived at, no matter how the decision turns out (e) One of the common things the DOL goes after is barring people from being a fiduciary for the rest of their lives. Is this a significant punishment? a. Yes. If youre barred for life from being a fiduciary, can you ever again be a member of a board of directors of a ? No. (you cant have any employee benefit plans if youre on the board. A member of the board, by definition, has discretionary authority as to the plan.) Cant be CFO, Treasurer, Controller, etc. either. i. And the DOL is very brush in their approach on this 1. Look at DOL Reg. 2509.951 a. For an analysis of the process of performing fiduciary duties (f) Today, 401k plans have become so expensive to administer that many of the plans services (from mutual funds provided, to the platform its on, to

the type of report you get to the internet activity, etc.) are integrated into one package. So you as the fiduciary have the obligation to select whats best for the participants; not whats best for Co or whats best for you a. Two three of the national providers still out there are absolutely miserable (g) If youre the consumer-employee, when a change is made, the employer has to give you a blackout notice under SOX (the DOL regs. For this are on blackboard as is a form of notice that they have provided, plus hes given a blackout notice that he uses) a. Why do you want this blackout notice? i. If you want to take out a loan, you need to know that you wont be able to take out a loan during the period the plan is switching service providers. That you cant get distributions. Each participant has a right to direct the investments that their $$$ is invested in; you cant do this during the blackout period either. ii. You also need to know this stuff if youre an attorney. If youre a corporate lawyer (or even just a business manager). Failure to give this notice on a timely basis can be very expensive, penalty wise Say you have a variety of fund families & the employer decides to go to a Fidelity platform (or T. Rowe Price platform), & theyre only going to have Fidelity (or T. Rowe Price) funds. Question is: when you switch, do you liquidate & hold cash until you get all the record keeping & stuff done? (it takes 3-4 weeks to close the records in the one fund, sell the assets, reinvest, & reupload the records & match them to the penny). Do you liquidate & hold in cash (so that if the market dives, youve still got the principle) or do you map it (mutual fund 1 on the first platform is equal to mutual fund 10 on the new platform & then move the $ in fund1 to fund 10)? (h) Most people are mapping in todays market a. You dont have a 30-40% drop in the market in a mos time. And, that 35% drop in March of 2007 was followed by a 23

33% increase over the next 5 week period. So, what if you had liquidated in cash & missed the 33% jump? b. This is a fiduciary decision to be made. So you always raise the question: are you going to cash out? Or are you going to map? i. Its not an easy decision. Next major of the outline involves reporting & disclosure requirements (i) Who do you report to? Who do you disclose to? a. Reporting is to the government b. Disclosure is to the participants (j) Summary Plan Description (SPD) a. Disclosure document given to plan participants & beneficiaries i. Describes plan provisions in easy to understand terminology (k) Summary of Material Modifications (SMM) a. Another disclosure document b. If you make a material change to a plan, you must either revise the SPD & redistribute it, or you can tell the participants & beneficiaries about the material change via a simpler & shorter SMM (l) Summary Annual Reports a. Historically, these are given for all types of plans (just like SPDs & SMMs) b. These are given within 30 days after the SPD is filed for a plan. c. If you look at the regs on SMMs, the information you get is next to worthless i. For instance, it talks about how you have to describe the cost for the plan yr (could be $1.5 million wtf, mate?) 1. Plan costs are also distributions a. So if the actual cost of running the plan was $500. & you gave a distribution of $1,499,500, then your SMM would disclose plan cost for the yr as $1.5 million

i. So w/ defined benefit plans, much more detailed information is now required in an annual report for s given in the fourth mo following the end of the plan yr, rather than the 10th or 11th mo 1. Emp loye r has until Sept . 15 to file a tax retu rn & mak ea cont ribut ion to a plan (if its a ) a. T h e n y o u 24

h a v e t o f i l e t h e 5 5 0 0 ( a f o r m o f r e p o r t i n g f i l e d

w / t h e D O L ) . & t h e n t h e s u m m a r y o f t h a t a n n u a l r 25

e p o r t m u s t b e g i v e n 3 0 d a y s a f t e r t h a t ( s o b y N o v

. 1 5 ) . B y t h i s t i m e , y o u r e g e t t i n g i n f o r m a t i o n t 26

h a t i s a l m o s t m e a n i n g l e s s i n m o r e t h a n o n e w a y .

i. I t s a b o u t a p l a n y r t h a t e n d e d 3 2 0 d a y s a g o . (m) Form 5500 a. All s must file these. It is a reporting form 27

i. Even if theres only one person covered by the plan ii. This is why, if you have a top-hat , & you dont file the top hat election letter w/ the DOL, you have to file a 5500 each yr, in addition to summary plan description, a summary of material modification & a summary annual report b. If you are a welfare plan, & you have 100 or less participants, you dont have to file a 5500 form, if it is: funded out of the employees pocket; off the employers payroll; or if its funded by an i. If its funded by a trust (VEBA) you must file a form 5500 c. In addition, if you are a VEBA, you must file (since youre a tax exempt Org & youre not a trust for a that has been granted an exemption) you must file the same form that any other tax exempt Org must file: a form 990 d. In addition to this, if you have a that is DQd, you have to file a Form 1041. All the forms (5500, 990, 1041) are all forms that you file w/ the IRS. They are reporting forms. Not disclosure forms. i. What is the big thing that is part of HIPPA that you can violate & get big penalties? Private health information (PHI) that is disclosed. ii. You could be in trouble for inadvertently disclosing it, the person who you disclosed to could be in trouble, your firm could be liable under the cofiduciary rules, & your client could be liable for telling you about it iii. Say youre working on a personal injury claim. You get consent of a party to get their private medical data. You sign the required secrecy documents w/ the medical records provider & you leave it laying on your desk. You have another client come in & its seen by them. You have a real

problem on your hands now this is probably true w/ any confidential legal document, but its a lot worse w/ this stuff (n) 204(h) notice a. It must be given either 15 or 30 days, depending upon the # of participants (over or under 100) before there is any curtailment, suspension or decrease in future benefits under either a defined benefit plan or a $ purchase b. Failure to give proper notice results in the plan amendment that effects the amendment (the decrease, suspension, curtailment) being void ab initio (of no effect) i. Hes only had one of these. Safe harbor 401k plan: (o) To have a 401k plan, the 8(c)(e)s deferrals (the amount that you put away yourself out of your own pay) have to be w/in a range of the deferrals made by non-8(c)(e)s a. 8(c)(e)s are highly compensated employees i. The range is 125% 1. The average deferral of the 8(c)(e)s is no more than 125% of non 8(c)(e)s a. Or, if greater, it can be up to 2 percentage points i. If the non 8(c)(e)s have an average deferral of 1.5%, the 8(c)(e)s could have an average deferral of 3.5% (p) The cost for a large plan of running this test at least once a yr (and many run it more times, b/c if you fail the test, you have to return the $$$ to the 8(c)(e)s bad news (they get taxed on it)) so if you adopt one of two safe harbor formulas, & at least 30 days before the first day of the plan yr, give a safe harbor notice for the next yr, 28

youd dont have to do this test (For some clients, it can cost several hundred thousand dollars a yr) a. Two safe-harbor contribution formulas: i. Matching contribution safeharbor formula 1. You match the contributions of people who make 401k contributions 2. And the match is 100% of the first 3% of 401k contributions, & 50% of the next 2%. a. So if you contribution as the employee 1%, how much is the employer going to match? i. 1%. b. If you contribute 4%, how much does the employer match? i. 3.5% c. If you contribute 10%, how much does the employer match? i. 4% ii. It caps out ii. Non-qualified non-elective contribution formula 1. The employer puts in 3% of every participants pay, regardless of whether they contribute. a. If someone has a 401k plan, & they decide not to put anything away, they are still an active participant w/ 0% contribution. So what the nonelective formula, its 3% across the

board for everyone, whether they put anything away or not (q) So if you adopt either of these plans, youve got to give a notice (annually) that youre going to do this 02/23/11 29 U.S.C. 1002(21) (page 4 of the materials on blackboard for that ). (r) Outlines the definition of what a fiduciary means. (s) The ERISA analog is III(21) 402 of ERISA (t) Deals w/ establishing a plan & what is required to be in the plan document 403 (u) The so-called in trust rules a. Whats the exception to holding the plan assets in trust? i. You can hold them w/ an under an 404 (v) Fiduciary duties (w) 29 U.S.C. 1104 (x) This is the Super prudent man rule a. Solely in the best interest of participants & beneficiaries for the exclusive purpose of providing benefits, deferring administrative costs, w/ the care skill prudence under the care of the circumstances then prevailing of a skilled person acting in a like capacity would act b. Requirement to diversify assets so as to minimize risk of large losses c. Must be in accordance w/ the plan documents 405: (y) Co-fiduciary liability provision 406 (z) In conjunction w/ s 407 & 408 deal w/ prohibited transactions a. These are all in the IRC under 4975 29

What other under the code, in effect, deals w/ fiduciary duties (its not a breach of fiduciary duties)? 401(A)(2) (aa) As a condition of qualification, you must operate the plan solely in the interests of participants & beneficiaries (bb) What if you dont do that? a. Well, under Title I, youve breached your fiduciary duties b. What happens under the IRC? i. You disqualify the plan under the Code ii. Means the employer doesnt get a deduction for amounts that arent vested. Amounts that are vested are taxed to employees. Trust assets & earnings are taxed. Its ugly 1. One of the bad things about the Code is for instance here, where you DQ a plan. a. Youve filed a 5500, so youve started the statute of limitations under Title I filings (disclosure filings for the plan) b. Youve started the statute of limitations running for the imposition of income taxes for a trust that is no longer tax exempt NO! you dont c. When a plan is DQd, you have to file a form 1041 (nonqualified trust form). i. If you havent filed a tax return, does the SoL

start to run? NO! b/c you havent filed it (cc) IRAs max out at $5k a. If youve rolled over $100k, you have excess (if youre otherwise allowed to roll it over) you have an excess contribution of $95k, which is taxable & you get a 5% excise tax. i. Next yr its 90k, you get another 5% tax. ii. Yr after its 85k & another 5% tax Supreme Court cases on Fiduciary duties Firestone Tire & Rubber Co. v. Brunch 489 U.S. 101 (1989) (dd) If the plan document says that the plan administrator has discretionary authority to decide the case, & that its decision shall be final, then it can only be overturned on appeal for abuse of discretion DoLs interpretive bulletin (2509.95-1) For breach of fiduciary duty cases, there are three areas where we, as non-ERISA lawyers, can expect to see cases (ee) Plans that have stock in them a. Where Co or the fiduciaries make decisions w/ respect to Co stock that are solely not in the interest of plan participants & beneficiaries b. Some of them are stock prices cases, c. In a 2009 case involving El Paso s stock (they make salsa & taco sauce), they settled the case against the plan fiduciaries for $17 million personal liability d. Another case where Co personnel manipulated the stock price (it was a stock manipulation case in the first instance & they were nailed by the SEC & the shareholders). The plan participants came back & said, once the manipulation scandal was out, the stock price dropped, 30

& therefore, b/c you manipulated the stock, you breached your fiduciary duties i. They werent directly responsible for the plan (it had been delegated to other people), but they manipulated the stock 1. Case was settled for $9,975k paid to the plan, & then the lead plaintiffs each got $7,500 & the attorneys cot fees of $1.5 million e. Another case (CMS energy , 2006) involving stock manipulation settled for $28 million. f. In each of these cases, the amount of the plan assets were substantially less than the judgment in the lawsuit i. So the plan participants actually benefited from the defendants breach of their fiduciary duties g. RiteAid in Camp Hill Pennsylvania portrayed itself as a w/ very strong profitability. It was later revealed that Cos management engaged in a variety of improper accounting methods to enhance its after-tax earnings by more than $1.6 billion stock fell from $36/share to $6/share i. Class of approximately 16k sued RiteAid. h. Case was settled & the defendants paid $16.5 million. Agreed to make changes to the EDS 401k plan that the matches in the plan be invested in stock. Froze the plans new investments. Removed the EDS Stock from the plan for 5 yrs. & EDS employees were able to purchase stock at a 15% discount (ff) Plan operation (breaches of fiduciary duty) a. One began throwing out LTD claims. Just to get rid of one out of every three claims. This, needless to say, qualifies as bad faith. i. Lady got all her payments, plus prejudgment interest, & all her fees & costs. ii. Payments werent that big (maybe $40k)

1. But $200k in attorneys fees (gg) DoL Enforcement cases for breach of fiduciary duties a. If youre not an ERISA lawyer, & you have a client that gets a DoL notice letter r/e someone who has alleged a breach of fiduciary duties, ANSWER IT by the due date b. If you ignore the letters, youre going to think Sherman has just landed in Atlanta & every presumption that they can come up w/ will be resolved against you & your client i. One of his clients moved. They changed the name of Co. Their 5500 had shown the change of address, the change of name, etc. ii. 10 yrs later, they had a fiduciary notice from the DoL. They had the same phone #. Their first notice was that they got a call from the solicitors office telling them that their officers were showing up in 45 minutes. iii. They had an error that was about $500. It happened after as they fought w/ the DoL over this. His firm was involved for about 2 yrs. Probably cost them $200k in attorneys fees. Cost their people hours & hours of time & effort. & he got a consent judgment that said that they couldnt be fiduciaries w/respect to the plan b/c of the $500 error, but the DoL recognized that they could continue as officers & directors of Co & they could hire an independent fiduciary to run the plan 1. Co terminated all health plans, group life plans, & its 401k plan. Their employees have none of these now b/c their officers cant be fiduciaries. & you give the employees the cost of 31

administering these benefits. a. But its hard for them to hire now w/o the ability to provide these benefits. c. In one case, a guy made a plan loan to himself (a prohibited transaction) even though he repaid it w/ interest. Federal court judge signed consent order approving a $188k settlement. (after he just paid back a loan of $170k). & an injunction preventing him from serving as a future fiduciary d. 2007 case, Sec. of Labor brought suit against & its officers for breach of fiduciary duties under ERISA. Here, the plaintiffs had a requirement under the plan document for Co to match contributions & they would be matched when the employees made their 401k contributions. Now, since the plan document says this, you have a fiduciary duty to operate the plan this way i. The defendants forgot to pay in $28k on a timely basis. Judgment: defendants had to pay $35k & were permanently enjoined from acting as fiduciaries to any employee benefit plan in the world, forever So what can we take away from these cases? (hh) Know if you are a fiduciary (ii) Know what the plan documents require a. If you dont, & you dont abide by them, then youve DQd the plan & its a per se violation of your fiduciary duties under 404 (jj) All plans must be administered solely in the interests of participants & beneficiaries a. There is a cardinal rule that will be violated each & every time: have no conflict. Theres always a conflict. Since theres always a conflict, make sure the ERISA hat wins (i.e. your duties as a fiduciary w/respect to the plan should trump)

i. If the conflict has to be resolved against your best interest, your , your family members, the Plan fiduciary hat must win (kk) 401k plans. (ll) All vendors who perform fiduciary duties should acknowledge that duty, but when youre using mutual funds theres always a problem (mm) Use an independent fiduciary whenever possible (nn) Have a full discussion among the participants & take detailed minutes of your committee meetings & your decision process (oo) Audit your plans internal controls for compliance (pp) Never take the decision to accept being a fiduciary likely a. Make sure you have fiduciary liability in place that your employer pays for D&O (Director & Officer) will generally specifically Exclude ERISA liability Metropolitan Life Co. v. Glenn, 128 S. Ct. 2343 (2008) (qq) LaRue v. DeWolff, Boberg & Associates, Inc., 128 S. Ct. 1020 (2008) (rr) Amschwand v. Spherion Corp., 505 F.3d 342 (5th Cir, 2007) (ss) Disclosure & Reporting Requirements (tt) 402(f): when someone terminates employment & is going to get a distribution from a plan, its a statutory tax notice that must be given, detailing the tax implications of each manner of distribution a. Required any time someone is given the option to take $$$ out of a plan. (uu) Notice to Interested Parties a. If you dont distribute the notice, & you admit this to the IRS, they will automatically deny your filing b. If you lie & say you did, then you commit perjury & go to jail 32

c.

d.

(vv) a.

b.

i. Out of 100k determinations, not even one is turned down. They work w/ you Theyve taken a requirement to file a tax court case if you are turned down w/ an adverse determination into a mandatory requirement in order to request a determination letter. If you give the notice to interested parties, you have a right to appeal adverse determinations Service Crediting Issues Before ERISA was passed, we had 1,040 qualified plans in Shaws office. Approximately 10 did not use the concept of elapsed time (you start at point one & look at the amount of time that elapsed to determine how much time you have under the plan). i. The labor provisions of ERISA (Title I) said not one word about elapsed time (it was like it didnt exist) & instead came up w/ a concept that, if you worked 1k hours in a yr (this came from people in welfare plans having requirements that exclude parttime employees). ii. Now, who is an employer? All members of a control group are one in the same employer. 1. So if you work for a tenth tier subsidiary, youre getting vesting credit w/ every member of that control group from top to bottom. This is vesting service 2. If you worked 1k hours in a yr, you got a yr of eligibility service. 3. Unless you were 100% vested in the plan, you couldnt require more than 1 yr of service to become eligible to participate in the plan When ERISA was passed, elapsed time was done away with

i. Since everyone used elapsed time, most employers decided to terminate their plans ii. All the nations planned were geared towards elapsed time iii. They decided to come up w/ equivalencies to the 1k hour requirement 1. But most non-hourly employees dont punch a time clock (most importantly, your big executives) a. How do you know what hours they work, what benefits they get, etc. b. What about traveling salesmen? They may meet their quotas by working only 10 hours a week iv. Elapsed time: its not the anniversary date, but the day before the anniversary date. 1. If you dont go to the day before, you lose a whole yr. So if you go to that day, & dont give the person an extra yr of vesting, youve just violated the terms of the plan. 02/28/11 Requirements of erisa: If have 1000 hours in a yr, have to give a person a yr of vested service & eligibility service o 3 types of service: & in addition to elgibility & vested service, there is also benefit service can actually require on a hours basis, 2080 hours 1000 hours of service credit ideas can out of labor, not tax 10 horus for working 1 horu in a day, credit for weeks & credit for mos 33

o along w/ that concept, there was also an elapsed time concept day before the anniversary date before the date of hire, it is a full yr, for vesting & eligibility service as a F, you are supposed solely act in the interest of participants & the beneficiaries there is probably going to be an obligation that if you are quiting two days short of the yr that they have to give you notice o which hat wins: always the ERISA hat for saving whatever the vesting is, going to save thousands in investigation & arbitration, & paying their costs 2 approaches to crediting of service: 3 different benefit levels under each approach: o if you used hours of service for one function, or do you need to use them for all? Many clients, an hours of service concept to be eligible for the plan, do that particularly if they have high turn over Short hours of service: if dont normally work 1000 hours. & not going to accrue any benefit anyway, why have the administrative expense of brining people in in a short time How much does it cost for employee benefit plans? o Costs today 35 to 50 dollars, depending on the vendor, to write a check: this is massive expensive What if vesting over 7 yrs: 10% after 1 yr, 20 after 2, etc. o if 1000 hours after the first yr, & put in a contribution of $100, & over 6 or 7 yrs, grows to $50, & have 1 yr vesting, so 10% vested in addition to the check writing charge, there is also a charge from $1 to $5 a quarter charged to the employer for maintaining the records on the plan so if the charge is 250 a quarter, so over 7 yrs, 70 dollars, 150 ollars, 30 for the check so 105 dollars just to give 15 dollars out if a lapse time, they are going to vested no matter how long they worked, so long as didnt terminate & come back, & terminate & come back, ok if 5 hours a week for 52 weeks/yr o 260 hours so not even 500 hours a quarter time, but if a lapsed time is adopted, you brought them in & you are putting $ away, & they are vesting in it, so cost so great, & the amount is so little makes you want to look at your employees figure out how to spend the $

the individual acct plan on BB has 50k employees roughly were spending an ungodly amt of $ to do 401k testing, ran 5 times a yr, quarterly & an yr end test o each time it was about $150k so close to $700k a yr to run these tests study showed that $700k would cover almost all the costs of having a safe harbor plan on benefits service usually as a term, sometimes credited service, that is usually in a DB vested, & eligibility is always in a plan usually not a benefit service in profit sharing plan, mppp, or esop, there, but just nto stated o ex. if last day requirement, in effect a benefit service many give a contribution after 500 hours of service, but some you have to be employed on the last day of the yr to get a contribution if a defined contribution plan, w/ a last day requirement: would only apply to what type of service? Benefit service. Why not w/ vesting service? Bc vesting service, under the 2 theories, vested 999 hours, would say you are one hour short, if lapsed time, different dates of hire, so staying at the end of the yr wont matter on vesting service, it will depend on your anniversary date Xc2 & 1: heading in the outline: Earned income of the self employed is one issue, & the other issues second Talked about the fact of parody between statutory employees & self-employed If you work for yourself, self-employed, who else is self-employed? Partners. o Not statutory employees. When erisa first started, couldnt get a loan from a plan: Definition of self-employment income: par tof the problem: o Defined as the amt that you have earned of SS taxes paid & self-employment taxes themselves are not equal bc When you are employed by an employer, each pay But if you are self-employed you are paying 1 times o So income is like of what that would have otherwise have been

Take off of the self-employment tax & then any unreimbursed expenses the firm has not reimbursed you for of SS & unreimbursed expenses, then you take off & reduce your pay by the amt of your HR 10 contribution algebraic formula for this & a computer to do it [why the hell are you talking about this then?] if no unreimbursed expenses, take the SS & take the amt of the contribution at $100k & you wont get 8500, whereas associate gets $10k contribution [he is clearly bitter about this] firm pays $100k to associate, $10k, of SS taxes, so package just on this is about $115k v. a partner: before paying taxes is probably $80k o $115k v. $80k point is that a penalty to be paid to be self-employed at the same dollar amt did not cover capital being a material factor: if work for a venture capital firm, where large amts of $ invested in the firm o if capital is a major contributing factor, for the firm, you have to put a lto of $ in then there are substantial rules that say how much of your distributable share is attributeable to capital, that is not subject to a contribution to a plan, & is attributable to net income from self-employment rule about bridge spanning rules: if you as a n employer adopt a plan using the lapse time, if a person leaves you & comes back w/I one yr, that one yr service has to be credited as if they didnt leave you, & that if you have people who leave & come back, have to treat the time they are gone as if they were there the whole time prohibited transactions: 406 & 7949 of the code o erisa: 406: cant do any of those items directly or indirectly many of the issues that the clients have are a result of the dol & the irs, what was done was an indirect violation of 406 & 4975 ex: among other things, a f shall not knowingly allow a plan to directly or indirectly lend $ to an employer [party in interest] exemption though that said can loan to participant if adequately secured, & so forth 34

 if borrowed $10k from the plan as an employer, & then loan it to the co.: engaged in a prohibited transaction? o Indirectly lending to employer, yep. DOL takes the position that failed. Developer: & have developed over time & in addition to the 4 principals, you have 11 employees, & everything else you hire out If you own 25% of the general partnership & you have 99 other limited partnership interests o So in the general partner, you own 25% & you start developing & selling & your annual return for project is somewhere around 20% & some of the employees say that made it work, & cant afford to So at any 1 time, no more than 25% of the general partner, so not controlled, of 1% so .25% So. Completely not following anymore. 406 look at definitons of party in interest under 3: where there are percentages: didnt meet any of the triggers in our ex., however, dol took the position that each of the transactions were prohibited o he said he cant figure out why the dol found this prohibited said not a direct violation, but an indirect violation but never took this to ct o *garner from this: the indirect rules can really be brought to bear against you & unless you are going to fight it, really very little you can do about it so even though that might know the direct prohibitions, can bite you when not looking for them in the indirect exemptions which are available: statutory exemptions, he said he would have gone after oen of these had he known 408 admin exemptions o 407 too PTE = prohibited rules RS says these are super convaluded, & said the problem that if a little outside the specific thing they give you, dont do it Third type of prohibited transaction exemption: is individual: if dont fit the statutory exemption, & one of the administrative exemptions that apply to everyone, if in this area, need one that applies specifically to your transaction 35

Application + proposed rule making, comments, & if approved need to send all affected by it for a chance to object etc. o 3 types of exemptions, so try to fit into one qualified plans: nothing is qualified under erisa, this is qualified under the code o under 401(a) or 403(a) under the IRC under erisa, F rules, plan document rules, in trust rules, but no qualifed rules what type of plans? Retirement plans, (no qualified welfare plans in this country, nor life , or medical benefit plan, only s) o Only deferred compensation plans that meet the requirements of 401a or 403a can be eligible to meet 401a v. 403a plans? Difference? 401a is a plan that either partially or totally is funded by a trust 403a plan is funded solely through an annuity k if only funded source, but the k is owned by a trust, then it is a 401a o if a trust involved in any way shape or form, it goes under 401a if you write your plan right, you can be either a 401a or a 403a plan soley by how it is funded funding agent, defined as a trustee or an co. that funds the benefits o so if trustee today & co. tomorrow it can switch between 403a plan is qualified under the rules of 401a & funded solely by an annuity k so all the rules to qualify o has to have identical compliance language 03/02/11 Service credit. What theyre used for, how they can be calculated, etc. Maximum # of hours you can have before you can vest someone? (ww) 1k What about for benefit service (xx) 2,080 hours a. Most round it down to 2k What about elapsed time?

(yy) You calculate using date of hire to the anniversary date of hire, & then you give them a yr of service You have a withdrawal liability & you pay it off. You get a letter says you have a new withdrawal liability that you can pay $8.5 million in a lump sum or they can pay $90k a quarter in perpetuity. (zz) Say plan interest rate is 7% (aaa) Take 8.5 million times 7% a. $637k per yr in interest b. If you take $90k a quarter, thats four payments. Thats $360k c. Youre not even covering the interest payment, let alone paying down any principal amount d. Now, if youre GE, you probably say well pay the $8.5 million because GE may be around for 100 yrs i. But other s may not. If youre a little retail store, w/ say a 5% profit margin, the payment of $8.5 million would put them outta business ii. But theyre going to strap Co w/ a perpetual $360k a yr payment before the doors open on Jan. 1 of any given yr Welfare plans are never qualified plans (bbb) They can be qualified under 401(a) & 403(a) of the Code (ccc) Whats the difference between the two? a. One is funded through a trust (in whole or in part) & the other is funded solely w/ an annuity i. If theres a trust, its exempt from taxation under 501(a) of the Code ERISA doesnt deal w/ taxes or qualification. ERISA deals w/ fiduciary duties & disclosure & reporting requirements Were talking about plans that are qualified. Were not talking about welfare plans. So were talking about s. (ddd) Whats the advantage of being qualified? a. The employer can deduct the contributions 36

i. Its actually a super deduction. ii. Say you go to work for a that doesnt have a plan. Say the employer decides to put in a plan for the yr though. 1. As long as the document is written & signed, & the trust document creates a trust under state law. (say you put $1 in the trust). Then you have until you file your corporate income tax (including extensions) so Sept. 15 of the following yr, to get your contribution in. if you get it in by then, you get to take a deduction on that contribution on your tax return for the prior yr 2. For qualified plans, if you put the contribution in by the filing deadline, you can take a deduction for the prior yrs tax return 3. You literally have to make the payment before the tax return is filed. a. If youre on extension b. If you file the tax return before the March 15 deadline, you can still pay the contribution BY March 15. c. But if youre on extension, & you file it on April 1 (even though you dont have to file it until September) you cant take a deduction after b. Other advantages to a qualified plan? (think about the employees) i. Not taxed until you actually receive the benefit (tax deferral)

ii. Trust earnings are exempt from taxation forever (as long as the plan is qualified & the trust is exempt) 1. When the $$$ is paid out to the participants, its taxed as ordinary income to you as the participant (eee) Three very large advantages a. Super deductions (see above) b. Not taxed to employees until its received c. Trust earnings are exempt from taxation as long as the plan is qualified We talk about a plan being qualified under 401(a) or under 403(a) 403(a) says that you meet the reqs for a plan, funded by an annuity that meets 401(a), etc. but when we say a plan is qualified under 401(a), do you think that that means you only have to satisfy whats in 401(a)? (fff) 403(a) has to satisfy the reqs of 401(a), but 401(a) does not have to satisfy the requirements of 403(a) So 401(a), many of the provisions of its subparagraphs say things like: well, its a qualified plan if it meets the 415 requirements (ggg) So you have to meet the 415 requirements (hhh) There are other s that say: if you meet the requirements of s 416 or 417, then you can be a qualified plan a. So some things in 401(a) say you have to meet these other s, but the roadmap isnt complete, b/c some of those other s were drafted by other people (iii) Other than 403(a), which is requires you t meet 401(a) or 403(b), which are tax-sheltered annuities, every time somebody decides that they want to add a requirement, theres another requirement that you have to map out & follow Corps get deductions under 404 (jjj) 404a is the deduction provision (in lieu of 104a of the Code) but the interesting thing is: if you make too big of a contribution to the plan, it can violate 404a, & therefore disqualify your plan OR end up slapping you w/ an excise tax for 37

having made a non-deductible contribution to the plan a. Say your limit for a one yr contribution to the plan is $100k. Say you (the Corp) forgot about your earlier contribution of $100k & you make an additional $100k contribution. Now you have an excess contribution that isnt deductible. So, not only do you not get to take the deduction, but you have an excise tax (which is a non-deductible tax) of 15% on the extra amount that you put in What if you screw up & fail to meet the rules? (kkk) The plan is disqualified (lll) What happens when a plan is DQd? a. Well, you get certain advantages to being qualified (current deduction, trust earnings are exempt from taxation, participants dont pay tax) i. You dont get the deduction. ii. The earnings of the trust become taxable iii. Participants have the amounts that have accumulated over the yrs become included in your gross income for the yr 1. Think about it. Say you have $1 million of income 2. When the plan is disqualified (say in yr 5 of the plan). Youve been filing your tax returns regularly. & theres a 3 yr statute of limitations. Do you care? Umm yes! The statute doesnt start to toll a. If you understate your income by 25% or more, the statute of limitations is expanded from 3 yrs to 5 yrs b. Well, the taxes were technically owed 5 yrs ago

i. So you get a 20% underpaym ent penalty ii. The taxes themselves (say 50%) iii. Interest for the last 4 yrs c. How are you going to pay this tax liability? i. You owe $500k in tax. You owe 20% of 1kk b/c thats what you didnt include (thats another $200k). You owe interest for the last four yrs, compounde d annually say thats ($100k) now you owe $800k (total) 1. Oh. & you don t get the $1 milli on. 401( a)(4) requ ires 38

you to oper ate the plan acco rdin g to its term s (you don t get the $$$ till you retir e. You re still wor king for Co.). ERIS A says you have to oper ate it acco rdin g to its term s. So if they paid you the $1

milli on, the fiduc iarie s woul d be pers onall y liabl e for the amo unt of $ they paid out b/c of the term s of the plan 2. Oh, & if you take your $1 milli on, ther es addi tion al taxe s b/c you re getti ng inco me 39

at that poin t Client in Macon, Georgia. They paid $1.5 million for Cos $900k assets. The IRS assessed $3 million in penalties to requalify the plan pursuant to a closing agreement (mmm) Your fiduciaries will pay that type of $ so that theyre not sued for breach of fiduciary duty & so as not to piss off all of your employees (nnn) If you think about all the taxes, what are the consequences? a. First, the statute of limitations for you as a participant is going to be 5 yrs probably b/c youll be more than 25% underreported b. Second, what about the trust? Whats the SoL on the trust? (say it was DQd in 1990 & the IRS picked it up in 2003). How many yrs do you have to pay taxes on? The SoL is only three yrs. But they go back to the date it was DQd filing the tax return is what starts the SoL running i. If youre a qualified plan, & youre trust is tax exempt, what type of return do you file? A form nothing you dont file! 1. Once you get DQd, you have to file a return. A trust thats not qualified has to file a form 1041 each yr ii. They go back & start assessing taxes, penalties & interest on every contribution made on every contribution & everything else it piles up fast Reference to 410(b) of the Code (ooo) These are the qualification rules that deal w/ coverage of participants i.e. what can you legally exclude from coverage & not lose your qualification a. If a plan covers 70% or more of all employees of the employer (remember the control group test for an employer) b. Another qualification out is that you have a classification of employees of the people covered

i. More than 70% of the people covered are non-highlycompensated employees ii. Then there are some highly sophisticated rules that, to prove whether you meet the rules or not, c. One of the rules under 414 of the code is that a plan can be qualified under the basis of a separate line of business i. Say you have a (an employer). What if you have a parent w/no employees. They own 100% of a gravel pit in Western Ohio. They own a machine tool & die in Columbus, Ohio. & they own a high-tech oil business in Houston, Texas. The gravel pit employs truck drivers, heavy equipment operators, etc. & they pay $10/hour. In Columbus, the business has employees who earn $25k - $100k a yr. They cant afford to have a plan for the gravel pit employees. The Oil in Houston has engineers & scientists who earn from $100k $500k per yr, & they have two or three clerical people, mechanical people (who implement the projects) & they have draftsmen that all earn maybe $30k-$40k. ii. The business in Columbus has 1k employees. The one in Houston has 95-115 employees (and the people they hire compete w/ Shell, Monsanto, Infinium i.e. big time. They pay this amount of $$$ b/c thats the only way they can hire these people, & they have a retirement plan benefit that is 20x richer than the total cost of the plan benefits of the Columbus employees). IRS said plan is DQd b/c you dont meet the 70% test. 1. These are separate lines of business. The Texas is a 40

unique business unlike anything the control group holds 414(s) is the separate line of business a. If you dont meet these requirements, you then dont meet the reqs of 410(b). & if you dont meet those, you cant be a qualified plan under 401(a) (ppp) 401(a)(4) & 401(a)(9) says that, as a code qualification requirement, you cant alienate benefits a. If the plan doesnt say that, the plan isnt qualified. (qqq) Its also an ERISA requirement a. ERISA is not a qualification requirement but you cant alienate benefits under ERISA either b. So you can have a non-qualified plan i. Non-qualified is different from disqualified c. Non-qualified plans are plans that no one ever intended to be qualified. Tax results are basically the same as a disqualified plan, but you file the tax returns on time, or you use a rabbi trust, etc. d. But the rules under ERISA still attach to non & dis qualified plans r/e nonalienation of benefits. What does this mean? i. It means that, if youre sued, someone cant attach your benefits & take them from you ii. What if one of us is in a plan & really hates our employer. Say you hate the managing partner. So, you go crazy & try to destroy their reputation by breaking into their home & stealing things, stealing things from the office, kidnap a kid something terrible your employer sues you & gets a judgment for the things you stole, gets you thrown in jail, wins a huge judgment in a civil

suit against you. Say you have $1 million in your 401k. say your boss tries to attach your $1 million in the 401k plan he cant do it (rrr) Say you breach your fiduciary duties. W/ respect to that plan youre in, the plan can recover & co-fiduciaries can recover against your interests IN THAT PLAN. However, if you breach your fiduciary duties w/ respect to plan 1, & youre not a participant in plan 1, but you participate in plan 2, & have $3 million in there, can you attach the $3 million? a. No. you can only go against plan assets in which you are a participant i. If you didnt commit a breach for the plan that youre in, you cant go against it (sss) The IRS can go against you for taxes (ttt) Your spouse, former spouse, or dependants can go after you w/ a QDRO (Qualified Domestic Relations Order) a. Few problems w/ QDROs i. It has to be a QDRO (a domestic relations order issued by a court of competent jurisdiction that has been determined to be qualified by the plan administrator for the plan). 1. If you have a domestic relations order that isnt qualified & the plan pays out $ pursuant to that domestic relations order, youve disqualified the plan (uuu) What if a child support agency issues an administrative order against your plan to pay your arrearages in child support. If youre the plan administrator, can you pay that? a. No. b. It would disqualify the plan because its not a QDRO. Its not a domestic relations order issued by a court of competent jurisdiction c. What do you do when you represent the plan administrator in a case like this? i. Talk to the child support agency. We understand your plight. But we cant do anything for you. 41

Plan, Code, & ERISA say that the plan cant pay it to you w/o a proper court order from the domestic relations court of competent jurisdiction. 1. So you go get the right order. Then the plan has to pay. d. The problem w/ QDROs are two fold: i. Plan administrators see children that are in need & they go ahead & approve these things (this isnt our problem) 1. Now theyve DQd their plan & you have to go in & either audit cap or VCP (voluntary compliance program) or, if its a minor error you can self-correct if you do it w/in one plan yr of occurrence ii. Your problem is that, if you represent the kids or the guardian ad litem, youre not going to get paid if you dont do it rights Last question under 12(d) of the outline (vvv) Are IRA assets protected from creditors? a. Heres another area where you as a nonERISA lawyer can affect your clients b. It depends on the state. Some states say that assets in an IRA are free from creditors & therefore they cant be picked up in bankruptcy (Florida is one state). Ohio & Michigan tried to pass statutes that did this, but the 6th Circuit said you cant do this b/c its preempted by federal law & federal law doesnt protect IRA assets c. The bankruptcy act now excludes retirement benefits that you need to maintain your lifestyle i. The bankruptcy act says that what you need to sustain your lifestyle is protected up to $1 million. 1. Say youre at a firm for 5 yrs. You have retirement benefits that are worth $800k (this is pretty

good). You leave the firm & roll this over into an IRA. You get sued. Someone goes after your assets & you file bankruptcy. Your $800k are protected. You work at this new firm for 20 yrs. After 20 yrs, your IRA stands at $3 million. Your new firms 401k $ is worth $2 million. Say you go into bankruptcy again. (you get sued for malpractice). How much, if any, of those assets are protected in bankruptcy? a. $2 million b. Bankruptcy code says retirement benefits are protected up to $1 million. They dont distinguish between qualified plans or whatever i. ERISA & the code protect qualified plan benefits period. 1. So you ve got $2 milli on in ther e 2. Wha t abo ut the $3 milli 42

on in the IRA. Well you d thin k at least $1 milli on woul d be prot ecte d. But you ve alre ady got $2 milli on prot ecte d. a. Y o u r o l l o v e r y o u r

$ f r o m o n e q u a l i f i e d p l a n t o a n o t h e r o n e , o r l e a v 43

e i t i n a q u a l i f i e d p l a n

b. M o r a l o f t h e s t o r y : D O N

03/14/11 Advantages of qualified plans Code requirements (401(a)(4) & 410(b)) Non-alienation provisions which include the requirements under 401(a)(4) (www) What are the exceptions to nonalienation? a. Quadro

R O L L IRA assets are protected from creditors (xxx) If you have assets in an IRA, & youre in Y the state of Ohio, are your assets protected from O creditors in bankruptcy? U a. In Ohio & Michigan, they werent safe at R all. Courts have said that Congress has had the opportunity to extend the anti$ alienation provision to IRAs & they have $ chosen not to do so $ b. So, if you only have your $$$ in an IRA, $ how much is protected? i. Up to $1 million O c. What if you have $3 million in a qualified V plan & $4 million in an IRA. How much is E protected? R i. The $3 million in the qualified plan I 1. $ in an ERISA plan, N whether qualified or not T a. If its qualified its O protected under Title 2 of the Code I & Title I of ERISA. R Everything in the A ERISA plan is s protected under ! the Code. ! 2. The amount in an IRA is ! protected up to $1 ! million. ! a. Statute says that your retirement benefits are protected up to $1 million i. You already have $3 million in retirement benefits ii. Moral of the story: dont put any in the IRA. 44

b. Tax liens c. Breach of fiduciary duty w/ respect to a plan that you have an interest in i. But only for the plans in which the person has an interest

Oct. 1, 2008 Memo from the Tax Exempt & Government Entities Division: Guidelines to Agents R/E Rollovers as Business Startups (should be on Blackboard) (yyy) Take a qualified plan & use it to start up a new business without paying the taxes on distributions out of the plan. These devices are known as rollovers as business startups aka ROBS (zzz) Think that this is a questionable use b/c it may serve solely to enable one to use tax deferred assets to avoid distribution taxes otherwise assessed on the exchange of stock (aaaa) And ERISA lawyer would never do this a. Shaw thinks that this is on the IRS hit list i. Whenever they do an audit, they look for this ii. They have a list of listed transactions 1. If you engage in a listed transaction, you have to report it & disclose all the details. You as the lawyer claim privilege/confidentiality IRS doesnt think so a. Require disclosure of your clients, their family members, who their attorneys are, who their accountants are, etc. Not a pretty site you dont want to be anywhere near a listed transaction iii. These things can involve S corp. ESOPs, ROBS, etc. iv. Many of these listed transactions have people losing $, so they can generate artificial tax losses, but they actually lose the $$$... are you better off that you didnt pay $30k of taxes, than you are that you lost $100k? v. Shaw refers to these things as synthetic swaps. 45

1. They take two treasuries that are close in sync (maybe off a mo or so). If one goes up, the other will go down by a like amount. Say you have $100k worth of income. On margin, (so, maybe it costs $4k for each of the two, so $8k total) you buy 2 swaps. You get a $100k treasury that is a long treasury & you get a $100k treasury that is a short treasury. In December, you find where you got the loss. One went up & one went down. On Dec. 31, you sell the one that went down & take your $100k loss. On January 2, you buy something that is the equivalent of what you sold, but not the same thing. (Say you had a Nov. short treasury youd buy a January short treasury). Then you put on another one to match the gain that you got. (b/c this yr you have to cover the $100k that you made off the transaction last yr, but the $100k youll make this yr) so it cost you $200k for the second yr a. The IRS doesnt like these obviously b. Two biggest groups who tend to be subject to criminal tax law prosecutions i. Doctors & lawyers (profession als) who dont file

their tax returns 1. If you re ever a part ner, mak e sure you do quar terly esti mat ed with hold ing. If you don t have the $, you still nee d to time ly file your tax retu rn the IRS won t get you for not filing 46

they can t thro w you in jail for not payi ng your debt s. They can thro w you in jail for not filing your retu rn ii. Various listed transactions cases How can a plan become disqualified? (bbbb) You can have a disqualified plan 2 ways a. One, you never did what was necessary to qualify the plan in the first instance b. Second, the IRS can look at a plan either on audit or, more often than not, when you file the plan for a subsequent requalification determination, youll get a letter in the mail saying that the clients plan is disqualified i. In doing a plan restatement, if you find that a plan is disqualified, one of the ways to correct it is to file a Voluntary Compliance Program filing (VCP)

1. Its a lot less expensive than the CAP program (Closing Agreement Program) ii. Once you file, you cant file VCP. You have to file VCP simultaneously w/ the restatement filing. 1. You have to go into CAP at this point 2. If you get nothing else out of this class, if you do anything w/ the IRS, DoL, or anyone else: Go in & blow the whistle on yourself. 3. Now you have to sign a Closing Agreement w/ the IRS to have the plan requalified & correct the non-amender status a. You can be a nonamender thats how you can be disqualified b. If you write the amendment wrong, you can be disqualified as well i. So you amend timely, but just do something stupid. ii. This is a defect in the plan document that disqualifies the plan iii. Usually, if you catch the problem yourself, you can fix the plan, so long as its not an egregious failure 1. Say, you brought someone into the plan that you shouldnt have (or left 47

someone out who should have been included) if you catch it, & correct it, if you do it by the last day of the plan yr following the plan yr in which it happened, youre allowed to self-correct a. You put the person in, give them interest, etc. & you dont have to file it w/ the IRS or do anything else. Just make a record of it. b. Say youre a calendar yr plan. You make a mistake in March 2011. You catch it & correct it by December 31, 2012, you dont have to do anything else other than document it. c. If you did it in 2008 & 2009 & 2010, & you catch it now, you can correct 2010. 2009 had to be corrected by Dec. 31, 2010. But you have multiple yrs. i. You correct this using VCP (voluntary compliance program) ii. Theres a filing fee that runs from $1k up to about $100k. Can be a lot of $$$

iii. Then the IRS looks at it, tells you how to correct it, & you have to do it their way. But its based upon the # of people in the plan. ($100k is a plan w/ more than 10k people) Non-timely amendment (or plan language failures) we just talked about Administrative & operational errors (cccc) Exclusion of eligible people (dddd) Inclusion of ineligible people For DoL purposes, members of the control group are an employer (eeee) But when we look at the ABC plan, & again at the XYZ plan (both on Blackboard), youll see that the XYZ plan is a single-employer plan w/ multiple state employers. They could be members of the control group & for tax purposes & DoL purposes, they may be all members of the same employer they could still be ineligible & thus disqualify the plan or if you cover members that youre not supposed to a. If you leave out an employee at ABC co, who should have been in, that also disqualifies the plan (these are called operational disqualifications youre not operating the plan according to its terms) One of the big things that the IRS doesnt like is for an employer to not allocate at least once a yr forfeitures that arise in an individual account plan (ffff) Plans could have three or four different provisions dealing w/ forfeitures. a. One says: forfeitures made during the yr are used to offset employers contributions 48

b. The other one says: forfeitures are allocated as additional contributions to participants. (gggg) Look at the first one. Say the payroll is $100k & you put in a 10% contribution. Whats the contribution? $10k. a. Say you had forfeiture of $2k. Whats the net employer contribution? i. $8k b. Say you dont deduct the $2k. & you put in $10k. What did the employer take a deduction for? i. $10k. (w/ qualified plans you get a deduction for the amount of your contribution). ii. What should they have taken a deduction for? 1. $8k c. What should the employees have gotten as an allocation? (if its added as an additional contribution) i. They should have gotten $12k 1. They have $2k of forfeitures in both cases Failure to make timely contributions (hhhh) Contributions for a DB plan (iiii) Not to turn over employee contributions that you deducted from the employees pay to the trustee of the plan (jjjj) If you dont make the deduction by Sept. 15 youd get the deduction on your 2011 return but on your 2012 return a. If you dont make it until 2012, its still for the plan yr 2010, but you dont get a contribution deduction until 2012. (kkkk) Under REA (Retirement Equity Act of 1984) married participants payments under either a $ purchase plan or any defined benefit plan or a profit sharing plan w/ annuity payout provisions must be paid in the form of a joint survivor annuity a. The participant can waive the joint & survivor annuity form & his/her spouse can consent to the waiver. i. Only the participant can waive it. But the spouse HAS to consent to the waiver the spouse cant waive it

ii. Shaw doesnt know why, particularly in the DB plan, b. If the spouse has not consented & the participant has died, you have to give the spouse the 50% survivor benefit & you obviously cant take the $$ back from the deceased participant i. Think about it: lets say you have $1k a mo retirement benefit (this is your accrued benefit). Say you are 65 & your spouse is 60. & the participant is a male & the spouse is a female. Your $1k benefit (wife will probably out live you by 10 yrs, & get payments after you die for an additional 10 yrs) will be paid out the actuarial equivalent for your life expectancy at a reduced rate to you, & then half of that for her life expectancy. Youll want 75%. Shes going to try to get $300 a mo & youll get $750. 1. Say you dont do it right & pay out $1k a yr for 10 yrs. You die. Is she going to get $375 but reduce your pay from $1k to $750? a. No. youve spent it. Where is she going to get it. b. What makes it worse: the joint & survivor is 50% of what you got. Since you werent reduced, she gets $500 (half of what you got) instead of $375. The effect of disqualification (llll) Taxation of trust earnings. (mmmm) Taxation of HCEs earnings (nnnn) Taxation of non-HCEs earnings (oooo) Loss of the deduction for what hasnt vested Difference between disqualification & non-qualification 49

(pppp)

Disqualified: a. It was qualified at one point but lost it b. Was qualified & later became unqualified (qqqq) Non-qualified: a. It was never intended to be qualified in the first place (rrrr) From a tax standpoint, the effects of either being disqualified or non-qualified are not the same a. The gut reaction is that theyre not the same b. Think what the qualification is: i. Qualification means: 1. The employer gets a current deduction ii. Disqualification 1. You lose the deduction until it goes into gross income 2. The employee has it excluded from gross income until he gets a distribution 3. Trust earnings (if qualified) are not taxed a. If DQd, youre currently taxed (you file a 1041) c. Non-qualified, from a legal standpoint, its identical to disqualified i. If you had a non-qualified plan, you wouldnt do things so that you would get the worst adverse tax consequences 1. You wouldnt fund a trust if its non-qualified b/c you get no deduction for it, the employees are taxed on it to the extent vested, & the trust earnings are taxable a. Where most of the adverse things happen is that, w/ DQing, its caught now, & it happened earlier, & you have all of these taxes, penalties, &

interest for the intervening time 2. If youre not going to qualify it, you fund it w/ a Rabbi Trust (a grantor trust) the grantor is taxed on the trust, the assets are those of the grantor a. So the grantor pays the taxes on it, & pays them currently to avoid the penalties & interest b. You make sure that the participant has no incidents of ownership & is not vested & is not secured so that the participant doesnt get taxed until they get paid out d. From a tax planning standpoint, disqualified & non-qualified plans are completely different i. If you think of them from a taxation standpoint, they are the same 1. Non qualified benefits are subject to 409(A) of the code. 03/16/11 Excise taxes on the employee under 409(A) if any employee has deferred compensation & you violate those rules, there are pretty heavy penalties If you are a key employee under 416(i) of the code, Qualified Non-elective Contributions (QNEC) (ssss) Can be used by employers where they have, in effect, disqualified the plan either b/c they didnt make the appropriate distribution to correct the 401k failure, or b/c they didnt make contributions for participants for whom they should have made a contribution 50

(tttt) You can either put in 125% of the contribution (so, 125% of their annual 2% contribution, or 2.5%) a. If they put away 3%, the amount between 2.5 & 3 is included in their gross income (so they pay taxes on it), the dont get a deduction for it, & then they have to pay taxes when its distributed to them In the ABC plan, the employer can put in an extra amount to all non-HCEs, that will bring that contribution level for the non-HCEs up to whatever is required to make 3% average deferral for the HCEs no more than the 125% amount of deferred compensation for the non-HCEs (uuuu) An employer may put in a non-qualified elective contribution for the non-HCEs that is sufficient to bring that test up (vvvv) Example: a. HCEs average deferral percentage cant be greater than 1.25% of the non-HCEs average deferral percentage i. Take the amount contributed by each non-HCE as a percentage of their pay ii. First person makes $10k & they defer nothing, what is there deferral? 0% iii. If the second has a $25k salary & they defer $250, their deferral percentage is 1% iv. If the third makes $50k & they defer $1k, their deferral percentage is 2% v. Average deferral percentage (ADP) is 1%. b. This is a 2-sided rule. Its 1.25% OR, if greater, then plus 2%... i. So here, we have 1.25 times our average of 1%. Or we have 1% plus 2%. 1. So we get 3% contributions for our HCEs c. So if your HCEs average was 3.2%, youd have to put in an additional ADP of .2% for everyone else to make it equal i. Youd give it as a non-qualified elective contribution (a QNEC)

People who terminate, youre governed by the plan document in effect when they terminate. (wwww) This is particularly important in a defined benefit (DB) plan a. Accrued benefit is what youve earned at any given point that is payable commencing at age 65. i. Three types say you have a unit benefit plan ii. When the person retired, it was $10 for each yr of service iii. Now the plan document says that its $50 for each yr of service 1. Participants sued b/c the drafter of the plan did not say that the provisions were applicable only to people who terminated now a. Well the plan now says were at $50 but you only accrued benefits at $10 for yr of service b. Its important to say to whom the plan version applies c. There are features in all plans that you want to make sure that the plan is clear about to whom the provisions apply b. You are required to say what type of plan the plan is if it has a deferral provision, you have to say that The definitions , in the ABC plan, he used the Act as the defined term for Title I of ERISA (xxxx) In most plans (and certainly in court filings) he defines the Act as ERISA (yyyy) Be very careful about how you use the term employer in a plan a. If its Everybody who adopts the plan 51

i. Well, then you say, the employer can amend the plan, have you created an ambiguity that, in effect, allows any employer to change the plan document? Or, on the other hand, can you only amend the plan if all employers sign the document? Should it matter? 1. YES. If youve got people out of the country & you get a law changed that has to be done soon You can take 401k contributions out only at: (zzzz) Termination of employment (aaaaa) Death (bbbbb) Disability (ccccc) Termination of the plan (ddddd) Or hardship The term Beneficiary is used more in a DC plan than in a DB plan (eeeee) DB plan has a requirement that the automatic form of a retirement benefit is a joint survivor annuity a. Many plans dont even have a provision that permits a beneficiary other than the spouse (fffff) In a DC plan, you dont have to have a qualified joint & survivor annuity (very few do today) & the death benefit (if theres a payment at death) generally provides that it goes to the spouse unless theres a waiver of that. Some plans, in conformity w/ the less-stringent legal requirements, provide that 50% of the benefit goes to the spouse (the minimum benefit to the spouse in a DC plan), & the other 50% goes to whoever the participant wants it to go to There is a great deal of interplay between state-law definitions of or employer & the federal concept, both under ERISA & the Code, that all members of the control group are treated as a single employer (ggggg) For qualification purposes, & for vesting & for a variety of different things, if you are a member of the control group, youre treated as being employed by the same employer

(hhhhh) But for eligibility to participate in the plan itself (not for crediting of service) youre only eligible to participate in the plan if youve worked for an employer thats adopted the plan

DEF

GHI

100%

100%

If youre a parent/subsidiary & own 80% or more, then you are a member of a control group. And if the plan provides that only members of the control group can participate, then OPQ, RST, & UVW could not participate in the plan. (nnnnn) But this plan says that, if you look at the definition of Employer it is the ones that are listed, & any relate or non-related subsidiary a. Related subsidiaries are the control group ABC members Company b. Non-related subsidiaries are members that are partially owned subsidiaries, but not members of the control group JK Sales LM Sales OPQ Mfg. RST Ops Both under ERISA & the Code, the plan document determines (ooooo) Once theyve written it the way they 100% 100% want it, they 50% 50% have to abide by it though ABCs definition of Continuing service: is this plan an UVW elapsed time plan? Or something else? Ops 100% (ppppp) If you look just at that definition, it clearly looks like elapsed time a. 1/12 of a yr between his employment commencement date (when he starts working) & his severance date (when he stops working) Assume the following:

How many control groups are in the above example? (iiiii) Four? (jjjjj) Five? (kkkkk) One? (lllll) The answer is three. a. The four w/ 100% are all one group b. OPQ mfg. makes up one, b/c its 50% c. RST ops makes up the third b/c of its 50% Definition of a control group: (mmmmm) Parentsubsidiary is one of them a. Where you own 80% or more of the stock i. It owns 100% of the stock of Cos on the left ii. It does not own 80% or more of OPQ mfg or RST ops. 1. And it owns 50% of UVW ops iii. Hat it owned 80% of RST & RST owned only 80% of UVW, it would be 64%... 1. RST would be in two different control groups b. But, back to what the facts really were. 52

ABC Company DEF GHI JK Sales LM Sales

100%

50%

100%

50%

Say UVW ops adopted the plan after 2002. Look at the definition of employee. All of these s have common-law employees

(qqqqq) Who of the common-law employees are employees for purposes of the plan? a. Is every employee of ABC Co. an employee for purposes of the plan? i. yes b. How many employees of DEF are employees? i. Yes. Its an employer. c. GHI? i. Yes. Its an employer d. LM? i. Yes. e. UVW adopted it after 2002 i. So all of their employees are too f. What about OPQ & RST? i. OPQ is a wholly owned subsidiary but you need to differentiate between statutory employees & employees of a control group 1. For testing purposes & eligibility for hours of service under the code & ERISA, its all one employer a. And once you get to a plan, the plan controls i. It may not be qualified b/c you dont have enough people, but the people who are eligible to participate are only those people who work for someone that has adopted the plan & has been defined as 53

an employer 1. OPQ is not defi ned as an emp loye r a. I t m a y b e a m e m b e r o f t h e c o n t r o l g r o

u p , b u t i t s n o t a n e m p l o y e r u n d e r t h e p l a n 2. OPQ ado pted the 54

plan befo re Janu ary 1, 200 2 non e of the m ado pted it after Janu ary 1, 200 2 exce pt UV W, whic h ado pted it in Jan. 1, 200 3 a. A B C , D E F , G H I ,

J K ,When can you go into a plan? (sssss) Some plans have automatic enrollment. L Others dont M (ttttt) Although an employer violates the terms of the plan if they dont actually give you a adequate notice to become enrolled & l participate in the plan l a. Its a breach of fiduciary duty not to give notice of how/when to enroll to the a employees d b. And if they dont enroll you when they o should, theyve got to make a QNEC p contribution on your behalf for the t period that you should have been in the e plan till when you actually come in, plus d earnings For vesting service, you could start at ABC i (uuuuu) There are 8 different control groups here t that are in this plan of the 8 different control groups, ABC has, in its control group, 11 or 12 b s. But they dont all participate in this plan e (more than half of them dont) f a. Anyone who is at any one of those s, o that goes to any of the other s in the r control group, has credit e i. But, if someone in the ABC control group goes to somebody else that J is an ABC subsidiary that has not a adopted the plan, even though n they have vesting eligibility . service, they start all over again 1. So they have to have both 1 adopted the plan, & be a , part of the control group 2 03/21/11 0 0 Whats the connection between securities litigation & 2 ERISA? (vvvvv) A lot of plans will invest in securities a. Used to be 16b securities lawyers (wwwww) There have been a lot of securities fraud cases in the last few yrs where, in mergers & acquisitions, what would happen is that somebody would have a few shares & they would become the lead plaintiff in the case. 55

(rrrrr) Say UVW had not adopted the plan, & their employee worked for five yrs, would they have eligibility for vesting service if they moved to ABC Co.? a. No. b/c its not control group service, & theyre not a member of the plan

Their lawyer would prosecute the case & get lots of $ as lawyers doing this litigation (xxxxx) Theres been some deviation in this trend in the last few yrs a. Directors & officers are now covering up losses in the financial crisis to the detriment of the shareholders. Then when the banking regulators stepped in & pointed out the frauds/cover-ups, the prices dropped from $60/share to $6/share. i. If you owned 100k shares, youve lost a significant amount of $ 1. A lot of plans would have a large # of shares b. Trying to get these plans to become the lead plaintiff in these securities class actions (yyyyy) He thinks that, in doing this, the plans trustees are exercising their fiduciary duties. What are two consequences that can happen if you dont follow the plan document, in addition to breach of ? (zzzzz) Disqualify the plan (aaaaaa) Breach of fiduciary duties under ERISA You might want to look at the defined term investment fund (bbbbbb) Many plans dont think this out (cccccc) Prior to daily valuation, individual account plans (defined contribution plans) had balance-forward accounting. a. Balance-forward accounting: i. Assume that there is a common trust fund & each of the shares your fund owns has the same market share. Say you have 10% share of GM, 10% of Ford, & 10% of GE 1. Its an undivided interest in each. 2. If you leave, & you can make a distribution in cash, then youre going to take the cash out equal to the total value of your interest 56

b. Say the plan is established Dec. 31, 2008. When does the $$$ go in? September 15, 2009 (when you file your tax return). So $1k goes in then. i. Lets say there are two participants. Both earn $50k. & you put in 10%. What is participant 1s interest on Dec. 31, 2008? 1. 10% is the amount of the contribution. Salary is $50k (so $100k was the total). What was your interest in Dec. 31, 2008? a. 5%. Participant 2 terminates on January 2, 2009. How much does he get? i. Nothing. 2. What does participant 1 get? a. 5% 3. Could they get paid on January 2, 2009? a. Nope. Not vested yet. 4. Even thought the amount hasnt been contributed, their account balance is $5k each. a. When they get it, & when theyre vested in it, are two different things b. What you have is an account. You dont really have the assets & when the $$$ goes in September, lets say they earn 1% a mo. How much $$ is that? i. The earnings are $300 for that three

mos. So on Dec. 31, 2008, the value is $10k. Say they contribute the same & earn the same. What do they have on Dec. 31, 2009? 1. Wha t was your acco unt bala nce? $10, 150. a. Y o u r v e s t e d a c c r u e d b e n e f 57

i t i s y o u r v e s t e d p o r t i o n o f y o u r a c c o u n t b a l a n c e

. I n b o t h c a s e s , i t h a s n o t h i n g t o d o w / t h e a m o u 58

n t o f a s s e t s i n t h e p l a n ii. If you were to leave after January 1, 2010, how much of your $$$ would you get out? 1. All of it a. Y o u h a v e $ 1 0

k , p l u s $ 1 0 0 o f t h e e a r n i n g s . W h a t w o u l d b e l e f t 59

i n t h e a c c o u n t ? $ 1 0 0 b. H o w m u c h c o u l d p a r t i c i p a n t 2

g e t o u t a t t h a t p o i n t ? i. $ 1 0 0 . T h a t s a l l t h a t (dddddd) The assets in the plan, & the value of the saccount, can be totally out of whack a. If youre in a balance-forward accounting l setup, the accounting is on an accrual e basis. Not only is the tax date treated as f Dec. 31, but so is the accrual date. So 60

you have an account balance that is out of whack w/ how much $$$ is actually in the fund i. This gets really complicated 1. What does balanceforward indicate to you? a. Whatever is determined as of one date is carried forward & used as the account balance until the next valuation date 2. You get that balance forward until the next Dec. 31. Nothing else. Nothing more. a. Say the market went down after you left. What would you get? i. Your balance carried forward until the next valuation date ii. What if it goes below the balance. Say theres $11k in there. You take out your 10,150. How much is left? 1. $90 0. 2. How muc h does Parti cipa nt 1 61

have left? a. $ 9 0 0 b. So in a down market, the people who leave, benefit. b/c they get their former, undepreciated balance. In an up market, the people who stay benefit b/c they get all of the increase allocated to them (eeeeee) Daily valuation accounting is exactly what it says Look at ERISA 407: it says that if you deal in employer securities, it has to be: (ffffff) No more than fair market value (gggggg) Without commissions What do we know about closely held employer securities? (hhhhhh) The value has to be determined by a qualified appraiser In these plans w/o mutual funds, theyll have three or four common funds (iiiiii) One will be a bond fund. a. They act inversely proportional to interest b. Principle is inversely proportional to interest. c. Say you have a bond fund w/ $1 million in it. Interest rates are 4% i. Over the next 5 yrs, rates go to 8%. ii. It goes down inversely proportional 1. A bond w/ a longer duration will go down faster than a bond w/ a short duration

(jjjjjj) In this plan, & in most plans Shaw writes, b/c hes seen people go back & forth between different types of funds, a. Page 31, 8.3. i. If he has mutual funds, he provides that an investment fund shall only consist of one mutual fund ii. He also provides that the interest of each participant in that mutual fund shall be just the mutual fund shares that his/her $$ has purchased Whats the first issue that all of us should know at this point? (kkkkkk) Youre operating the plan contrary to its terms a. The provision says he will come in on the date he is hired i. Even if hes in California working for a subsidiary. The subsidiary is a member of the control group, thus one in the same employer. ii. How do you correct it? 1. Give a QNEC 03/23/11 One of the provisions of title I is that the provisions of the plan must be set forth in a plan document. (llllll) You have to run a plan according to its terms When you get a job (mmmmmm) Get a copy of the plan, get a copy of the SPD, get copies of your statements (and read them!) (nnnnnn) If you have a 401k plan or a 403(b) plan, they will have some language or another that gives import to 807 a. Its a 404(c) (of ERISA) plan Say a plan permits you to invest your own assets. It either does not say that it is a plan designed to be a 404(c) plan, or it says that it is, but it doesnt meet the 404(c) requirements. Why do you think that should bother you? 62

(oooooo) Youll be liable as a fiduciary under ERISA (pppppp) What does 405 of ERISA say? a. Youre liable for breaches of your cofiduciary b. If youre all on the same plan, & all but one person makes $$$, whats the one that doesnt make $$$ do? i. Sue you for breach of fiduciary duty 1. But if he invested his own $$$ in an improper way, then hes breached his fiduciary duties. Hes gonna sue each of us, b/c we didnt stop him from causing himself to breach c. 404(c) is the real Achilles tendon of where d. The trustees & plan administrator have to run it so that it is a 404(c) plan, it means each & every participant is a fiduciary. Which means theyre all co-fiduciaries to each other 402(g) of the code sets out limits on personal contributions to 401k plans, etc. per yr 404 of the code outlines limits on how much employers can deduct from employee contributions to qualified plans 415 sets forth a limit on how much can be allocated to you based on other members of a control group (qqqqqq) Also outlines maximum benefit from a defined benefit plan that can be paid to you 10.1 outlines the different types of termination events that govern how much youre vested (rrrrrr) The reason this plan has cash or deferred (before tax contributions) & after tax contributions is b/c before tax contributions have stringent limitations on when the $$$ can be distributed (ssssss) The IRS has a fiction that your salary is reduced, & the amount of the reduction is made as an employer contribution a. They feel that if you can defer pay & put it away w/o being taxed on it, then you shouldnt be able to get it until retirement, except in a few cases what

are those cases? (for getting $$$ out of a 401k plan as a participant) i. Your beneficiaries can get it when you die ii. You retire 1. Retire means you reach the normal retirement age as defined by the plan iii. You leave employment (termination of employment) iv. You can get a distribution while youre employed after youre age 59 1. Most employers dont include this v. Disability 1. If youre disabled, you can get a distribution even though youre still an employee vi. If you have a hardship as defined by the Code & the Regs 1. Examples are: a. Death of a family member b. Educational expenses of the participant or his/her dependents 2. Some employers kind of wink, wink, nudge, nudge, at this until the IRS comes in & disqualifies the plan oops. a. Good employers will apply the rules on a fair, consistent, & not necessarily easy basis 10.6: disposition of non-vested benefits (tttttt) Benefits that you as an employee dont get paid to you b/c youre not 100% vested in a. For example, a profit sharing plan that requires 5 yrs to be fully vested, but you quit after 2 yrs

If someone is reemployed & they were a participant in a plan (uuuuuu) They come in immediately (vvvvvv) Understand how they come in (wwwwww) Understand that if you leave a & youre not vested, & if you forfeit an amount, different provisions can apply to you r/e whether you can get that $$$ back a. Some plans have a buy-back feature (from your perspective, its a pay-back) i. If you had $100k in the plan & $95k was vested, if you want to get the $5k that wasnt, you have to repay the $95k back to the plan w/in 5 plan yrs of when it was paid out to you, or you dont get it back 1. So if you dont come back w/in 5 yrs, you lose it 2. If you rolled your $$$ over into an IRA w/ an w/ a front-end load, they can be 8% of the amount you put in. & you forfeit that if you leave before a certain # of yrs (i.e. you move your $$$ again) These are all s of the ABC 401k plan 10.10: Restrictions on alienation 10.12: facility of payment 10.14: (xxxxxx) If you terminated the plan three yrs ago & didnt vest the people, & the plan terminates, youve disqualified the plan three yrs ago (yyyyyy) Why would you be worrying about tracking people down who the plan owes $$$ to? a. Under 401(A)(9) of the code, if someone is the beneficiary of a death benefit, & theyre not a spouse, & you havent commenced paying it in the form of a lifetime annuity, you must pay it out (totally) within five yrs of the last day of the yr in which the person died 63

b. Under 401(A)(9), there are minimum distribution penalties i. Say first yrs required minimum distribution is $10k. The fine is 50%. You dont pay it out. So the next yr you owe $20k. 50% of that is $10k. Plus the $5k from the yr before. Plus taxes & interest. (see where this is going?) 12 deals w/ participant loans (zzzzzz) Cant get less than their account balance or $50k (aaaaaaa) The $50k is an amount that is determined based on the highest loan balance outstanding at any time during the preceding yr a. If you take out a loan of $40k to buy a house. Then his uncle dies, leaves him a bunch of $$$, & he pays off the loan 2 mos in so in the end of May, he pays it off. In June, he wants to buy a $50k speed boat. He comes & applies for a loan. How much can he get? $10k b/c the $40k stays outstanding until a yr after he took it out (bbbbbbb) Loans can be handled two ways a. First: as an investment of the plan i. One of you takes a loan & the interest on that loan is an asset of the plan, so you all share in the earnings and/or losses b. Second: (and more predominant treatment today) a segregated investment of the participant. He or she has the full risk and/or benefit of the loan 13 Under an individual account plan, a spouse must be a beneficiary of at least 50% of the account balance unless that spouse begs off (ccccccc) Shaw makes the spouses 100%... always. 14 is plan administration Withdrawal deals w/ subsidiaries & others who have adopted the plan & now want to get out In 16.3: termination, the notwithstanding provision is vesting upon termination of the plan 64

16.5: the auto language from the IRS is that, if you have a reOrg, its an automatic termination of the plan. To avoid this, he says that if its just a mere reOrg, it has no impact. Otherwise, youd have to amend before you do the deal, or its automatically done. & under 411(d)(6), whats done cant be undone traps (ddddddd) The Jones Day amendment. a. They had a scheme where there was a different defined benefit for each partner. They designed them in such a way that, taken as a whole, it passed. Congress didnt like this 401(l) (eeeeeee) Applies to any plan that, today, is called an integrated plan. IRS calls them permitted disparities What are these? a. Social Security benefits provide benefits up to a given level of pay. Everyone at or below it has the same % of their compensation taxed & the same level of benefit. So if you earn $10k or $5k, when the integration level is $12k, you each got the same benefit at retirement i. Say you earned $5k. Your SS benefits were 8%, the same as a person who earned $10k got 1. Say you earned $100k. You still get 8% of 10k a. But you paid out 8% of your salary in taxes i.e. $8k b. So you could give the high earners an extra 5% in excess of the social security taxable wage base, to make up for this disparity 411(d)(6) (fffffff) (ggggggg) a. b. c.

It applies to every qualified plan It is the anti-cutback rule You cant decrease benefits You cant take away vesting You cant take away optional forms of payment d. You cant take away an accrued benefit

i. Whats the definition of an accrued benefit under a defined benefit plan? ii. Under a defined contribution plan: its the account balance at any given time 412 (hhhhhhh) Applies to purchase plans & defined benefit plans (iiiiiii) Its the minimum funding standards account a. Each yr, the employer must put in a certain minimum amount. Since its a qualification issue, if you dont do it, youve disqualified the plan b. The amount you have to put into a DB plan is determined each yr by an actuary i. $ purchase plan: determined by the plan formula ii. Defined contribution plan: 414(l) (jjjjjjj) When you have a merger of plans or a spinoff of plans or you do anything between two plans, the benefits & assets of the plan after the spinoff or combination, merger, etc. has to be equal to or greater than it was before a. Whats w/ the greater than requirement? i. There can never be a condition where one of them can be greater than b. Applies to all qualified plans (kkkkkkk) If you arent equal to or greater, both plans are disqualified ERISA s 204(h) (lllllll) Provision that is a corollary to 411(d)(6). But it applies only to DB plans & $ purchase plans a. Says that you must give notice to participants in a DB plan or in a $ purchase plan either 15 or 30 days (depending upon # of participants) prior to the effective date of the amendment. 65

If you dont give the required notice, the amendment is void ab initio Sarbanes Oxley Blackout periods are required b/c of SOX 409(A) (mmmmmmm) Among other things, any of the top 50 paid participants in a non-qualified deferred compensation plan who are defined as key employees under 416(i) of the code cant be paid out their deferred benefits for 6 mos after they leave employment. Why? a. SOX is going after people who would engage in all sorts of illegal activity, hurt plan participants, & jump ship w/ their $, & you wouldnt find out about it for a few mos (nnnnnnn) If you have a non-qualified plan & a defined benefit plan, which has been classified as at risk (it has less than 80% assets to fund beneficiaries), then if you fund your nonqualified plan, the employee who is the key employee gets an excise tax imposed on them at the rate of 50% of the amount of funding, plus interest. Youre taxed at this 50% rate, but not w/ respect to the $$$ that went in before the plan was at risk interestingly, a. But if you later become a key employee, any $ put in when the plan was at risk is later taxed at 50% plus interest (ooooooo) And Co cant reimburse these employees 03/28/11 Under 406, if you have a U.S. where 95% of its gross receipts are from non-U.S. source income. For its U.S. citizens, it can make contributions & take a deduction. Even though its foreign sales make up most of its compensation, you can file a consolidated return w/ your U.S. source profits & get a deduction for it Another item to be aware of is the provision under MEPPA (Multi-Employer s Amendment Act of 1980) (ppppppp) If you have a that is selling its assets to another non-related party, & you jump through some hoops set forth in the statute, you can

avoid withdrawal liability on the part of the selling . Defined benefit plan issues: (qqqqqqq) If youre a DB plan, or you have adopted one as an employer, you are essentially guaranteeing the benefit that is stated in the plan to your employees. We talked about the accrued benefit of a defined contribution plan (the account balance at any given date). This is different from your vested accrued benefit (the amount of the account balance in which you are vested). For instance, your 401k contributions are vested 100% from day one. If you have profit sharing plan assets, vesting can be immediate, or after a period of yrs, or graduated vesting over a period of up to seven yrs. (rrrrrrr) In a DB plan, your accrued benefit is the amount that you have earned at any period in time payable commencing at normal retirement age (which can be 65 or whatever other age the plan says) & payable for the life of the participant. Thats what you are getting when youre in a DB plan a. Three different types of formula i. Unit benefit (i.e. $10/mo for each yr of service) b. Dont mix up the accrued benefit, on one hand, & the normal form of benefit payment, on the other i. Say youre born on the same day & go to work for the same on the same day. You always got the same pay every day that you worked there. You both terminated employment/retired on the same day. & are both on the same plan. 1. Is your accrued benefit the same? a. Yes. Because your accrued benefit is the amount that youve earned at any given point in time i. Your vested accrued benefit is 66

also the same 2. Would your normal form of benefit payment be the same? a. Maybe. It could be. Why? i. If one is married, the answer would be no. The married ones normal form of benefit payment is his accrued benefit paid in the form of a qualified joint & survivor annuity benefit, where his wife gets either 100%, 75%, or 50% of a reduced pension off of his accrued benefit (reduced more for the greater amount that she gets). Doesnt mean he has to take it, but its the normal form for a

married person ii. The single persons normal form is the same as his accrued benefit. iii. Heres where things get interesting: 1. Say you re a yr olde r. & you didn t get the ben efit for a yr. Your life expe ctan cy is, say, 2 mos less. They adju st for not getti ng it for a yr, & adju st for 67

not livin g as long as you thou ght 2. Say the marr ied guy is actu ally on his fifth wife by the time he retir es wha ts goin g to be his pens ion? (ass ume its wha t peo ple thin k is requ ired by ERIS A as ame

nde d by REA) a. S a y y o u g e t d i v o r c e d a f t e r 3 y r s . Y o u v e b e e n 68

i n t h e p l a n f o r 2 y r s . S h e s g o i n g t o g e t 5 0 % o f

y o u r t h e n a c c r u e d b e n e f i t . T h e n e x t w i f e , y o u w e r 69

e m a r r i e d t o f o r 2 m o r e y r s . S h e s g o i n g t o g e t 5

0 % o f t h e m a r i t a l p o r t i o n o f y o u r a c c r u e d b e n e f i t 70

. S i n c e y o u v e b e e n t h e r e f o r f o u r y r s , t h e m a r i t

a l p o r t i o n i s 2 / 4 , & s h e g e t s 4 0 % o f t h a t . T h e n e 71

x t w i f e , y o u w e r e m a r r i e d t o f o r t h r e e y r s . Y o u v

e n o w b e e n t h e r e 7 y r s . S h e g e t s 5 0 % o f 3 / 7 . T h e 72

n e x t w i f e y o u r e m a r r i e d t o f o r 3 0 y r s . Y o u r e g o

i n g t o g e t o f t h e f i r s t h a l f . & h a l f o f t h e n e x 73

t 2 / 4 . & o f t h e n e x t 3 / 7 . & o f t h e r e s t o f i t

. T h a t w i l l b e y o u r n o r m a l f o r m o f b e n e f i t . & y o u 74

r s u r v i v i n g s p o u s e w i l l g e t t h e r e s t o f i t . K i n d

o f . C l o s e e n o u g h , a n y w a y . b. T h e s p o u s e c a n w a i v e t h i 75

s . & y o u c a n c o n s e n t t o i t . Y o u a s t h e p a r t i c i p a n

t c a n w a i v e i t . & t h e s p o u s e h a s t o c o n s e n t t o y o 76

u r w a i v e r o f t a k i n g t h e i r p a r t o f t h e b e n e f i t a w a

y (sssssss) This was Geraldine Ferreros claim to fame: (REA was) a. If you are ever in a case against a domestic relations lawyer, they have a thing about what REA means: i. First, they say that everyone is entitled to 50% of the spouses benefit. 1. Well, Shaw knows of no such provision in REA. ii. Second. Say you have a husband & wife who have been married 25 yrs. Husband has worked at several places. In one place he has a DB benefit & a DC benefit. Another place, he has two DC benefits. The wife worked at a place w/ a 401k & an ESOP. Say before that, she worked at a place w/ a 401k & a DB plan. 1. W/ just working two places each, we have 8 plans. 2. They took how much each had in their own name, added it up, & then compared the two. By the time they got done putting $ back & forth, the wife was owed a net amount of about $10k. The cost of doing all of these quadros is about $500 each. So the cost of doing the quadros could very well be more than the net difference a. But divorce lawyers, unless you work them through this, theyre bound & determined to tell you that ERISA & REA require you to give 50% each i. So, what you do, is 77

say to the lawyer: you can see that she is owed $10k. Well give it to you one time out of one plan. You pick 1. You can writ e& proc ess one qua dro for the diffe renc e of the entir e thin g. Tota lly legal tran sacti on. No law says that you can t do it

The common lore is that everybody gets 50% of everyone elses assets in a divorce (ttttttt) ERISA doesnt require this

If you have a divorce where you have one person, that their entire benefit is a DB plan (which doesnt let you get anything other than a lifetime annuity) & the other person has a DC plan (which normally have no provision for annuity payments) you might want to do a quadro on each plan so that the DC person gets something guaranteed for life, & the other spouse gets a cash payment from their DC plan, that makes sense to do back & forth. But it doesnt have to be 50/50 of each (uuuuuuu) Think outside the box when it comes to this type of stuff a. It can be cars & boats as the other side of the persons benefit, or stocks & bonds it doesnt have to be a split of the retirement plans Once you have a qualified DB plan, you have to pay a head tax each yr to the PBGC to insure the plan against illiquidity, bankruptcy, etc. (vvvvvvv) If you have a DB plan or if you have a client who has DB plans & youre involved in corporate transactions, make sure somebody is looking at the reportable event requirements a. Many corporate transactions require 30day advance notice & consent from the PBGC before the transaction can take place 411(a)(1) of the code defines normal retirement benefit Remember, 410(b) is the non-discrimination qualification rules\ 411(a)(1) says that a normal retirement benefit is the benefit that is payable at normal retirement age (wwwwwww) It is the larger of the benefit payable at normal retirement age or any larger early retirement benefit a. So if you have an early retirement benefit thats bigger than your normal retirement benefit, that becomes your normal retirement benefit (xxxxxxx) The normal retirement benefit does not include the qualified disability retirement benefit. a. That means it does include anything that isnt a qualified disability retirement benefit. (this becomes your normal retirement benefit) 78

b. In unit benefit s, i. If you look at 411(a)(9), it says that a qualified disability benefit is a benefit that does not exceed the normal retirement benefit. So, if its $10 per mo, then the disability benefit cant exceed $10. It goes on to say that if it isnt a qualified benefit, then the disability benefit becomes the normal retirement benefit. 35 yrs of service = $387kk. Minus $163kk. = $224kk. (yyyyyyy) This is how much they thought the plan was underfunded (based upon not having any problem). What is the amount of the accrued benefit if the normal retirement benefit is $70 times yrs of service? a. $774kk. Accrued liability is based upon your accrual rate. So if it doubled, how much did your assets go up? None. i. Your liability doubled. Your assets were the same. Now its underfunded $611kk oops. The corporate lawyers will be the due diligence lawyers doing acquisitions. Make sure you look at plans as you hand them off to people. Usually these are in negotiated hourly plans (zzzzzzz) See if there are provisions about double disability benefits when the person isnt eligible for social security. If you find this, you want to do an amendment to the plan & file it w/ the IRS & ask for them to let you retroactively amend these plans to the first day of ERISA (aaaaaaaa) 411(d)(6) says that you cant fix these double dip problems if the IRS catches them in an audit a. Its the anti-cutback provision; you cant take away something i. If the IRS finds is, they have the authority to permit retroactive amendments. Usually they only do this when you bring something to them DB plan document

03/30/11 A good final exam question might be: you have a client that tells you on March 29 that Co is going out of business, for most purposes, on March 31. If youre going to terminate a plan, plan qualification is on 5 yr cycles. Every plan is resubmitted on one of these 5 yr cycles. & when you do them, you do all amendments set forth in the cumulative list for the yr before (so in 2011, if you amend the plan (or terminate it) youve got to make all the amendments to keep it qualified for all the cumulative list through 2010). If you have a prototype or master plan sponsor (bank, law firm, etc.) they prepare a plan document & people adopt it. These are on 5 yr cycles, but it takes 2 yrs to get them approved (so the plans he submitted in 2010, were submitted in 2005. So since they were 2005, you had to comply w/ all the requirements of 2004. So you havent complied w/ 6 yrs of new requirements). If you want to terminate one of these plans, you have to bring the plan up to date for all six yrs that youve missed. You know you have to operate a plan according to its terms ( or welfare plan). If its an ERISA plan, part IV says that, if its a welfare plan the Code provides it. You dont have time w/ such short notice to properly amend the plan, & if you screw up, you could disqualify it. So, can you think of anything that you could do? Short of trying to amend the plan, can you do anything? (bbbbbbbb) You could amend the plan to say that you wont credit compensation for plan benefit purposes on & after April 1, 2011, & you say that you wont let anyone else come into the plan, who isnt in the plan on March 31, 2011. & you say that you wont make any contributions to the plan for any period of time on or after April 1, 2011. Could you do this? a. What about 204(h) of ERISA? If this were a $ purchase plan or , you would need either 15 days advance notice before the effective date of the amendments or, if you have more than 100 participants, youd need 30 days notice. Is the 204(h) notice requirement applicable to 401k plans & profit sharing plans? No. so lets assume our plan is one of these. i. Yes. You can amend the plan, but you have to amend it before the effective date. The effective date 79

is probably March 31. So you needed to have everything done by March 30. ii. From an economic standpoint, its identical to terminating the plan (which is what the client wanted). 1. He calls this a Freeze or a Soft termination a. Froze contributions & participation b. Now he can do the actual termination documents in an orderly fashion (probably 25+ provisions that need added, subtracted, or modified)

ABC (cccccccc) Intro was set forth in one glob (dddddddd) XYZ plan was set forth in 5 or 6 globs (eeeeeeee) Is there a difference? a. Not really b. In the XYZ plan, it is actually more important to have the limitation on the effect of the plan going forward to be i. Because in DB plans, your accrued benefit is what is stated at normal retirement age ii. In DC plans, your accrued benefit is what youve had put into the plan & how it grows up or down 1. Example: In a DB, it was a unit benefit plan that unlike the majority of them was a career average unit benefit plan (accrued benefit for the first yr plus the amount for each subsequent yr added together). Where final average pay plan is the highest 3 of the last 5, averaged, applied to a percentage, etc. unit

benefit plan is a unit measurement times mos of services (so a moly benefit equal to your unit, times your yrs of service). This plan had gone into effect during WWII. When the put it in, it literally had benefits of $.50 times your service. Whats normally done in a unit benefit plan is your ending benefit times yrs of service. This one was $.50 x period in effect (3 yrs). Then it was $.65 times next two yrs. Then it was $.75 times the next three yrs. Then it was $.80 times two yrs. & so on. Got to be about $12.50 over three yrs. Normally these plans, if you retired at any given time, your unit measure was the rate in effect when you retired. Under this plan, you got the benefit for each period you worked, plus the benefit from the next period (so $1.50, plus $1.30, plus $2.25). so most people had a benefit under this plan, when he got involved, of about $25/mo. This isnt much, but its what their union had negotiated. Along comes ERISA. Their annual contribution requirements were around $50k-$70k per yr. He gets a call from the client in 1978 saying that we just got our calculations of how much we have to put in & they said it was around $450k. wtf? why does this sound about right after ERISA? 80

a. When they restated the plan, they restated it & said if you retire in the first three yr period, its $.50. if you retire in the second, its $.65. when they got down to where it was $12.50 times all of your yrs of service. So now you have 12.50 times 30 yrs, & that adds up to $375. Versus the $25 they had been paying. The that they had restate the plan the way most plans are. Not the way it had originally been negotiated. So, Shaw sends an associate over to the to get the files. He copies the whole file. In there were a few incriminating things: 1. A letter from the s home office to the agent, telling him to give a letter to the client & then ordering him to destroy it once the client got it back (the letter said lawyers are bad, let us restate them & itll save you $$$). 2. & the letter he sent the client.

b. Shaw goes to the s home office. c. Moral of the story: the plan document says to do it a specific way. If you change a plan document to increase benefits, how do you fix it? well, in this case, the left it alone & funded it for those people affected (they had to go back & make retroactive payments plus interest). Today, they could have gone into VCP & fallen on the sword, & ask for permission to correct it. Whether the IRS would let them, hes not sure (they might not Code 411(d)(6) anticutback rule). If you violate that rule, you disqualify the plan d. If you sign a w/ a guy & give him a specific benefit, you could amend the plan. If that guy is an HCE, it could discriminate in favor of him now it could violate the plan document e. What would happen to the teacher if got the 81

medical benefits in the form of cash? i. The $1k is included in gross income. ii. Heres the whammy. The 40 employees of the church who have the medical benefits, which are tax-free fringe benefits under s 105 & 106, get converted to a taxable benefit. 1. Beca use the mini ster wan ted to be a nic e guy & give the teac her the med ical ben efits in the

form of cash 2. You can do this for the teac her if but only if the choi ce is avail able eith er und er a Flexi ble Spen ding Acco unt or othe r type of cafe teria plan und er 125. You nee d to do it und er a cafe teria 82

plan docu men t. 3. If you give the m cash in leiu of a nontaxa ble fring e ben efit, each & ever y pers on who was und er that plan is now taxe d on the fring e ben efit. iii. Say youre doing an employment . They say if you stay for at least five yrs, when you leave, well give you an extra $10k a yr so you get a minimum of $50k. Say he stays 25 yrs. He gets $250k. Whats the problem here? Say theres no discrimination of

HCEs. This is a top hat plan. Its a deferred compensation arrangement. There are hundreds of thousands of these things out there that no one recognizes as being subject to SOX, ERISA, excise taxes under 409(A) The ABC plan is a DC plan. The XYZ is a DB plan. Is there anything in XYZ Article I that differs from ABC? (ffffffff) Well, in ABC its the preamble But, same effect (gggggggg) The defined term accrued benefit a. In a DC plan, the accrued benefit is the account balance. You dont need to define it as the accrued benefit b. Under the code & ERISA, a DB plan accrued benefit has to be defined in the plan document (hhhhhhhh) Something else not in the ABC plan was the definition of Actuarial equivalent a. In a DB plan, either by definition or inCorp, this will be there. b. If the accrued benefit, which is the amount earned at any point in time payable at commencement of normal retirement age for the life of a single person. Say the retirement age for this plan is age 65 (they dont have to be age 65, but say this one is). If you are paid a DB from age 65 till whenever, & youre all the same age & sex, & all earn the same amount of $$$, have the same accrued benefit, born the same day, is the accrued benefit going to be paid for the same amount of time? i. No. You might all die at different times. ii. It will be the same amount each mo. But it may not be paid over the same amount of time. Youre going to die when you die. 1. Its the whole basis for actuarial assumptions. 2. Theres an assumption that everybody at a certain age will live a finite period 83

of time & its going to be the exact same period of time. If the life expectancy of a 65 yr old is 11 yrs & 5 mos. They take the average of when people die to get this expectancy. a. The accrued benefit is the amount that is going to be paid to all the employees for life. If you all retire at 65, they pay it until the day the average person dies. So thats how much they invest. That average life expectancy times # of employees i. If you start your benefits at age 55, instead of 65, the benefits are paid to you until you die. But youre going to die when you die no matter if youre paid from 65 till the time you die or 55 till the time you die. Thats the importance of it. 1. The aver age

redu ctio n of ben efits for com men cem ent 10 yrs early is abo ut 60%. This is b/c of the extr a time you have to mak e up until you die you get a bunc h of extr a ben efits if you start 10 yrs early 120 84

extr a. Wha t if you live to be 110 yrs old. The n you get an addi tion al 120 ben efits . Nor mal retir eme nt age: you get ben efits for life. Be it one day or 45 yrs. Its a moly ben efit for your life.

c. Say you both work together. Same everything (job, pay, age, etc.). Youre both 65. One has been married 45 yrs. The other got divorced 5 yrs ago & remarried a 19 yr old (shes 25 when you retire). Did anyones accrued benefit change? i. No. their accrued benefit is the amount theyve earned at normal retirement age payable for your life. ii. Now. REA of 1984 says that the normal form of benefit payment is a qualified joint & survivor annuity. Thats a reduced benefit payable for your life at 50, 75, or 100 % of the reduced amount to your surviving spouse. iii. Shell still be alive when you die. So the payments wont stop. Say you die at 90. She goes to 95. Payments should have stopped at 90. The plan still pays out, actuarially, 60 more payments than your life. So it lowers your benefits to account for the extra payments to her iv. So. The Vegas marriage guy (who has the 40-yrs-younger wife). The plan will have to pay out, after you die, a shit load of payments. So theyll reduce it for her being 40 yrs younger. 1. You might get 10 cents out of your benefit & shes gonna get 90 cents. Either way, the reduction is significant. d. What if, instead of you marrying her when you were 59, you got married in Kentucky to a 25 yr old. & you had retired at 55. Now theres a reduction in your benefit b/c you retired 10 yrs early. & because you have a wife whos 30 yrs younger. So it gets reduced again. When you fund benefits & guarantee them for life, thats exactly what youre guaranteeing them for: one persons life. If they commence them early, you have to 85

reduce it. If you pay it over 2 lives (husband & wife) you have to reduce it. Because thats how they can tell how to fund the plans The plan will define normal retirement age. (iiiiiiii) retirement age is when you retire (can be early, late, or normal) (jjjjjjjj) If you retire late, you get an increase in your benefit. Thats 36 payments you havent gotten. (kkkkkkkk) You make the actuarial calculations at retirement. If your wife dies, the plan gets an actuarial gain. A benefit. It doesnt readjust. 04/04/11 Permitted Disparity & Integration People pay tens of thousands of dollars (50-100) for studies to tell them what kinds of plans they should have (llllllll) If its a small , he or she is probably going to instate a 401k (mmmmmmmm) A DB plan can be based on yrs of service w/ Co. Its a formula. a. You can have a past-service benefit (nnnnnnnn) A DC plan cant a. A DC plan has a set contribution to the plan based upon your salary for the yr. b. Itd be hard to give a past service contribution because of the limits under 404 of the code by the amount you can deduct as a contribution to a DC plan i. The maximum you can contribute under 404 is 25% of compensation of all covered employees (oooooooo) If youre single at age 65, the form of the single payment equates to a lifetime annuity payable for their life. This is their accrued benefit. a. It is the same as the accrued benefit. (pppppppp) Your accrued benefit, for everybody (married, single, whatever), is the amount youve earned at any given point in time payable commencing at normal retirement age & payable for the participants life

a. If you were single, thats exactly what you get: your accrued benefit. This is your normal form of payment b. If youre married, its a qualified joint & survivor annuity that is the actuarial equivalent of your accrued benefit If you look at 2.2, on page 2, youll see actuarial equivalent defined. (qqqqqqqq) It is an amount of equal value determined using interest & actuarial tables that are based on life expectancies (rrrrrrrr) In this plan, at the time it was written, they were using the 1983 group annuity/mortality table for males. (sometimes itll be for males, for males w/ five yr setback for females, sometimes unisex. You use what the plan says ) (ssssssss) If they amend the plan & decrease benefits, unless its pursuant to a statutory change, it might violate the anti-cutback rule (rule 411(d)(6) of the Code) (tttttttt) You dont use the lump sum a. For all other purposes, we use the definition of applicable interest rate & applicable mortality table because this was pursuant to a statutory change i. For determining the small lumpsum cash out, you cant use these interest rates b/c it gives too big a benefit (uuuuuuuu) If the interest rate goes up, the amount paid goes down does this violate the anti-cutback rule? a. No. Its changing because the plan says its changing i. You havent changed the plan language to take away an accrued benefit the plan language, in these cases, is self-adjusting (vvvvvvvv) What is the definition of accrued benefit? a. Amount youve earned at any given point in time payable commencing at normal retirement age & payable for life i. If the males life is extended 6 mos, what does that mean? 1. The actuary takes this into account as to how its funded, but its still part of 86

the normal accrued benefit. 2. What changed as an actuarial value of the benefit? a. The annuity table changed, & it is a 411(d)(6) issue. Why? i. The accrued benefit ii. The average womans age changed by 6 mos & three weeks. The average woman will be paid 6 mos & three weeks longer than what she was. So youre going to pay the man for his life, but youre going to pay the woman for 6 mos & three weeks more, so since youre supposed to pay both of them together, youre going to pay her longer, which means you need a greater reduction.

To do that, you reduce his benefit, & thereby violate the anticutback rule Compare s 2.7 & 2.16 You cant discount life expectancy because of disability Dont file a lawsuit to get ERISA benefits restored. Its hard to win. You wont get much if you do. (wwwwwwww) Once it commences, thats the way it is. Unless the plan says that theres a bump up pursuant to the plans terms a. If they would give you a bump up, what would happen if there wasnt in a plan to do this? i. The plan would get disqualified & youd breach your fiduciary duties, & youd probably get sued for undermining the financial integrity of the plan In this area of the law, some things arent logical A beneficiary has to be a natural person (according to this plan) Definition of employee: (xxxxxxxx) Has to be an employee who works for an employer Definition 2.24: this is what type of DB plan? (there are three types) (yyyyyyyy) This is a final average pay plan. a. Have to be highest consecutive 3 or 5 yrs Look at the definition of normal retirement age (zzzzzzzz) Theres an exception (and its legal) (aaaaaaaaa) Its designed so that someone cant come in a. What if somebody starts working for you at age 64, & their benefit is going to be $25. 87

i. If you define it this way, youre stuck w/ it (bbbbbbbbb) Defined benefit plans usually define it such that: a. Normal retirement is age 65 or, if later, the completion of 5 yrs of participation i. So that there has to be some minimum level of participation The taxable wage base is the base at which the social security taxes are assessed (ccccccccc) Up to a certain amount, everyone pays social security taxes XYZ Defined Benefit Plan Article V: what it takes to become eligible for any one type of retirement benefit (ddddddddd) Normal, late, early, vested, disability Article VI: shows how the benefit is determined. (eeeeeeeee) The accrued benefit is set forth in 6.1 (fffffffff) It has a couple things to focus on. a. If you look at it, what statutory provision does it exemplify? i. 411(d)(6) anti-cutback ii. This plan, before it was restated, had a huge benefit this was a German that came in & bought a small American w/ a very, very large benefit 1. This is called a wear away. 2. They put in a new formula that applied to all service going all the way back. If the benefit under the new formula is greater than your accrued benefit, you get the new benefit. If it is less than the new benefit, you get the old benefit. a. For about 15 yrs, not one person scored under the new benefit b. The accrued benefit, stopping

15 yrs before, was larger than the new benefit formula for all their yrs of service 3. This says you get the larger of A or B. B is the accrued benefit capped off at the day before the restatement date 4. This is a permitted disparity formula 200k x .0135 + integrated portion (.0065) x 100k (amount in excess of the Table II wage base) x yrs of service (in this case, 11) = yrly benefit 04/06/11 Where can normal retirement benefit bite you? (ggggggggg) Under code 411, normal retirement benefit is the greater of the normal retirement benefit or a larger early retirement benefit. (hhhhhhhhh) Where does this grab you? a. The double disability i.e. the double dip b. You can have someone like a salesman in a final average pay plan who, at age 55, has a really high salary. So his early retirement benefit is $50k a yr. The last 10 yrs, it drops off, & is only $25k when he retires. If he had retired at 55 & could have gotten $50k, this is the larger early retirement benefit (iiiiiiiii) The double dip is where, if the qualified disability benefit (an amount equal to any amount not greater than your normal accrued retirement benefit its only in a unit benefit plan. & the plan is $10 times each yr of service. Any amount in excess of the normal retirement in & of itself becomes the normal retirement. So if youre at 10, that makes the double dip 20, which makes the normal 20. But if the union says that the double dip is twice what the normal is, the double dip is now 40. But the government says that if the double dip is 40, which makes the normal 40 etc. ect.). a. How do we give union members what the CBA says they get? 88

i. Put the double dip in the qualified plan. Then, under the disability, you say that the disability benefit cant exceed the normal retirement benefit amount 1. This takes it from a double dip to the normal. So if its 10, it goes to 20, it goes back to 10 ii. Then you have a welfare plan that gives a welfare benefit that gives the amount otherwise provided under the that cant be provided b/c of the normalization clause iii. Say the normal retirement is 40, the double dip is 80. Say you dont have the definition of normal retirement above 1. From a tax standpoint, would you rather have 80 under the , or 40 under the pension & 40 under the welfare? 2. Its tax neutral. Its ordinary income under the & the disability benefit plan. So it doesnt matter, from a tax standpoint, which way they get it. b. If the plan is integrated w/ Social Security (or has permitted disparity), if you commence benefits early & dont reduce them, you destroy the integration formula & disqualify the plan oops Vested Benefits (jjjjjjjjj) What is your vested benefit? Is it the same as your accrued? a. Only if your vested benefit is 100% b. If youre 50% vested in a DC plans account balance, that means you get half of it, & half of its forfeited c. 401k contributions must always, always, always be 100% vested d. Safe harbor matching contributions are always 100% vested i. If you have a matching contribution that is not in a safe

harbor plan, you can have a graduated vesting schedule but it is going to be shorter (more acute) e. Non-safe harbor matching will have vesting over a period of up to 4 yrs f. Profit sharing contributions can have matching up to seven yrs (kkkkkkkkk) Many have five yr cliff vesting a. If you work for the employer for less than 5 yrs, you get zero. Once you reach 5, youre at 100% (lllllllll) Some have seven yr graduated vesting a. If you leave when you have something but not everything, say youre 20% vested, that means youre 20% vested in your accrued benefit. If accrued benefit is $100/mo, at age 65, youd get $20/mo i. And if the lump sum equivalent of $100/mo is $50k, youd get $20k In the XYZ plan, 6.1 (mmmmmmmmm) It exemplifies a principle of the code. a. Subpart b is analogous to 411(d)(6) (anticutback rule) its the former accrued benefit b. What is the statutory principle set forth in subpart a? i. 401(l): social security integration (aka permitted disparity) Early Retirement: (nnnnnnnnn) Your early retired benefit is your accrued benefit a. When does this stop earning benefits? i. When you leave employment b. Same thing w/ early termination. Its what youve earned at the age you quit, payable at normal retirement age, payable to the participant for life (ooooooooo) Same thing as before, but only after a reduction for early commencement a. So youre docked for starting at 55 b. For you, the reduced amount is going to be paid as is; normal form

c. In the case of a person w/ a spouse, it will be further reduced because its being paid for two lives Theres an override r/e early retirement benefits: Vested (ppppppppp) How do you get a deferred, vested benefit? a. Need five yrs of service under the XYZ plan b. What you see in 6.4 is that for you to commence it earlier than age 65, you have to have 10 yrs of vested service i. If you leave prior to 65 & 10 yrs of vested service, you can commence it at age 55 or anytime there after ii. If you have 5 yrs of vested service, but not 10, you cant commence it until age 65 c. Is this type of provision fair? i. Whats the actuarial reduction at 55? 1. 60%... 2. What size benefit are you going to have w/ the same salary at 5 yrs as you do at 10 yrs? a. 50% b. At the same salary, are you going to have at 5 yrs, 50% of what youd have at 10 yrs? i. Yes. c. If youre going to reduce that 50% benefit by 60%, the benefit youre going to get is going to be smaller than the cost of the check to write it & there are people who will take their $$$ whenever they can get it w/o thinking the 89

consequences through i. So as an employer, when they ask should we pay out their benefit at age 55 you should say no 1. Afte r5 yrs, after the actu arial redu ctio n, the cost of writi ng the chec k& proc essi ng it is less than the amo unt of the chec k 2. The law does nt requ ire 90

you to pay a ben efit othe r than at nor mal retir eme nt age a. S o y o u c a n d i s t i n g u i s h b e t w e e n e a

r l y r e t i r e m e n t

i t s d. You cant distinguish based upon employees i. So if youre going to give the president 5 yrs, you have to give everybody 5 yrs d. Where does he get the idea that if you are deferred vested, you have to have 10 yrs to get a retirement benefit? i. 6.4(a)

b e n e f i tWhat about the disability benefit under this plan? s (qqqqqqqqq) What does this thing really say? a. If youre disabled, & you retire, what do & you get? (see 6.5) i. This does a number of things: n 1. It treats a person on o disability as continuing to r be employed by Co m a. If you look at the a definition of l compensation & credited service r youll see that a e disabled person t gets a continuation i of his salary & as r long as youre on e Cos LTD, they m dont have to e retire. & this is the n key point t i. You dont have to b retire under e this plan n (and under e most) if f 91

youre on disability b. Heres the issue: if youre getting LTD, there is almost always an off-set for any payment made under a i. Say your LTD is 60% of pay & you were earning $50k (so, $30k). ii. Say you get $10k under the . They reduce your LTD by $10k. Now. If you start your LTD early (or youre disabled at say, age 45) & your accrued benefit is $10k, youre going to get a whack of something like 85%. So youre only getting $1,500, for life, & your LTD is going to stop being paid at 65. 1. So you get LTD till 92

65, offs et by the 1,50 0. & then , whe n you retir e, you only get the $1,5 00 a. S o w h e n y o u r e d e a l i n g w / p e o

p l e t h a t h a v e a n y t h i n g t o d o w / E R I S A p l a n s , i f y 93

o u d o n t h a v e a n E R I S A l a w y e r i n v o l v e d , b e s u r e t

o r e a d t h e d o c u m e n t s , & c h e c k f o r o f f s e t s & f i g 94

u r e o u t , p a r t i c u l a r l y i f t h e r e s a r e d u c t i o n f o r

l i f e , i t

d o e s n 6.6: (rrrrrrrrr) What statutory provision does this t embody? a. The definition of normal retirement m benefit a i. This is the any larger, early k retirement benefit part e 6.7: s (sssssssss) This was in the ABC plan document e a. This is the deemed distribution n provision s b. If you have no vested interest, youre e deemed to have received your vested . interest (which is zero) because the IRS takes the position that if you dont have iii. Moral of this, & you terminate a plan w/in five yrs, the story: you have to vest everyone who left the dont retire plan w/in the prior five yrs if youre c. Its like the equal to or greater than test disabled on mergers 1. It is i. 414(l) your ii. The only thing they can be is fiduc equal to. Or less than. iary (ttttttttt) On plan termination or partial duty termination, IRS says you have to vest or to partially vest everyone infor a. Five yrs from the date of termination, m backwards your i. So anyone who left during that emp period would be vested or loye partially vested if this clause es of werent in there the econ 7.4(a) omic 95

effe ct of thes e plan s (if you re a plan fiduc iary) .

(uuuuuuuuu) IRS says that you cant accrue a DB pension, under two benefit plans, at the same time, for the same service w/ an employer a. This is a real pain. i. In a given yr, you can have somebody work in two or three different locations & if youre not careful w/ your record keeping, you dont/cant know where his benefit is (vvvvvvvvv) This is another statutory provision. Shaw has seen some people implement it in such a way that theyve had three law firms, two accounting firms, two actuarial firms & the IRS all try to figure out how it works & nobodys really been able to get it a. So they re-wrote it 7.5 has the 415 limitations on the maximum benefits under a plan 7.6 has a recurring theme (wwwwwwwww) The Pension protection act of 2006 (xxxxxxxxx) In 1994, there was the Retirement protection act Under 9.2 are the standard forms of benefit payment You can waive qualified joint & survivor if you waive it & the spouse consents to it (yyyyyyyyy) If youre single, you can waive the lifetime annuity & select a different form What if the client goes back to work after having retired. & the employer either offsets or discontinues their benefits after they go to work. Theres a right way to do this & a wrong way to do this (zzzzzzzzz) Flag this, & find an ERISA lawyer a. This is 9.7 in the xyz plan Rollovers: (aaaaaaaaaa) If you get a benefit paid to you out of a plan b/c you change employers, an (bbbbbbbbbb) You can have mandatory withholding, roll it over into an IRA w/in 60 days of receipt, & pay taxes on the 20% withheld & get the rest of the withholding repaid to you a yr later 96

(cccccccccc) You can do a direct plan to plan transfer & no taxes are withheld. a. You can either roll it to an IRA or another employers plan Where do you get the most protection under ERISA & the bankruptcy code if you want to protect retirement assets? (dddddddddd) Qualified plans & ERISA plans (eeeeeeeeee) So dont roll it over to an IRA Who can adopt the ABC plan? (ffffffffff) Anyone who is a partially owned of ABC a. Didnt have to be in the control group b. This is a multiple employer plan i. A multi-employer plan is two or more control groups that make contributions pursuant to a collective bargaining agreement What is XYZ plan? (gggggggggg) Its not subject to a CBA, so its not a multiemployer plan (hhhhhhhhhh) It cant have two or more control groups adopt the plan so its not a multiple employer plan a. The only people who can adopt are subsidiaries w/in a control group (iiiiiiiiii) Its a single employer plan Under this plan, related entity means member of a control group A top hat election is something you make w/ the DoL when you have a plan so that you elect out of plan documentation requirements, disclosure, etc. if youre eligible So if he doesnt qualify for the top hat plan, just up his compensation Address: 401 Ravine Drive, Aurora, Ohio 44202 04.10.11 Now moving to welfare plans

Part IV of Title I of ERISA sets forth the requirements for plan documents - Specifically, s 402 & 403. Do these different documents in the Welfare plans (Health care, etc.) meet the requirements of an ERISA plan? o None of these documents meet the requirements of ERISA Does anyone of them say a plan name? provide that they establish plan benefits? Is anyone of them established by a plan sponsor that has the right to amend the plan, or terminate the plan? No. Each & every one of these is a between an & some . & youll notice that they provide some type of benefit to maybe even employees of Co, but they provide them pursuant to an agreement between the & the holder So what this is, in each & every case, is an that does not meet the requirements of ERISA Story time: - When health benefits were really cheap in the 1940s, 50s, & 60s, a lot of employers entered into s w/ s & unions that said that they would provide medical benefits for life, at no cost to the employees. & then, as the cost of medical care went from $25-$50 / mo, to $1k$1,500 / mo, the employers couldnt sustain it o Several s went bankrupt (e.g. Republic Steel / LTV Steel, & a lot of others). - s went back to the unions & negotiated changes unions recognized that Cos couldnt sustain w/ just the current employees paying benefits. Retired employees filed lawsuits, fighting the fact that they had to pay more in contributions o When you look at ERISA, where do you see vesting requirements? What benefits have to be vested under either the Code or ERISA? Code: 411 ERISA: Parts 2 & 3 of Title I They only apply to s 97

Nothing about welfare benefit plans Well, the 6th Circuit has said that, if you agree by w/o reserving a right to not vest (or w/o saying that they dont vest), then youve vested the benefits (this is only the case in the 6th Circuit) So, if you dont say that youre not vesting, then you do vest even w/ welfare benefits (even though ERISA makes no mention of welfare benefits) o Whats more, the 6th Circuit says that if you dont follow ERISA & have a plan document (plan document must say who can amend the plan, who can terminate the plan, whether those powers exist, etc.), the 6th Circuit has said that if you dont have a plan document, then you cant have a document that allows for amendment and/or termination Now s found out that they have plans that cant be amended or terminated oops. The s say that

the insu rer can ame nd the , but not on beh alf of the emp loye r or plan spon sor, as requ ired by ERIS A just that the insu rer can term inat e the bet wee n itself & the insu red, so the is 98

not a plan docu men t und er ERIS A When ERISA was passed in 1974, Shaw drafted basically what are known as wrap-around plan documents. These take the 5 or 6 elements of ERISA that are mandated by the act & puts them into a boilerplate document that they wrap around an . The ABC plan wraps around 11 or 12 different s (Health , life, group life, etc.) & then he just files one plan document w/ the DoL & one 5500 Some people got really smart. They started writing plan documents that were medical plan documents that basically started mimicking the provisions of the medical But this generates extra costs/fees Why else isnt this a good idea? o What do you think happens when youre summarizing the provisions of what is insured & you write it a little differently than how the is written? Co would have to

cover things you say that the plan covers b/c its a plan benefit, but the doesnt have to pay for it b/c its not actually in the So, extr a cost s for Co oops The wrap-around documents dont cost much to write, & totally incorporate you w/ ERISA, so that youre in full compliance What he has done is, if someone comes w/ a & no plan document, they adopt a plan document that incorporates the , & it says that you can amend, terminate, etc. So, first off, he doesnt go directly to terminate. & they dont make big elaborate amendments o An , no matter how detailed or thorough, will meet the requirements for a plan document s dont want to be in this position If its a plan document, theyre no longer the funding source, they may become plan sponsors and/or co-sponsors not where they want to be Hartford Plan 99

Theres a LTD plan. & then a basic & supplemental w/ disability provisions, dependent-life provisions

Medical mutual has a that is a medical plan, but they also have the services that is called a plan b/c theres a backup plan to it that is incorporated in - What theyre providing here is Administrative Services Only (ASO) o ASO documents are NOT plans In an ASO , it is not an Its the provider or the administrative service provider has a bank account of the employer & it administers the claims that are payable under the . They will have a checking account that it is the signer for (not Co Co funds the checking account) Different from PPOs (preferred provider Orgs) & HMOs (Health maintenance Orgs) o ASO s, even though they all end in O, the HMO & PPO are Orgs that provide services, whereas the ASO is a & the O refers to Only administrative services - Wrap around docs allow you to satisfy the requirements of ERISA without forcing you to summarize the s when drafting the plans o Allows you to incorporate them into qualified ERISA plans w/o including extraneous benefits o VEBA (voluntary employees beneficiary association) These can provide group life But if you dont insure them, & you dont have a very large # of lives, its not economical If you provide, through a VEBA, benefits to multiple employers, (a Multiple Employer Welfare Arrangement) is subject to ERISA & the state laws (its a mini- )

There are also travel accident policies These pay while youre traveling on business. A split dollar policy The policy benefits are split between Co & the beneficiary/employee o Provided cheap benefits to the employee where Co got back its costs of the & the employee was only charged for the PS 58 costs (not quite as cheap as Table I costs) but when it was deferred compensation, it was a very cheap cost. A form of 125 cafeteria plan is a flexible spending account plan (FSA) o Most of us will have FSAs at our employer many have them When you become a partner, you cant have it any more You can reduce your pay & pay for out-of-pocket costs through an FSA Its a use it or lose it, but you can pay deductables You can pay many out of pocket costs (co-pays, cost of your share of the premium, etc.) can be paid by the FSA HSA (Health Savings Accounts) & HRA (Health Reimbursement Arrangements)

04/11/10 Complying w/ reporting & disclosure requirements Summary plan descriptions: - SPDs. They summarize, in laymans terms, the provisions of an ERISA plan & apply to all ERISA plans except where you might have an exception like a top hat plan - Must be distributed w/in 270 days of the effective date of the plan & must update it by a summary of material modification (SMM) or a new SPD whenever there is a material change that affects the provisions of the SPD Summary Annual Report - This is a disclosure document. Disclosure goes to the participants & beneficiaries o Reporting/filings go to the DoL or the IRS - Is you have a summary annual report, what is it summarizing? o Its a summary of the plans annual report o Whats an annual report? Gives the plans performance for the yr Its the Form 5500, which originally was filed w/ the IRS, but is now filed w/ the DoL on behalf of, if its a , the IRS, if its a DB , in addition to the IRS, the PBGC, & the DoL If youre in anything other than a DB plan (which now has to be given under the Pension Protection Act of 2006 participants must be given an annual funding notice in lieu of the SAR) o Most significant feature of the SAR is plan expenses Distributions to participants are classified as plan expenses

Anything in the health area; dont ever disclose HIPPA protected information, Health Information, or personal health information. Costs employers lots of $$$ & its illegal bad place

204-H Notices - Required for any plan that has a 412 requirement of the Code (minimum funding standards account standards) 100

o What plans have these? Qualified plans So, not welfare plans Not profit sharing plans Not 401k plans Not ESOPs Not top hat plans DB plans are covered And DC plans are covered $ purchase s are covered Blackout Notices - Came in w/ SOX - The exemption on the purchase of employer securities is 407 of ERISA o Code provision that corresponds is 4975 - SOX notices (blackout notices) see blackboard - Must be given at least 30 days in advance of any blackout period that is three days or longer in nature o A blackout is where any plan participant cant do transactions in his or her account. Cant take out loans, cant get a distribution, etc. Sometimes they dont let you put $ in, but usually they do, even during the blackout - It has to tell you the duration of the blackout Form 5500 - An annual report - Not a tax return Form 1041 - Any plan that is disqualified files one of these - Or, if you have a non-qualified plan (i.e. one that was never intended to be qualified) that is funded by other than a Rabbi trust, you also have to file a 1041 - You file 1041s for estates, trusts, etc. o This is why the trust for a DQd plan has to file one - If you have a qualified plan that becomes disqualified & you dont know it, theres no statute of limitations that starts until you file your tax return

o If you dont file the 1041, your statute of limitations never begins to run If you are a VEBA, youve got two forms to file - One is a form 1024 o The view of the U.S. government as to who owes taxes to the government is that everybody in the world owes it taxes The U.S. Code definition of person is interesting Is a trust a person? A Corp? A partnership? An LLC? If it breaths moves, is incorporated is formed, etc., its a person - What are the restrictions on the U.S. from collecting taxes from everybody? o International law (no jurisdiction over people w/o a nexus to the United States) o Certain tax treaties w/ other countries - If youre in the U.S. or have U.S. source income, unless theres a tax treaty or a statute that says youre not taxable, youre taxable o Are there any statutes that say youre not taxable? 501(c)(3) 401(a) 403(a) is an annuity 401(a) is funded by a trust that is exempt from taxation under 501(a) of the IRC - After filing a request, the IRS gives you a determination that you are tax exempt o They way you get this for a 501(c)(9) Org is the file a 1024 o This is under VEBA (voluntary employee benefits association), which is exempt from taxation under 509(c)(9) - A lot of social clubs lose their status as a 501(c)(9) b/c they havent filed a form 990 o They have until April 15 of this yr to get it done - The 990 is the annual tax return that a VEBA has to file

101

What else do we know about VEBAs? - What do they fund? Welfare benefits. So youre providing the welfare benefits pursuant to a welfare benefit plan. So if you have welfare benefits, what else might you have to file? o A form 5500 (the annual report) Rabbi Trusts - Say you have a top hat plan funded by a Rabbi Trust that earns $100k. What type of filing report do you file for the rabbi trust? o What is a Rabbi Trust? A grantor trust Its the grantors assets, the grantors income so what does the grantor trust file w/ the IRS? Whatever the grantor is, is what it files The grantor trust, itself, files nothing o Its treated as having no income, no assets Because the grantor is treated as having the income & the assets o What does the Rabbi Trust fund? Top hat, non-qualified deferred compensation plan o What does the non-qualified deferred compensation plan (the top hat plan) file? If it has filed the election for alternative compliance w/ the DoL (and theres a form on blackboard for this), you dont need to file anything else If you dont file this, you have to file annual reports (form 5500), summary descriptions, etc. So, moral of the story, file a request for alternate compliance So that you dont have to file anything else - 99% of the cases he sees where someone has a complaint about not getting top hat benefits, the

employer that has adopted the plan has not filed the form for alternate compliance o So, ask for copies of the 5500s for each yr, plus the SPD, plus everything else Wait 30 days, ask again. Wait for 6 mos or so, you file a lawsuit under ERISA for compliance w/ the disclosure & reporting requirements of Part I of Title I. to which you are entitled to $110 per day per failed document request oops Wait enough days to get whatever your clients are owed, & yippie o Oh, plus attorneys fees Moral of the story: file the top hat exemption request w/ the DoL The top hat exemption requests to the DoL are due 150 days after the plan becomes effective Puerto Rico - If you are in Puerto Rico, its interesting. For our purposes (ERISA class), Puerto Rico has its own tax laws. It adopts the U.S. tax code usually yrs late o When the 1950 code was around, they were using the 1939 code. When we adopted the 1986 code, they were using the 1950s code. Currently, a 401k plan, where we may be able to put away 16,500 a yr, this yr, down there you can put away 5,500 this yr. & you dont qualify your plan w/ the IRS, you qualify it w/ Hacienda. Qualifying a plan through Hacienda is difficult He had to resubmit one 11 times because they couldnt find it Gotta get the plan qualified by Hacienda, in Puerto Rico, under the Puerto Rico Code The documentation is much like ours was, preERISA

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However, Puerto Ricans are U.S. citizens, but not subject to U.S. tax laws o What does this tell you about plans in Puerto Rico? o They are subject to ERISA

Revenue Ruling: Rev. Rul 2008-40 - Put to rest the standard way of handling benefits in P.R. (used to have a plan qualified under U.S. law & Puerto Rican law). - Puerto Rico started giving tax advantages to distributions from plan assets invested in P.R. businesses o People started having dual trusts (one in P.R. & one in the U.S.). if you look at the requirements of ERISA, ( 403) it says the assets must be held in trust & subject to the jurisdiction of the U.S. Courts Most people thought that b/c P.R. was a possession, territory, (or whatever), it qualified. Rev. Rule 2008-40 says that its not, unless youre a Puerto Rican. So people transferred the assets from the U.S. to a spun off Puerto Rican The IRS then said the spin offs were prohibited transactions (moving the $$ from a U.S. plan to a non-U.S. plan funded by a non-U.S. trust). IRS says that as long as the $$$ was moved & the transaction completed by Dec. 31, 2010, they wouldnt disqualify the plan. By Dec. 31, he had moved all assets out of all plans that had P.R. employees in them to P.R. plans

In addition to having to comply w/ the Canadian Dept. of Revenue, each province has its own separate requirements for their RSAs & they have a requirement that the assets must be maintained in Canada o So clients w/ Canadian operations, cant have the Canadian employees in the U.S. System. Need separate plans in Canada, be qualified by the federal government, & if theyre in more than one province, get them qualified by each province Most clients just wont have s if theyre in more than one Canadian province

England used to have a three-tiered system - Theyve gone to a system resembling the U.S. system - Under 409(A) (the non-qualified retirement plan provisiondeferred compensation provision) you can get into some really quirky situations - This is mandated by SOX - Part of the 409(A) requirements are that, if someone is a top 50 employee & they terminate their employment, they cant be paid out for a period of time (thought being that they might know something & are trying to game the system). - If you have an under-funded DB plan (a red zone plan), then if you have $$$ in a rabbi trust, the participants (who are certain top executives; SEC reporting execs) get an excise tax. & if Co reimburses them, that too is subject to the excise tax but, part of this legislation had to do w/ off-shore funding of non-qualified plans. o Thought was that if you had a Bermuda trust funding a top hat plan in the U.S., there was something bad about this & they wanted to make it illegal. o There is an exception: if you are a U.S. Citizen working in England, you can get a retirement benefit Canada: If you have a qualified plan in - They dont really have qualified plans, they have England, Canada, or any other Registered Savings Accounts (RSAs) country, is it a qualified plan in - Have their own rules, etc. the U.S.? 103

No. its non-qualified deferred compensation So the exception is, if you work in England & are paid for work you do in England, & your deferred compensation is funded by an English trust, thats okay What if youre a U.S. Citizen, living in England, & working for a British w/ operations in Russia, Germany, & South Africa, & you work for 6 mos in each location o This wouldnt qualify. You worked in those countries. So since you werent paid in England, you get taxed at 110% of whats involved o Ouch

Not only can expose an employer to w/o notices under cobra, will pick up any medical costs that they have civil penalty for violation, but worse when acquiring is if you are acquiring hasnt done right & they are coming into your control group, one of the penalties, for failure to comply w/ cobra for any single plan is that lose benefits for all in the group o can take a dive w/ stocks here

Closing Agreement Program - The IRS enters into closing agreements w/ tax payers whenever theres something wrong & they collect a fee for it, in exchange for not pursing the matter further - In the qualified plan area, not only do they not pursue it, but they qualify the plan again - This is the CAP program (Closing Agreement Program) - This happens when they come in & audit you & find that your plan is disqualified 04/13/11 Acquisitions & mergers: - Corp. transactions, employee benefits, generally are a major concern o Sometimes they are deal breakers o Failure to comply for continuing medical coverage

another area: GA ex., pay a small price for a little co. & have a disqualified plan that was disqualified since day 1 & purchase price goes up by a ton, this doesnt make bd of directors very happy - unfunded withdrawal liability for co. being acquired, several times (more than 25) the whole purchase consideration, including assumption of debt o purchaser doesnt want to take on liability, & they want to deduct from the purchase price the unfunded liabilities that you are attributed w/ so will end up keeping & getting price reduced Taft Hartley Act Plans: - Talked about from the Labor Perspective, equal number of representation, lay on top of this ERISA & the FDs o Often, plans that are jointly maintained by labor management bd of trustees or the like, the management trustees, tend to feel that it is the workers $, do w/ it as you want Absolutely not. If increase liabilities w/ re: to past services, if you do it across the bd: his ex., a little act led to a $5 billion increase

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If Fs, wearing multiple hats, if a F issue, the ERISA hat always wins. - What determines the left of contributions under the Taft-Hartley Act, o Wages determined through negotiations/CB if there is a union Contributions to plans negotiated? - Generally they are. o Employees want $ to their pocket Health benefits, can reduce payments by reducing that getting, or get more $ out of a contribution from somewhere else, or combination of both o F functions have to win, but have the option to amend the plan & decrease benefits bc dont have $ coming in DB plan, covered by Code, title I ERISA, & title IV, PBGC rules - W/ all those rules, employers may be required to do 1 of 2 things - Unintended consequences can be very severe: unfunded, co. goes bankruptcy, puts people out of work, loss their homes, no good. - Only real solution is for the govt to bail pension programs out Mutual funds: 401k & s: they own most of wall street 3 types of plans: - 1. Individually designed plan: doesnt fit a model - 2. Buyer & submitter plan: Plans approved by IRS in advance & used by law firms, acting firms, agencies, buy & submittal plans - 3. Prototype plans: prepared by big national houses, banks, co.s, brokerage firms, & most o has a master plan that has eer provision that can get approved by the IRS if a standardized plan, that is a plan that if you adopt it, there are very very few changes you can make automatically includes all members of the control group, by definition allowed to exclude nonresident aliens w/ no u.s. source income, allowed ot

exclude, under nlra, bargain employees, & for contribution purposes, leased-employees o everyone else is included o if you have 2 or 3 divisions or corps. everyone is included in that plan, whether you want them in there or not o definition of compensation is fixed, everything else, so few changes to make, that unless you goof up in the operation, it is going to be a qualified plan, many clients dont even submit a non-standardized plan, you can pick the employer if you are in a control group, you pick one, you can exclude groups of employees & do all kinds of things, & r. fee for adopting a protoype or non-standardized plan generally advise clients that unless going to be one person forever, to not adopt a standardized plan

if doesnt need a individualized plan, tell to just use a prototype - 411d6: anticut back: cant take away benefits o battle of the forms: what if the provision is buried in a page way down somewhere? And next plan adopted doesnt have it in there? & some turn over in personnel? Have a way of coming back around & draining blood from corporate system Prohbited transactions: - Provisions under title I: 406, 407, 408, talked about these before o Under code 4975: a disqualified person, cant engage in transaction between plan & a disqualified person In erisa, cant between a party in interest & the plan Basically can interchange the two terms, labor provisions were done by education & labor provision of the senate, so that is why terms are a little different

Prohibited transaction means just that: various transactions that are listed are forbidden, & if yu do, 105

excise tax, & will get a penalty & some are so bad that just thrown into the criminal s 04/18/11 PBGC only guarantees the benefits of qualified DB plans New Age Plans - Plans that are not traditional plans o Traditional plans are DC plans, DB plans, profit sharing plans, $$$ purchase s, unit benefit plans, final average pay plans, career average plans o New age plans can use: Cross-testing Cash balance Pension equity plans Technically, a target benefit is a new age plan b/c, although it is a $ purchase plan in structure, the contribution is made by an actuary (they determine how much the contribution will be each yr) & $ purchase s are plans w/ a fixed formula (i.e. 5% of pay) what are $ purchase plans? They, together w/ DB plans, are subject to ERISA 204(h) notices for curtailment of benefits, theyre subject to 412 of the code (minimum standard funding account) But, unlike a DB plan, even though theyre qualified, the benefits are not guaranteed by the PBGC A PEP (pension equity plan) & a cash-balance plan are both forms of DB plans & theyre both subject to 204(h), 412, & the benefits are guaranteed by the PBGC

that say that the benefits of a cant be alienated A QDRO allows you to alienate the benefits o It is a domestic relations order that has been issued by a court of competent jurisdiction & approved by the plan administrator 401k plans are DC plans - Key features of 401k: o Cash or deferred arrangement (not plan). Its a profit-sharing plan w/ a cash or deferred arrangement

Puerto Rico: - People born there are U.S. citizens. - Theyre subject to the laws of the united states - The code provisions say that if you are a Puerto Rican resident, you are not subject to the tax laws of the U.S. but you are subject to the tax laws of Puerto Rico. (theyve adopted the U.S. Code, but theyre not entirely up to date) - Say I (an Ohio resident) go down & work in Puerto Rico for a yr. Theres a provision in the Code that says that you can elect, after 31 days, to elect to be taxed under the laws of Puerto Rico. As a part of that code, they have their own separate rules for qualification of plans. - A Puerto Rico plan would not be qualified in the U.S. - Since P.R. is part of the U.S., however, Title I of ERISA (the labor provisions) apply to P.R. plans. o Means that they have to file annual reports (form 5500) o Have to file summary annual reports o DB plans in P.R. have to file annual funding statements o Have to distribute SPDs & summary annual reports & summaries of material modifications o All the disclosure provisions, the in-trust rules, the fiduciary rules, etc. have to be complied with o Title I, Part IV says that assets shall be QDRO held in trust & subject to the jurisdiction - Qualified Domestic Relations Order of the U.S. district courts all title I o One of the three or four exceptions to provisions can be met. However, the IRS the provisions of both the Code & ERISA says that if you hold assets for a U.S. plan 106

in P.R., youre holding those assets in a foreign situs trust interesting In Rabbi trusts, the assets are still subject to creditors until theyre disbursed (its a grantor trust) - The idea behind it is that you can kind of fund & protect senior management & highly compensated employees to the extent that they havent been attached by creditors but you cant give them such protection that it is funded o Then it wouldnt be eligible for a top-hat plan Select group of management or a select group of highly compensated employees (or both) & it cant be funded The normal form of benefit payment for someone who is married is a qualified joint & survivor annuity If you have s A, B, C, & D, & individuals 1, 2, 3 & 4 - 1 owns 25% of each - 2 owns 25% of each - 3 owns 25% of each - 4 owns 25% of each He wont give us an exam question about a brother/sister % match up You take the common % for each shareholder - If you had 10, 10, 10, 15, 10, & added them together, itd be more than 50% ownership. It has to be more than 50%... If you have a deferred compensation provision in an employment agreement, that is a top-hat plan & its subject to all the reporting & disclosure provisions of a plan, unless you file a top hat exemption - By filing the exemption, you dont have to do a form 5500, the summary of material modifications, etc. MEPPA (Multiemployer Pensions Plans Amendment Act of 1980) - Applies only to multi (and not multiple) employer s - A similar acronym is MEWA (Multiple Employer Welfare Arrangement) 107

In the 6th Cir., multiemployer plans are adding to their trust agreements that the contributions of pension & welfare plans are due & payable & become plan assets when the contribution is due o This is contrary to ERISA & the DoLs position

If he asks a question about the ABC plan, it is a DC plan If its the XYZ plan, its the retirement income plan we had in the class A VEBA funds a welfare benefit plan. Which means that, since its funded, ERISA preempts state law (not the VEBA) - See the California vacation plan example