A plan sponsor is in the business of issuing mortgages – they loan money to real estate purchasers in need at above market rates. The retirement plan is also heavily invested in similar mortgages (they are heavily secured, low loan-to-value ratios, well documented investments that have performed very well with a minimum of risk). The plan does not participate in any loans with the plan sponsor. However, it was recently noted that the family trust of one of the Trustees is a co-investor in a few of the mortgages. The family trust did not purchase the mortgages from the plan. The mortgages were issued with the plan and the family trust both participating (at the same terms) in the investments – essentially as if 2 acres of real estate are for sale by a third-party and the plan buys one acre and the Trustee’s family trust buys the other. Do you believe this to be a prohibited transaction despite the absence of a transaction between the plan and the party-in-interest? Do you see any arguments against P/T status if audited?

A self employed dentist shut down his practice in July '05 and is in the process of terminating his profit sharing plan. There are no other participants in the plan besides him.

He has already funded the plan for 2005 and he will exceed the 404 deduction limit by $6,000. Since he will not have any future income he has no way of using up the excess contribution. Do you think this excess contribution could be returned to the employer based on a 'mistake of fact'?

Thanks in advance for any responses.

Is there any issue with an employer depositing $3,000 to the suspense account in 2004, planning to allocate the monies for the 12/31/06 plan year?

I presume this is acceptable but he/she can not take the deduction until 2006, and is counted as a liability on the form 5500 until allocated, correct?

Thank you

Notice 2005-1 allows a participant to revoke a deferral election in 2005 and receive a distribution of the amount that would have been deferred, but one of the requirements is that the full amount of the distribution must be "included in the participant's income in calendar year 2005, or, if later, the participant's taxable year in which the amount is earned and vested (as defined in Q/A 16)."

May an election to defer a discretionary 2005 bonus that is payable in 2006 be changed under this provision?

Assume a participant is guaranteed to receive a set percentage of a bonus pool, even if he terminates during 2005 (in such case, he would receive a prorated bonus). Assume also that the compensation committee determines the size of the 2005 bonus pool in 2006, has discretion to eliminate the bonus pool altogether, and that the discretion is legitimate and would prevent the bonus from being a legally binding right under the regs.

Would such a participant have an "earned and vested" bonus, even though he has no legally binding right to the bonus? Or does it necessarily follow that if you do not have a legally binding right to an amount, then it cannot be earned and vested? If the bonus is earned and vested in 2005 but paid in 2006, then Q&A 20 would not be available.

It would have been clearer if Q&A-20 referred to both earned & vested and legally binding right, but it does not.

If you have a rehire employee - what date would you use for the restructured test? The original hire date or the rehire.

example: rehire date 6/04/05, original hire date 1/1/03 (immediate elgibility)

calendar plan year - 12/31/05

want to use the maximum age and service for testing

what date would you use? the rehire date which would put the employee in the under group or the original hire date?

Does anybody know if this rule is still in effect? I seem to recall that it was abolished, but can't put my finger on it.

Client is terminating their 401k plan. IRS submission for approval was done, and they have received a letter back from the IRS asking the following:

Explain how the plan is entitled to the entended RAP for GUST?

Can someone help me on explaing what that means?? I don't know what RAP even means?

Thanks

We have a new client coming in with a frozen Non-Erisa 403(b) plan and a Simple 401(k) - They would like to terminate the Simple and Start up an ERISA 403(b) - would these be considered a new plan or would it just be "unfreezing" the old plan and restating it?

A non-profit entity (Credit Union) with an under funded DB plan has been approached by an outfit that claims they have some approach/structure that given the entity is a "non-profit" will somehow "remove" the dividing lines of the plan and the credit union so that assets of the credit union are somehow available to the plan and now the plan is fully funded and has none of the typical under funding issues (restricted lump sums, high PBGC premiums, etc..). I'm getting vague info but it sounds like maybe because both the plan and the credit union is non-profit that somehow the suggestion is that there need not be clear "firewalls" between the plan and the general assets of the CU. Has anyone familiar with non-profits heard of this approach and is there substance to it ? (I know this is vague but I'm hoping someone familiar with non-profit orgs may have heard of this).

I have a 401(k) plan that we are terminating. We have paid everyone out except for 3 participants that we have successfully made contact with (via certified mail) but remain unresponsive. They have account balances in excess of $5,000. Per DOL Bulletin 2004-02 I believe we have authority to force these balances out to an IRA. However, I am running into some difficulty locating a company that will open up IRAs for someone without their signature.

I have seen companies that will do this for balances less than 5,000 - are there companies that will do this for balance over 5,000?

Thanks,

trumpy

Note: An employer may amend a cafeteria plan document to enable a health FSA participant to become HSA eligible during the grace period (limited purpose FSA/Post-deductible health FSA). A new Transitional Rule is provided for "no unused contributions" situations and amendments to exclude grace period coverage to individuals who elect HDHP coverage under a "general purpose" health FSA.

Notice 2005-86 follows:

NOTICE 2005-86

PURPOSE

This notice provides guidance on eligibility to contribute to a Health Savings Account (HSA) during a cafeteria plan grace period as described in Notice 2005-42, 2005-23 I.R.B. 1204. As discussed below, an individual participating in a health flexible spending arrangement (health FSA) who is covered by the grace period is generally not eligible to contribute to an HSA until the first day of the first month following the end of the grace period, even if the participant’s health FSA has no unused benefits at the end of the prior cafeteria plan year. This notice, however, provides guidance on how an employer may amend the cafeteria plan document to enable a health FSA participant to become HSA eligible during the grace period.

BACKGROUND

Cafeteria Plans

Section 125(a) states that, in general, no amount is included in the gross income of a participant in a cafeteria plan solely because, under the plan, the participant may choose among the benefits of the plan. Section 125(d) defines a cafeteria plan as a written plan under which all participants are employees, and the participants may choose among two or more benefits consisting of cash and qualified benefits. “Qualified benefits” mean any benefit which, with the application of § 125(a), is not includible in the gross income of the employee by reason of an express provision of Chapter 1 of the Internal Revenue Code, including employer-provided accident and health coverage under §§ 106 and 105(b). A high deductible health plan (HDHP) as defined in § 223©(2)(A) can be employer-provided accident and health coverage. A health FSA, which pays or reimburses certain § 213(d) medical expenses (other than health insurance or long-term care services or insurance), is also employer-provided accident and health coverage. The term “qualified medical expenses” as used in this Notice, means expenses which may be paid or reimbursed under a health FSA.

Cafeteria Plan Grace Period

Notice 2005-42, 2005-23 I.R.B. 1204, modifies the application of the rule prohibiting deferred compensation under a cafeteria plan (i.e., the “use-it-or-lose-it” rule). The notice permits a cafeteria plan to be amended, at the employer’s option, to provide a grace period immediately following the end of each plan year, during which an individual who incurs expenses for a qualified benefit during the grace period, may be paid or reimbursed for those expenses from the unused benefits or contributions relating to that benefit. A plan providing a grace period is required to provide the grace period to all participants who are covered on the last day of the plan year (including participants whose coverage is extended to the last day of the plan year through COBRA continuation coverage). The grace period remains in effect for the entire period even though the participant may terminate employment on or before the last day of the grace period. But an employer may limit the availability of the grace period to only certain cafeteria plan benefits and not others. For example, a cafeteria plan offering both a health FSA and a dependent care FSA may limit the grace period to the health FSA. The grace period must not extend beyond the fifteenth day of the third calendar month after the end of the immediately preceding plan year to which it relates, but may be adopted for a shorter period.

Interaction Between HSAs and Health FSAs

Section 223(a) allows a deduction for contributions to an HSA for an "eligible individual" for any month during the taxable year. An "eligible individual" is defined in § 223©(1)(A) and means, in general, with respect to any month, any individual who is covered under an HDHP on the first day of such month and is not, while covered under an HDHP, “covered under any health plan which is not a high-deductible health plan, and which provides coverage for any benefit which is covered under the high-deductible health plan.”

In addition to coverage under an HDHP, § 223©(1)(B) provides that an eligible individual may have disregarded coverage, including “permitted insurance” and “permitted coverage.” Section 223©(2)© also provides a safe harbor for the absence of a preventive care deductible. See Notice 2004-23, 2004-1 C.B. 725. Therefore, under § 223, an individual who is eligible to contribute to an HSA must be covered by a health plan that is an HDHP, and may also have permitted insurance, permitted coverage and preventive care, but no other coverage. A health FSA that reimburses all qualified § 213(d) medical expenses without other restrictions is a health plan that constitutes other coverage. Consequently, an individual who is covered by a health FSA that pays or reimburses all qualified medical expenses is not an eligible individual for purposes of making contributions to an HSA. This result is the same even if the individual is covered by a health FSA sponsored by a spouse’s employer.

However, as described in Rev. Rul. 2004-45, 2004-1 C.B. 971, an individual who is otherwise eligible for an HSA may be covered under specific types of health FSAs and remain eligible to contribute to an HSA. One arrangement is a limited-purpose health FSA, which pays or reimburses expenses only for preventive care and "permitted coverage" (e.g., dental care and vision care). Another HSA-compatible arrangement is a post-deductible health FSA, which pays or reimburses preventive care and for other qualified medical expenses only if incurred after the minimum annual deductible for the HDHP under § 223©(2)(A) is satisfied. This means that qualified medical expenses incurred before the HDHP deductible is satisfied may not be reimbursed by a post-deductible HDHP even after the HDHP deductible had been satisfied. To summarize, an otherwise HSA eligible individual will remain eligible if covered under a limited-purpose health FSA or a post-deductible FSA, or a combination of both.

Moderator's Note: This text was posted on the IRS site (drop files), the official version in IRB may contain a correction to the second to last sentence in the above paragraph. That line should probably read "...reimbursed by a post-deductible FSA...," rather than "...reimbursed by a post-deductible HDHP..."

OPTIONS AVAILABLE TO AN EMPLOYER

An employer may adopt either of the following two options, which will affect participants’ HSA eligibility during the cafeteria plan grace period:

(1) General Purpose Health FSA During Grace Period

Employer amends the cafeteria plan document to provide a grace period but takes no other action with respect to the general purpose health FSA. Because a health FSA that pays or reimburses all qualified medical expenses constitutes impermissible “other coverage” for HSA eligibility purposes, an individual who participated in the health FSA (or a spouse whose medical expenses are eligible for reimbursement under the health FSA) for the immediately preceding cafeteria plan year and who is covered by the grace period, is not eligible to contribute to an HSA until the first day of the first month following the end of the grace period. For example, if the health FSA grace period ends March 15, 2006, an individual who did not elect coverage by a general health FSA or other disqualifying coverage for 2006 is HSA eligible on April 1, 2006, and may contribute 9/12ths of the 2006 HSA contribution limit. The result is the same even if a participant’s health FSA has no unused contributions remaining at the end of the immediately preceding cafeteria plan year.

(2) Mandatory Conversion from Health FSA to HSA-compatible Health FSA for All Participants

Employer amends the cafeteria plan document to provide for both a grace period and a mandatory conversion of the general purpose health FSA to a limited-purpose or post-deductible FSA (or combined limited-purpose and post-deductible health FSA) during the grace period. The amendments do not permit an individual participant to elect between an HSA-compatible FSA or an FSA that is not HSA-compatible. The amendments apply to the entire grace period and to all participants in the health FSA who are covered by the grace period. The amendments must satisfy all other requirements of Notice 2005-42. Coverage of these participants by the HSA-compatible FSA during the grace period does not disqualify participants who are otherwise eligible individuals from contributing to an HSA during the grace period.

TRANSITION RELIEF

For cafeteria plan years ending before June 5, 2006, an individual participating in a general purpose health FSA that provides coverage during a grace period will be eligible to contribute to an HSA during the grace period if the following requirements are met: (1) If not for the coverage under a general purpose health FSA described in clause (2), the individual would be an "eligible individual" as defined in § 223©(1)(A) during the grace period (in general, is covered under an HDHP and is not, while covered under an HDHP, covered under any impermissible other health coverage); and (2) Either (A) the individual's (and the individual’s spouse’s) general purpose health FSA has no unused contributions or benefits remaining at the end of the immediately preceding cafeteria plan year, or (B) in the case of an individual who is not covered during the grace period under a general purpose health FSA maintained by the employer of the individual's spouse, the individual's employer amends its cafeteria plan document to provide that the grace period does not provide coverage to an individual who elects HDHP coverage.

EFFECT ON OTHER DOCUMENTS

Notice 2005-42 and Rev. Rul. 2004-45 are amplified.

DRAFTING INFORMATION ***

Notice_2005_86.pdf

I'm looking for comments on running a short year with the following:

Plan is TH. Plan has 3 classes - Owner lawyers, Non owner lawyers, all other

PY - 10/1/04 through 9/30/05. Short Year - 10/1/05 through 12/31/05

Plan is 401(K) with SHNEC(3%).

For Plan Year ending 9/30/05:

1 Owners contributions(comp. of 205,000) = 401(k) made in 2005 was 6k

SH was 6,150

PS was 20,275

1 Non-Owner(HCE) = SH = 3%

PS = 0

3 EE's = SH = 3%

PS = 1.3%

Passes gateway and 410(b) etc.

Q:

What is obligation for Short Year: SH notice was given.

Prorate comp at max of 52,500?

Allow owner to contribute 401(k) of $12,000(over 50)

Safe Harbor of 3% to Class 1, 2, and 3

The result is it gets the owner to 46K by 12/31/2005. Any suggestions or comments?

Here's a strange question--has this happened to anyone else? When I am using my mouse button on the far right side of the screen to scroll down while reading messages, my computer often crashes when the scroll bar reaches the very bottom right corner of the screen. It has been doing this both before and since the message board software was updated. When this happens there is no alternative but to hit "reset" and start all over--hitting Ctrl/Alt/Delete doesn't do anything when in this "mode." This does not happen when I am in any other application.

If anyone has any ideas on what causes this and how to avoid it I'd love to hear them!

We have a plan that wants to use a cross tested formula in order to benefit several of the company managers. The employees that they would like to benefit are older so cross testing seems logical.

None of the employees in the plan are HCE's. No one has enough compensation to make them an HCE and none of the owners of the company are currently employed. I am not sure how to go about testing this plan. Without HCE's does it automatically pass? Is it even possible to use cross testing when there are no HCE's?

My client just requested benefit summaries in spanish from their insurance carrier in reference to their fully insured plan. The national carrier responded they don't provide them........isn't there some federal law that requires the alternative language materials?

Thanks for your help.

A company with foreign subsidiaries has a 401(k) that excludes nonresident aliens with no US-source income. A foreign employee is moving to the US and will have US-source income. He will be eligible for the 401(k) after relocating.

The question I have is will he receive service credit for his time with the overseas subsidiary, for participation and vesting purposes? (There is a 90-day eligibility period for the plan, and a vesting schedule for matching contributions.)

The minimum participation standards at Code §410 and ERISA §202 refer only to "employees." ERISA's definition of employee does not differentiate between US or foreign status. Code §411(a)(4) allows certain service to be excluded for vesting purposes (such as service prior to age 18), but does not mention nonresident aliens.

I suspect that service by the nonresident alien while working for the overseas subsidiary will count for participation and vesting purposes, but I am not familiar with foreign employee issues and am concerned that I might be missing something.

Thanks in advance for any thoughts.

2 401k plans, common ownership, always administered separately, 2 tax returns. Client informs me the smaller company will be merged into main corp in March, 06. Both plans use prior year testing. When I test the main corp plan end of 2006, how is the adp test affected when 2 plans merge? I understand I have to terminate the small plan and potentially, not all participants will roll their account to the main corp plan.

Thank you!

Linda Michals

Never have run into this situation before - 401(k) with Flexible Safe Harbor provision - plan has 3 HC/1 non-highly - non-highly does not contribute to 401(k) - 3 HC always have contributed max and, until '06, has had the Guaranteed Safe Harbor provision - changing to Flexible for '06 - all HC are 50+ - can they each contribute $5000 as catch-up contributions assuming the non-highly continues to defer no salary? anxious to hear what you gurus have to say about this! Thanks in advance

My firm has taken over a DB plan which i understand is a change in funding method in itself. We were able to match within less than 10 percent the prior actuary's 2004 valuation numbers. Is a filing for approval necessary or an attachement to the 2005 Schedule B when prepared?? Thanks.

I received an invitation to join the College of Pension Actuaries (COPA) which is "a newly formed organization devoted exclusively to pension actuaries in good standing with the JBEA". Their objective is to "serve the professional needs of our members".

I notice several significant names associated with this new organization so I refrained from immediately "filing" it.

Since Mike Preston is listed as a director (as well as Kevin Donovan, Ed Burrows, Larry Deutsch and others) I wondered if Mike could share a few more details about its purpose. Since most of the names appear to be "ASPPA People" is this new organization somewhat in response to ASPPA's drifting away from pension actuaries?

What is the mission? How can you "serve" your members better/differently than all the other organizations (Society, Academy, CCA, ASPPA, etc)?

The mailing was fairly generic and I wondered what the real drive of the new organization will be. I think this could be a good thing, but I wanted to know more about its goals.