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105(h) discrimination corrections


Guest Richard Tennenbaum
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Guest Richard Tennenbaum

Interesting issue:

Company has not performed 105(h) testing for several years for self-insured plan. They have included a select few retirees, and as a result will fail. Therefore, excess benefits to all HCIs are taxable.

Prospectively, the company can carve out an insured plan for the select retired execs they want to cover, but any ideas on what the retroactive correction is for prior years? Issue amended W2s and 1099s for past years to the HCIs (active employees and retirees) and have them amend their tax returns? That's tough to swallow considering the definition of HCI in 105(h) regs includes the top 25% wage earners (more than 200 individuals in this case).

thanks for your thoughts,

RT

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My thoughts:

1. It has been shocking to me how many companies maintain 105(h) plans (and even 125 plans) and do perform the prescribed testing.

2. The approach you mention is the approach I believe that IRS would consider appropriate. Forcing your client to go through with it will probably cost you the client relationship. The client may prefer to let sleeping dogs lie and hope the statute of limitations runs out.

3. Your approach for the future should be undertaken immediately. Amounts for the year to date may still be a problem for 2006.

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Guest Richard Tennenbaum

Thanks Guru,

Just a couple of questions:

Under 1., do you mean to say you're surprised at how few plan sponsors actually do the testing? If so, I'm similarly surprised...this client, a new client, had never heard of 105(h)...

2. by statute of limitations, you mean waiting for the tax years to close?

3. i'm not sure I understand what you're saying...for the current year, there is no doubt that since W-2s and 1099s have not yet been issued, they should probably do so when the reporting deadline approaches...well, on second thought, I guess they could let sleeping dogs lie here too....

On a related issue, I'm only now doing related 409A analysis, but it looks like there could be some exposure there as well. Appreciate your thoughts!

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Under 1., do you mean to say you're surprised at how few plan sponsors actually do the testing? If so, I'm similarly surprised...this client, a new client, had never heard of 105(h)...

Yes

2. by statute of limitations, you mean waiting for the tax years to close?

Yes

3. i'm not sure I understand what you're saying...for the current year, there is no doubt that since W-2s and 1099s have not yet been issued, they should probably do so when the reporting deadline approaches...well, on second thought, I guess they could let sleeping dogs lie here too....

Do testing and reporting correctly for 2006. Employer should make decision about prior years based on full understanding of issues.

On a related issue, I'm only now doing related 409A analysis, but it looks like there could be some exposure there as well.

Bring them into compliance by 12-31-06.

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Guest Richard Tennenbaum

Bring them into compliance by 12-31-06.

I absolutely agree that this is the prospective correction (probably through purchasing an insured policy for the retired execs), but I don't think that would remove the 20% 409A tax burden for 2005 and 2006? As always, appreciate the comments.

RT

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