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A couple issues as you noted, Debb-- All employee HSA pre-tax contributions through payroll are made through the Section 125 cafeteria plan. The Section 125 rules require a choice between cash and qualified benefits. There's no choice in this scenario. State wage withholding laws generally require the employee to expressly authorize any withholding any benefits deduction in writing. That won't be preempted by ERISA here. Here's a couple relevant cites: IRC §125(d): The term “cafeteria plan” means a written plan under which— (A)all participants are employees, and (B) the participants may choose among 2 or more benefits consisting of cash and qualified benefits. California Labor Code §224: The provisions of Sections 221, 222 and 223 shall in no way make it unlawful for an employer to withhold or divert any portion of an employee’s wages when the employer is required or empowered so to do by state or federal law or when a deduction is expressly authorized in writing by the employee to cover insurance premiums, hospital or medical dues, or other deductions not amounting to a rebate or deduction from the standard wage arrived at by collective bargaining or pursuant to wage agreement or statute, or when a deduction to cover health and welfare or pension plan contributions is expressly authorized by a collective bargaining or wage agreement.

If plan forfeitures are reallocated to other participants, per the document, doesn't making her 100% vested adversely affect the remaining employees? i.e. if the forfeiture has occurred, per the plan document, should they be entitled to a forfeiture allocation?

... and do this before paying the distribution.

Assuming the receptionist is a NHCE, then go ahead and do an amendment to give her 100% vesting. If you are using a preapproved "fill-in-the-blank" style document it probably has a spot for special vesting provisions. You can enter something like "Jane Smith is 100% vested as of 6/8/2022" or "Receptionists who were hired in 2018 are 100% vested as of 6/8/2022" or whatever language will accomplish the desired result, as long as it is definitely determinable and not subject to employer discretion. Do not attempt to get "cute" - one of the requirements to be eligible for self-correction under EPCRS is that the plan must have processes and procedures in place to reasonably promote compliance. If you are knowingly and willfully flouting the plan document then you are not promoting compliance.

david rigby, your thinking is that denying the spun off employees the distribution to which they might be entitled without the spinoff could be a cutback? It's a good point, and if vesting is involved and the transaction amounts to a partial termination, the spun off employees would also be potentially losing accelerated vesting. Having said that, I don't see how the acquired and selling companies' contractual agreement in the original deal doc should have greater legitimacy than their post-deal agreement, other than, perhaps, if a partial term has now occurred, then doing the merger now without fully vesting them (which of course you could do by amendment) would seem to cure that. Interesting case.

l I don't know the answer and have never looked at this until you asked, Debb, but I think under FAB 2004-1 if you require an employee to have an HSA (which you'd have to do if you want to require them to contribute) the HSA would become subject to ERISA. Also, if not subject to ERISA, then you would not have ERISA preemption and would need to be concerned with state payroll withholding laws (which for a lot of states this would probably violate).

I do have a question. Is this paycheck truly severance pay or is it for pay earned up to the minute of termination, plus any pay they were entitled to (Vacation, PTO, etc.) as a result of their employment, that was paid after their last day of work? Most employees have a paycheck or two after their last day of work that would be considered as compensation they actually earned and those pays would require deferrals/match, unless the employee executed a new Salary Reduction Agreement. True Severance pay would be monies paid as a result of their termination, that was not otherwise earned, and therefore not compensation for plan purposes.

A spinoff does not have to create a new plan. You could spin off the accounts of the employees of the division that was purchased and merge those accounts into the existing plan. That's pretty much what a spinoff is for.

Does your opinion change if the employee was just hired, so he is a NHCE for the current year, but his salary is 400,000 and he will be a HCE next year.

You've got the basic gist - forfeit the match they shouldn't have gotten, use it to fund everyone else next week. As for the 401(k) amount - they can issue that refund as an EPCRS correction, code E. It'll be taxable this year if they do it now, and will essentially serve to offset the extra deduction amount which will show up on their W-2 at the end of the year. Another valid choice is to run a makeup paycheck showing "negative 401k" - that way the participant gets it in his/her paycheck. And the account balance is then also forfeited, since that was an erroneous employer contribution, which the employer would use in the future, too. If the person's already been overpaid, then it goes into the latest EPCRS rules for recovering Overpayments. I suppose you could look into whether or not the post-severance compensation is at least eligible to be considered 415 compensation, and possibly do a corrective amendment to adjust just his definition of compensation for 2022. And could the extra match be re-categorized as a discretionary nonelective amount for the person? One of those things where, if the testing's not an issue, just retro-fit the document to match what you did so that nobody's faced with re-issued tax forms and that the person's payment amount ends up conforming to what's in print.

There may or may not have been a termination of employment but whether the person enters on 7/1 or 8/5 doesn't matter as TH based on full year pay unless considered terminated (again?) before PYE. Employer should make the determination - was person terminated in payroll system, did person's other employment-related benefits stop, was the person offered COBRA? Reductions in hours, working on an as-needed/on-call/per diem basis is generally not a termination, in my opinion. Otherwise, I think you put yourself in position of tracking a string of hire and term dates for each temporary stint, two weeks here, then another week a month later, and so on and dealing with the break-in-service rules - which I have seen done and it wasn't pretty.

Check the plan document for language describing Participation upon Re-employment. My guess is the employee was eligible in 2021 possibly on 8/5/2021... but this as-needed basis is going to muddy up the conversation. You can research Service Spanning Rules also for information regarding entry date. Hope this helps.

Here's one path through the maze: From the chart summary, FSAs are subject to the PCORI fee " unless the arrangement satisfies the requirements for being treated as an excepted benefit" From the definition of "excepted benefits" (athttps://www.ecfr.gov/current/title-26/chapter-I/subchapter-D/part-54/section-54.9831-1#p-54.9831-1(c)(3)(v)): (v) Health flexible spending arrangements. Benefits provided under a health flexible spending arrangement (as defined in section 106(c)(2)) are excepted for a class of participants only if they satisfy the following two requirements - (A) Other group health plan coverage, not limited to excepted benefits, is made available for the year to the class of participants by reason of their employment; and (B) The arrangement is structured so that the maximum benefit payable to any participant in the class for a year cannot exceed two times the participant's salary reduction election under the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the participant's salary reduction election). For this purpose, any amount that an employee can elect to receive as taxable income but elects to apply to the health flexible spending arrangement is considered a salary reduction election (regardless of whether the amount is characterized as salary or as a credit under the arrangement).

@ombskidthey have to make the deferral election by 12/31 of the year for which the election applies.

Can't do 401k retroactively.

There used to be an IRS form the plan sponsor could complete and mail with the check. Although plan sponsors may no longer be able to use this method. I'm completely dating myself!

I think your best bet is to use Penchecks. https://penchecks.com/