Leaderboard

I have also encountered this argument, and I agree with your take. What they've done is created what I refer to as a "taxable HRA". That's basically an oxymoron, but I don't know what else to call it. The one piece of the other adviser's argument I agree with is they avoid the §105(h) issues here by making the arrangement taxable. I just disagree with everything else. Any employer reimbursement of medical expenses with an ongoing administrative scheme is a group health plan. Other than for purposes of determining whether the §105(h) rules apply, it doesn't matter whether those reimbursements take advantage of the otherwise available §105 exclusion from income. That means this arrangement still needs to deal with: ERISA ACA COBRA HIPAA HSA (eligibility issues) So I'm on your side on this one. In my opinion, they've received some poor advice on this one. Definitely more mountain than molehill until they strip out the medical components. Here's my take: https://www.newfront.com/blog/addressing-employee-health-plan-exception-requests-part-vi Solution #2: Avoid Creating a Group Health Plan Employers may have a strong desire to preserve the informal “one-off” exception-based approach to a specific employee request to address a medical expense outside the group heath plan. The employer can always provide additional taxable cash compensation to employees that is not conditioned in any way on the employee’s actual medical expenses incurred. For example, the employer can provide an employee experiencing unexpected medical expenses with a standard raise/bonus/stipend that is taxable and subject to withholding and payroll taxes. These payments cannot be a direct or indirect reimbursement of any medical expenses incurred (taxable or non-taxable). In other words, the employer could not determine the amount of the payment based on the actual medical expenses incurred by the employee, nor could the employer condition the additional payment on the employee’s submission of medical receipts. Any such form of reimbursement would trigger a group health plan and the issues outlined above. Note: Employers often question why they cannot simply reimburse medical benefits on a taxable basis to avoid application of the group health plan legal restrictions. However, reimbursement of medical expenses on a taxable basis would still be a group health plan subject to all the group health plan laws described above (with the exception of the §105(h) nondiscrimination testing requirements), and therefore it is also not a viable solution. That taxable reimbursement approach would no longer be an HRA because it would not be designed as a tax-advantaged vehicle under IRC §105 and §106, although some refer to the approach as a “taxable HRA” because it would still be a (non-tax advantaged) defined contribution group health plan arrangement. ... Relevant Cites: ERISA §733(a): (a) Group health plan.
For purposes of this part— 
 (1) In general. The term “group health plan” means an employee welfare benefit plan to the extent that the plan provides medical care (as defined in paragraph (2) and including items and services paid for as medical care) to employees or their dependents (as defined under the terms of the plan) directly or through insurance, reimbursement, or otherwise. Such term shall not include any qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2) of the Internal Revenue Code of 1986).
 Slide summary: 2024 Newfront Fringe Benefits for Employers Guide

IRS Notice 2024-80 401(k) deferral limit increases to $23,500 415 limit for DC plans increases to $70,000 HCE threshold increases to $160,000; Key employee at $230,000 401(a)(17) limit increases to $350,000

We do all the plan termination resolutions and amendments simultaneously and then proceed with distributions. Perhaps it can be done differently.

Agree that an operating business (employing ESOP participants) that's taxed as a partnership and owned (in part) by an S corp (in turned owned by an ESOP) would be a problem under 409(l). If you already have a 100% S corp ESOP, how would an F reorg get you a lower-tier partnership with other owners? Typically, the F reorg is (1) shareholders of S corp 1 form new S corp 2; (2) shareholders of S corp 1 contribute 100% of S corp 1 stock to S corp 2, in exchange for pro rata stock ownership in S corp 2; (3) S corp 1, now a wholly owned sub of S corp 2, becomes a Q sub then converts to an LLC; (4) S corp 2 then sells 100% of equity of LLC (formerly S corp 1). Whether you have one original S corp shareholder or multiple shareholders, the resulting LLC is wholly owned by the newly formed S corp 2, no? If S corp 2 owns 100% of an LLC (that has not elected to be taxed as a corporation), wouldn't it be a DRE by default? Unless you introduce new owners to the LLC after the reorg. Hope I'm not missing something.

Self-certification is only good as long as the employer has no knowledge to the contrary. The quip cited by metsfan would , to me, be "knowledge to the contrary" that a hardship condition doesn't exist.....

Wouldn't the LLC be a disregarded entity (wholly owned by the S corp) and not a partnership? If a DRE, no problem.

Comp limit for employees excluded from the calculation of startup cost credit increased to $105,000

No, but from the ESOP's perspective it converts the transaction from a stock sale (the ESOP trust as the S corp's shareholder selling the S corp stock to a buyer) to an asset sale (the S corp selling its assets, the LLC interests, to the buyer). To the buyer, and for purposes of the deal documents, it's still a stock sale of the operating business, so this shift can be easily overlooked. The rub is that a stock sale generally does not require a pass-through ESOP participant vote, whereas a sale of substantially all assets generally does. This changes the entire dynamic of the deal, so is difficult to decide to do/change at the last minute (i.e., when buyer's accounting firm discovers some miniscule S corp infraction from 20 years ago and panics...).

For testing if the two plans have different eligibility you test them based on earliest eligibility. So if it passes either with the the person not benefiting in the one plan, or by testing otherwise excludable you are good. If it's not passing look to your document for correction methods or (11)(g) amendment to correct.

This seems logical - early DB entrants being OE and tested separately/excluded from primary test and gateway.

Is it for partial withdrawal liability or a complete withdrawal? Employer can absolutely negotiate a lower amount and they will postpone enforcement pending review (although I recall the liability continues to accrue interest during the review). They will request all financial records in determination of what the employer can afford....it is not easy to reduce the amount owed, but it can happen. Let the negotiations begin.

A SH 3% nonelective amount is part of the rate group calculations, whereas a SH match is not. A match is still part of the average benefit percentage test (along with deferrals) though.

Safe harbor match does not factor into passing cross testing.... that's why you design cross tested with 3% safe harbor safe harbor 3% is used for everything to pass testing and remember... you have to pass gateway before you can cross test.....

"Balance-forward" commonly is used to refer to a plan accounting method where historical transactions that occur in an account are summed up to a specific point time - typically up to the beginning of a plan year - or up to the date which provides the basis for an allocation. This technique was used to condense the data needed to be stored and processed which saved computer storage and decreased the amount of computer resources and time it took to perform an allocation. Almost all legacy recordkeeping systems used some form of balance-forward accounting, and several have an annual "roll forward" process for each new plan year. With the drop in the relative cost of storage and increase in computer power, recordkeeping can keep all transaction history available which allows them to easily compute a participant's balance at any point in time. The basis for an allocation is the amount that is used to pro-rate a participant's allocable share of an amount that is being spread across all participants included in the allocation. Employer contribution, interest, dividends, and expenses are typical examples of amounts that are allocated across all participants. The plan document may provide the formula for calculating the allocation basis for each type of transaction. If it does not, then the calculation should be well-documented in the plan accounting documentation. For example, an employer contribution may be allocated over plan compensation. Interest may be allocated over all participants who are in the fund in which the interest was paid. Expenses may be allocated over participants' total account balance. Some plans use only balance-forward method for allocating income. Typically, the investment is in a pooled fund that is valued periodically and the income earned over the period is allocated over the account's basis. Some plans use daily valuation for daily-valued investments, but may also have one or more pooled funds. There is a ton more detail to plan accounting. If your question is related to plans that use only balance-forward accounting, my experience is they are very rare and typically are used in small plans that only have a profit sharing contribution. If your question is related to any plans that use balance-forward accounting, my experience is every plan does at some level for some transactions in some accounts.

I will attempt to answer this. The participant loan is a plan asset and earns interest which just happens to be paid by the participant. The interest is a plan asset since it is earned on a plan asset. In this case, the loan is part of the participant directed account so the participant is choosing how the funds are "invested" and the participant is earning interest on their loan asset. When payments are made to the plan, the cash buys shares of the TDF. So in your example the $1800 of interest buys shares of the TDF in the participants account. it is similar to any other investment in the plan. If you own a mutual fund that pays dividends, those dividends are reinvested in your account and they buy more shares of the investment.

In general, the required contribution in a defined benefit plan is based on the difference between the market value of assets and the actuarial present value of accrued benefits, measured on the plan's valuation date. A significant decline in the market value of assets could result in an increase in the plan's required contribution (conversely, a sudden rise in the value of plan assets could result in a reduction in the maximum contribution, possibly to the dismay of an employer who was looking forward to a large tax deduction). The increase in the required contribution due to a drop in plan assets may not be dollar-for-dollar however, as the "funding shortfall" amount is amortized over a period of 15 years. This only speaks to the minimum required contribution under ERISA 303 / IRC 430. Plans may have a funding policy that directs the employer to contribute an amount larger than the required minimum. Cash balance plans may use an interest crediting rate based upon the actual rate of return of plan assets, which may even be negative (although the "preservation of capital" rule of 26 CFR 1.411(b)(5)-1(d)(2) prevents the interest credit rate from being negative on a cumulative basis). Proponents of these formulas claim that it ensures that plan liabilities will always be in line with assets; in other words, if the sponsor contributes the amount of the pay credits each year, then the assets will always equal the hypothetical account balances. This may be true, however it can be problematic for smaller plans, especially those that are tested together with a DC plan.

I’ve never needed to think about funding formulas regarding a cash-balance pension plan. If the value of the gold is meaningfully down as at a year’s close, could that increase the employer’s funding obligation?

Allowed, yes. Advisable I'll leave that to others. As to where and how it is stored, it could be a Prohibited Transaction if not stored and held by a non-party in interest. Since gold bullion is not a "qualified asset" you may have higher bonding requirements and would not be able to file a Form 5500-SF.

Again, assuming this is participant directed, if the funds all came out of one TDF, and the participant does not change their investment mix for future deposits, every platform I have ever worked with the repayments would be back to the same TDF. I suppose there are situations where this might be different, but I do not think they would be common norms or industry standards. The entire payment, both principal and interest, is re-deposited into the participant's account, unless there is some admin fee applied to the payment before deposit or the loan is treated as a pooled investment which is no longer very common. Typically the loan accounting will take the prior outstanding balance, add interest to it from the last payment and then apply the payment to reduced the outstanding balance. Each loan system might be a little different in how they apply this but it's all going to be pretty close.

Assuming a self-directed platform, loan payments will generally go into the investment "mix" selected by the participant for contributions.

From the instructions for this line: The highlighted portion seems to describe your plan, so it might make sense to check "N/A" as described.

A disclosure under ERISA § 408(b)(2) is a service provider’s communication to the fiduciary responsible for deciding whether to engage or continue the service provider. The fiduciary considers the information in the fiduciary’s evaluation of whether the service provider’s compensation is reasonable. Even if a service provider might not be a covered service provider because it expects compensation less than $1,000, could it be simpler to do the disclosure anyhow? Don’t you want a “paper trail” showing the fiduciary approved, at least impliedly by nonobjection, your compensation? Further, consider that the rule’s text might not measure the less-than-$1,000 by a year (a word that nowhere appears in the rule). Rather, it is what the service provider expects “pursuant to the contract or arrangement[.]” 29 C.F.R. § 2550.408b-2(c)(1)(iii) https://www.ecfr.gov/current/title-29/part-2550/section-2550.408b-2#p-2550.408b-2(c)(1)(iii) If your service agreement, instead of only a one-year term, continues until either party gives notice to end the agreement and you “reasonably expect” your open agreement might continue for a few years, might the compensation “pursuant to the contract” be $1,000? This is not advice to anyone.

For what it's worth, we have followed this structure many times with ESOP-owned companies--including receiving initial and termination determination letters--without any resistance from the IRS. In those cases, the parent company sponsors the ESOP and is a holding company with no employees. The parent company stock is used as the ESOP's employer securities. The operating business and all employees are housed in a wholly owned subsidiary (or subsidiaries). The operating subsidiary joins the holding company's ESOP as a participating employer. Edit: Just re-read the original post, which mentions not wanting to execute a participation agreement. Sorry.

Some aspects of what you ask involve the public and private law of the business organizations involved. A parent, intermediate parent, or even ultimate parent acting for a direct or indirect wholly-owned subsidiary is usual for many business groups. But you (or your client’s inside counsel) would trace through the ownership interests, formation documents, and bylaws, LLC, or partnership agreements to satisfy yourself that A has power to act for B. If the plan sponsor would use IRS-preapproved documents, consider how to make A’s acts and B’s acceptances fit the form of the documents. A service provider’s plan-documents set might impose conditions beyond those applicable public law calls for. I’m unaware of an on-point court decision. Observe that ERISA § 3(5) defines “employer” to include “any person acting directly as an employer, or indirectly in the interest of an employer[.]”

I just wish everyone would go back to the original question that was asked, not the question that was NOT asked. The employer wants to change the eligibility; are people who are due to come in 10/1 on the 10/1 entry date guaranteed that right? The answer is NO, as has been said. The REASON is not because there is a way to "kick people out"; here, they are not in yet because 10/1 hasn't occurred yet, and being there on 10/1 is one of the requirements to be "in". Therefore, a change in the entry date PRIOR to their entry is NOT kicking anyone out. That is the answer to the question asked.