DOL Proposed Regs for Timely Deposits

[12AX7]

Do the propose regs suggest that any 401 (k) contributions and loan payments made after 7 business days are automatically considered as "late" and therefore subject to the prohibited transaction rules?

Until the final regs are issued, what are others considering if the deposit occurs after the 7th business day? We've already informed our clients about the proposed regs, but my feeling is that we'll be looking at more prohibited transactions until the clients change their deposit habits.

[BG5150]

Until the regs are final, then the current ones are in effect. However, we have heard of plans undergoing audit being called on the carpet for not timely (read: as soon as administratively feasible) sending in deferrals even though they were within the current limits (15th business day following...)

And, yes, for small plans (those under 100 lives; the regs do not mention being a schedule I or H filer), the safe harbor is the 7 business days, and after that they are considered late and subject to the excise taxes. Don't forget that interest must be applied to those contributions/payments also.

Get ready for a busy 5330 season!

[John Feldt ERPA CPC QPA]

I'm not sure I read the proposed regs that way.

The wording appears to state that the DOL cannot question the timeliness of your (small plan) deposit if you got the money into the plan by the 7th business day following the date it was withheld from pay.

Thus, if you deposit later than the 7th day, you then fall under the normal rules of: ASAP, which cannot be later than the 15th business day of the following month. The DOL, upon examination, could question a deposit made after that 7th business day, but the proposed regs do not appear to say it is automatically late.

Thus, if you deposit on the tenth business day because your accountant left the company, you may have facts and circumstances that the DOL might accept (maybe).

[Kevin C]

I agree with J4FKBC's interpretation.

But, don't count on the DOL agreeing to anything deposited after the 7 business day safe harbor. We have had two different DOL agents challenge timeliness of deposits when checks were mailed no later than the first business day following the pay date. They initially used the date the deposits were credited on the trust statements as the deposit date.

The current final deposit regulations have a mailbox rule of sorts. The deposit is considered made when the check is mailed, as long as the deposit check clears the bank. We recommend that our clients who mail deposit checks keep a written log showing the pay date, deposit amount, date mailed and who mailed it.

[jlea]

I, too, agree that the safe harbor is just that and that deposits thereafter are subject to the general rule, rather than automatically considered late. My recollection is that one of the speakers at the March ALI-ABA conference likewise viewed the proposed regs in that manner.

My thanks, too, regarding the suggested client practice. I'm working with a client who's correcting a temporary cessation of elective deferrals under EPCRS and we were just talking about when the corrective contribution is considered made - the date the check is mailed or the date the deposit hits.

[Don Levit]

Folks:

This proposed regulation deals with "amounts that an employer has received from employees or withheld from wages for contribution to employee benefit plans."

The distinction between these 2 methodes seems to include cafeteria plans.

It also seems to suggest that these plans are employee contributions, for an employer has received them from employees.

Therefore, even though employees receive tax-preference due to their status as employees, the contributions themselves are employee, not employer contributions.

Agree or disagree?

Don Levit

[GBurns]

That something gets treated in a certain manner by the IRC, for satisfying a specific peculiarity, has nothing to do with the DoL and its regulations.

[Don Levit]

George:

Correct.

So, if an employee pays the premium on an individual policy which he brings to a new employer, in a cafeteria plan, has the employer established an ERISA plan for that one employee?

Don Levit

[J Simmons]

Hi, Don,

As George indicated, treatment under the IRC does not mean the DoL treats it similarly. In the context you mention of a cafeteria plan, amounts the employer pays toward insurance premiums that corollate to elected payroll reductions are nevertheless 'employer contributions' for tax deduction purposes. However, the DoL sees that same amount as an 'employee contribution' for purposes of its plan asset regulations and rules on timely remitting.

There is authority cutting both ways on whether a plan for just one non-owner employee is an ERISA plan, or in legal terms, merely a contract between the employer and that one employee flying below the ERISA radar.

Clearly, if the employer lets the employee pay for the individual policy through payroll to avoid income and payroll taxes, the arrangement needs to meet the requirements of IRC sec 125 (cafeteria plans). If that cafeteria plan is kept to a skeletal remains of what most cafeteria plans involve, but yet satisfies IRC sec 125, then I think it may not be an ERISA plan or a 'group health plan' under other applicable federal laws (COBRA, HIPAA, USERRA, PDA '78, etc). If the employer gets to involved or the cafeteria plan is drafted in the typical way, the 'group health plan' mandates of those laws will likely not be found in the individual policy and expose the employer to liability for those mandated features missing from the individual policy.

[Don Levit]

John:

Thanks for your reply.

What features of a typical cafeteria plan might subject the individual policy to the group health plan mandates?

If the contributions are considered employee contributions, wouldn't the individual policy which the employee brings to the employer meet the 4 conditions of the safe harbor guidelines excluding the policy from ERISA coverage?

Don Levit

[J Simmons]

Hi, Don,

All sorts of things the plan design might require or employer might do can cross the threshold into being a 'group health plan' for one or more of those federal laws.

Who bears the cost of the premium is obviously one. If the arrangement amounts to an ERISA plan, it will likely be a plan 'of the employer' triggering application of HIPAA and COBRA (which most individual policies do not have provisions for). To avoid being an ERISA plan, the employer cannot bear any part of the expense. Participation by employees must be entirely voluntary. The employer must not endorse the plan or make it appear as part of the employer benefit package. The employees must not receive a discount against the otherwise commercially available premium because of being employees of the employer or choosing to participate in this payroll practice. The employer should not be the 'owner' of the policy or listed in any other capacity with regards thereto. If the employer receives compensation for implementing the payroll reductions and corresponding premium payment, that too can be problematic.

At the same time, the plan must be written to satisfy IRC sec 125. Several courts have indicated that having a cafeteria plan is a factor in considering whether there is an ERISA plan, although it is possible that an employer can have a cafeteria plan without it rising to the level of an ERISA plan. It depends on all the facts and circumstances. The cafeteria plan should not offer other benefits, such as a flex account. The fewer, if any, eligibility requirements imposed on employees to participate the better. Eligibility requirements require administration and that usually leads to the finding of an ERISA plan.

COBRA and HIPAA apply either if the arrangement is contributed to by the employer or is "of the employer". It is important too to avoiding these mandates that the employees not receive a price break on the premiums for being employed by the employer. Most individual policies do not give the covered persons these laws require the employer with a group health plan provide.

For USERRA and Pregnancy Discrimination Act purposes, the availability of the individual policy must not be made "in connection with employment". If they are, then the mandates of these laws must be complied with and usually are not by individual policies.

The FMLA applies to 'employee benefits' ("all benefits provided or made available to employees by an employer, including group life insurance, health insurance, disability insurance, sick leave, annual leave, education benefits, and pensions, regardless of whether such benefits are provided by a practice or written policy of an employer or through an 'employee benefit plan'" as defined in ERISA). The FMLA, if applicable, could require special payment terms that would complicate the cafeteria plan to the point its administration rises to the level of being an ERISA plan and possibly a 'group health plan' for HIPAA and COBRA purposes too.

The ADA applies to 'fring benefits available by virtue of employment, whether or not administered' by the employer, and prohibits discrimination against the disabled with regards thereto. If the disabled employee's premiums for individual policy coverage are greater than they are for similarly situated other employees, is there discrimination of the type prohibited by the ADA? Possibly, even though the counter argument is that a scaled back, bare bones cafeteria plan for paying insurance premiums amounts to nothing more than a payroll practice and does not provide coverage. As such, it is actually of greater benefit to the disabled employee who is able to shelter the higher premium cost from taxes, while other employees only are allowed to use the cafeteria plan to shield their lower premium costs from taxation.

Same argument could be made that such a cafeteria plan actually benefits more those who are over age 40 and facing higher individual policy premiums than those that are younger, for ADEA purposes.

There is also state law to contend with. If the plan is not an ERISA one (probably essential to avoding HIPAA and COBRA), then there is no ERISA preemption of state law. So whatever rules the states in which the employer has employees must also be dealt with.

Satisfying the requirements of IRC section 125 to make the premiums on individual policies tax-free, but without bumping into these other laws requires a careful balancing act. There's a big downside potential for the employer if it accidentally does too much with respect to those policies, triggering the application of these laws, that must be weighed against (a) keeping employees happy by making their health premiums tax free, and (b) 7.65% FICA savings for the employer on the premium dollars involved.

It may be worth it to some employers, and maybe not to others. As David Letterman might say, "don't try this at home, kids, these are trained professionals."

[GBurns]

Don

It is very very rare for an employer to allow an employee to "bring" anything for many reasons. There is a practical or functional liimit on the number of payroll slots (hence number of disbursement checks) that any payroll system or payroll department can handle. Not many of the insurance companies will accept payments from sources other than as set up with the policy application and provisions. Not many will accept third party payments. Many will not list bill. Etc ETC.

It is just impractical to allow more than a few employees to randomly provide insurance policies. And even then it probably is not worth the risk and effort to do it through a cafeteria plan under the current laws and in use regs. This could possibly change in a few years if the new 125 Proposed Regs come into play and cause condusive ERISA guidelines to be issued.

Then there is the issue of the setting up of the 125 cafeteria plan. Not only is it an employer provided plan, but it is selected, endorsed and adopted etc by the employer who also selects the TPA and quite often controls the funding. I cannot imagine a cafeteria plan, especially with benefits credits, flex or FSA, that is not an ERISA plan.

[Don Levit]

John:

The parameters you cite to avoid being an ERISA plan seems to qualify the individual health policy under a cafeteria plan.

The employee brings his individual policy to the employer. Thus, the employer had no involvement with the employee obtaining the policy.

And, if the cafeteria plan contributions are employee contributions, the employer is not subsidizing any of the premiums.

Have any courts actually decided that having a cafeteria plan, in and of itself, establishes an ERISA plan for every participant?

And, is it possible for the cafeteria plan to be an ERISA plan for some participants, but not for others?

For example, an employee may participate in a 401(k) under a cafeteria plan, which, of course, is an ERISA plan.

However, the component that deducts premiums for his individual medical policy need not be an ERISA plan.

In McMahon v. Digital Equipment, First Circuit, 1998, it states, "The exclusion of payroll practices from the scope of employee welfare benefit plans follows from the policy underlying ERISA, because these types of employee benefits are not vulnerable to either of the evils that Congress intended to address within ERISA. There is no benefits fund to abuse or mismanage and no special risk of loss or nonpayment of benefits."

Both these characteristics extend to cafeteria plans, in which the individual medical policy with the characteristics I outlined exists. Thus, for that portion of the cafeteria plan for this medical policy, it is merely a "payroll practice."

By the way, are you aware that even former employees may be participants in a cafeteria plan?

Don Levit

[Don Levit]

George:

The practicality of adding an individual medical policy is certainly an issue, although, of course, the legality of such an arrangement is primary to its convenience.

I agree with you that the proposed cafeteria regs will make such an arrangement even more likely.

I disagree with you that each and every portion of a cafeteria plan would meet the parameters of an ERISA plan, even though some features would.

The DOL safe harbor guidelines, if satisfied, would be adequate to make that portion of the cafeteria plan a non ERISA arrangement.

Don Levit

[GBurns]

Don

If a cafeteria Plan, and its incorporated benefits, are established, endorsed, adopted, maintained, vendor selected, TPA selected and employer funded or partially funded, by the employer, How can a portion be treated differently than another portion?

[Don Levit]

George:

Good question.

The cafeteria plan is a funding method.

I believe the proposed cafeteria regs attest to that.

Whether or not part of a cafeteria plan is an ERISA plan or not depends on the benefits.

For example, if a benefit was one of the "excepted benefits," and the employee paid the premium, would that benefit be part of an ERISA plan?

Don Levit

[GBurns]

What "excepted benefits" are you referring to?

What ERISA section covers these "excepted benefits"?

How does the employee pay the premium? Through the cafeteria plan under an SRA?

[Don Levit]

George:

Excepted benefits are (1) those provided under a separate policy, certificate, or contract of insurance; or (2) are otherwise not an integral part of the medical plan.

Examples would be limited-scope dental or vision benefits and other similar, limited benefits. ERISA 732©(1)and 733©(2).

Don Levit

[J Simmons]

Hi, Don,

I don't know that you can slice and dice a plan trying to insulate a portion from ERISA otherwise applying, particularly if it is a type of benefit (health coverage) that ERISA specifically covers.

For example, if you were to try a POP cafeteria arrangement on a bare bones 125 compliance basis for individual policies, concerns about compliance would be increased if the same employer has a MERP or another cafeteria plan with flex accounts. Those involve employer dollars and significant ongoing administrative schemes, respectively, that invoke ERISA, and make it particularly difficult then to resist being tagged a 'group health plan' for COBRA, HIPAA, etc. That POP ought to be, IMHO, the only type of welfare benefit arrangement, and then you ought to get written opinion from an attorney that the specific employer situation and 125 practice will be exempt from those laws before trying it.

There is a risk level here that should be respected and appreciated by the employer before attempting to make tax-free reimbursements to employees for paying the premiums on their individual health policies.

[Don Levit]

John:

Thanks for your reply.

I am not looking at the employer making tax-free reimbursements to employees for paying premiums on individual health policies.

I am looking at an employee-pay-all situation using the cafeteria plan (employee-pay-all according to your pointing that out from the DOL's perspective).

And, while it may be a benefit that ERISA specifically covers (health benefits), I am assuming that if the particular benefits meets the DOL's 4 guiodeline safe harbor, then the medical policy would be excluded from ERISA coverage.

If true, the question would still remain that the individual medical policy (which the employee brought to his employer) would have to meet the cafeteria plan guidelines.

Which specific cafeteria plan guideline (citation) may this medical policy not satisfy?

Even if satisfied, you then mentioned there may be other federal laws this individual medical policy may violate?

What specific laws, including citations, may this individual medical policy violate?

Don Levit

[J Simmons]

Hey, Don,

If you're not looking for tax-free reimbursements to employees for paying premiums on individual health policies, then I wouldn't bother trying to use a cafeteria plan for the employee-pay-all situation. It would be much easier to steer clear of ERISA 'welfare benefit plan' status and status as a 'group health plan' under COBRA, HIPAA, etc.

Interestingly, the 4 guideline safe harbor in the DoL Regs §2510.3-1(j) is for "group or group-type insurance programs". Using that safe harbor to back away from ERISA might back you right into a 'group health plan' for purposes of the other other laws. DoL Regs §2510.3-1(b) provides an exception for certain, specified payroll practices.

I won't take the time to cull all the citations to the laws I mentioned in Post #11 in this thread. I'm not here going to provide a legal analysis or opinion. I will give you a few nuggets, however:

ERISA may apply whether or not a tax break does. US Dept of Labor (DOL) Opinion Letter 2001-05A (June 1, 2001). The DOL has recognized that every arrangement merely to pay the premiums is not subject to ERISA. The DOL has noted that a ‘premium conversion arrangement’ may be offered by an employer primarily “so that its employees may gain certain tax advantages and [which arrangement] itself provides no ERISA-covered welfare benefits”. Footnote 5 to DOL Opinion Letter 94-15A (April 20, 1994). That is, the DOL agrees it is possible to structure the payment of insurance premiums to be tax-free in a way that would not be subject to ERISA.

The DOL has concluded that a ‘pre-tax plan’ designed to meet IRC § 125, allowing employees the choice to pay premiums with pre-tax deductions from their pay, did not “constitute, in itself, a separate employee welfare benefit plan within the meaning of section 3(1)” of Title I of ERISA. The DOL explained that “[t]he provision of this tax-favored treatment, . . ., is not the equivalent of the provision of a benefit enumerated under section 3(1), and it does not appear that the Pre-Tax Plan itself provided any enumerated benefit.” DOL Opinion Letter 96-12A (July 17, 1996).

On one occasion at least, the DOL ruled that direct payment of the premiums by the employer to the insurance company subjected the arrangement to ERISA regulation. DOL Opinion Letter 77-54A (August 8, 1977). Granted, in later opinions (DOL Opinion Letter 94-23A (July 1, 1994) and then 94-26A (July 11, 1994)), the DOL said that the employer’s directly paying the insurance company (and then collecting from the employee) would not of itself trigger ERISA application. A couple of federal courts have agreed with the DOL’s more recent rulings: Roehrs v Minnesota Life Ins Co, No. CV-03-1373-PHX-LOA (D.Ariz. 02/16/2006) and Bagden v Equitable Life Assur Society of the US, 1999 US Dist LEXIS 7066 (ED Pa 1999).

It is important that the policy be owned and held by the employee, not the employer. All the employer should do is reimburse the employee on proof of payment of the premiums for the individual health policies. See DOL Opinion Letter 94-26A (July 11, 1994) and 94-22A (April 20, 1994).

In a situation where all employees were initially covered by a group policy, but then the coverage for some was replaced by individual policies while the coverage for others was continued through the group policy, a court found the individual policies merely to be part of the ‘group plan’ subject to ERISA. Peterson v American Life & Health Insurance Co, 48 F3d 404 (9th Cir 1995) and Stern v Provident Life & Accident Ins Co, 295 FSupp2d 1321 (MD Fla 2003), but compare Laventure v Prudential Insurance Co of America, 237 F3d 1042 (9th Cir 2001).

Apart from the 4 guideline safe harbor for group and group-type insurance programs, “there is no authoritative checklist that can be consulted to determine conclusively if an employer’s obligations rise to the level of an ERISA plan” * * * “In this cloudy corner of the law, each case must be appraised on its own facts.” Belanger v Wyman-Gordon Co, 71 F3d 451 (1st Cir 1995). See also DOL Opinion Letter 90-08A (April 11, 1990).

Just having a ‘cafeteria plan’ (which the 125 Payroll Practice is) has been cited by federal courts in Alabama as a factor in determining whether ERISA ought to apply. Stoudemire v Provident Life and Accident Insurance Co, 24 FSupp2d 1252 (MD Ala 1998), Levett v American Heritage Life Ins Co, 971 FSupp 1399 (MD Ala 1996) and Lott v Metropolitan Ins Co, 849 FSupp 1451 (MD Ala 1993). On one occasion, those Alabama federal courts went so far as to hold that use of a ‘cafeteria plan’ invokes application of ERISA. Hrabe v Paul Revere Life Ins Co, 951 FSupp 997 (MD Ala 1996). Compare that to the DOL advisory opinions which take a different position (DOL Opinion Letters 2001-05A, 1996-12A and 1994-15A).

When asked in 2005, DOL officials declined to make even unofficial comments about which circumstances of offering individual insurance policies through a cafeteria plan might trigger the application of ERISA. The reason the DOL official chose not to comment: a court case was then pending in which that question was at issue. The question (Q&A-27) was posed at a May 18, 2005 meeting of the American Bar Association’s and DOL’s Joint Committee of Employee Benefits Technical Session. On June 24, 2005, the federal 4th Circuit Court of Appeals ruled in that pending case, Casselman v AFLAC, 143 Fed.Appx. 507 (4th Cir. Nos. 04-2370 & 04-2378, 06/24/2005), that

Both determining eligibility criteria and selecting the insurance company have been found relevant to the determination of whether the safe harbor is applicable. See Butero [v Royal Maccabees Life Ins Co, 174 F3d 1207, 1213 (11th Cir 1999)] (recognizing, in holding the safe harbor inapplicable, that the employer picked the insurer and deemed certain employees ineligible to participate). Given the unequivocal language of the regulation limiting functions of the employer to the enumerated tasks, we conclude that the employer exceeded the bounds of the permissible interaction with the program under the safe harbor.

[Don Levit]

John:

Thanks for your very informative and detailed response.

In this particular situation, where an employee brings an individual policy to his employer, it seems that the the employer has not exceeded the bounds of the permissible interaction with the program under the safe harbor. When you consider that the employee is not being reimbursed by the employer, the employer's level of involvement is even less.

I find DOL Opinion Letter 96-12A to be very helpful, in that it seems to differentiate from providing tax-favored treatment and whether a benefit is contained in section 3(1) of ERISA.

I found the Hrabe v Paul Revere decision to be disappointing, although enlightening.

Is there any way you could E-mail that decision to me?

Don Levit