The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net!

Loans Made While a Deemed Distribution Loan Remains Unpaid

[Effective date.] Prop. Treas. Reg. §1.72(p)-1 [click], Q&A-9(B) and ©, Q&A-19, Q&A-20, Q&A-22(d), 65 F.R. 46677 (July 31, 2000), supplement final regulations issued today under IRC §72(p) ... The proposed regulations will apply to loans made on or after the first January 1 which is at least six months after the regulations are finalized. Since January 1, 2001, is already less than six months away, the earliest effective date for the rules contained in these proposed regulations will be January 1, 2002 (assuming final regulations are issued by June 30, 2001). For earlier loans, a reasonable, good faith compliance standard applies. Presumably, following these proposed regulations will satisfy this good faith standard.

* * *

A loan that is deemed distributed under §72(p) is considered outstanding for purposes of applying the loan limits under §72(p)(2)(A) until the loan is repaid (either through payments made by the participant or by a loan offset). See . Proposed Q&A-19(B)(2) [click] will establish additional requirements on a subsequent loan that is made before the deemed distributed loan is repaid. If these conditions are not satisfied, the subsequent loan is treated in its entirety as a deemed distribution under §72(p). To satisfy Proposed Q&A-19(B)(2), one of the following conditions must be met:

1. repayments on the subsequent are mande under a payroll withholding arrangement that is enforceable under applicable law, or

2. the plan receives adequate security from the participant that is in addition to the participant's accrued benefit under the plan (i.e., the plan obtains other collateral for the loan).

The payroll withholding arrangement described in 1) may be revocable but, if the participant later revokes the arrangement, the outstanding balance of the loan is deemed distributed. Similarly, if the additional collateral is no longer in force before the subsequent loan is repaid, the outstanding balance of the loan becomes a deemed distribution.

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users!

Proposed Regulations Issued To Cover Multiple Loans

[Effective date.] Q&A-9(B) and ©, Q&A-19, Q&A-20, Q&A-22(d), 65 F.R. 46677 (July 31, 2000), supplement final regulations issued today under IRC §72(p) ... The proposed regulations will apply to loans made on or after the first January 1 which is at least six months after the regulations are finalized. Since January 1, 2001, is already less than six months away, the earliest effective date for the rules contained in these proposed regulations will be January 1, 2002 (assuming final regulations are issued by June 30, 2001). For earlier loans, a reasonable, good faith compliance standard applies. Presumably, following these proposed regulations will satisfy this good faith standard.

If a participant receives multiple loans, each loan must satisfy §72(p), taking into account the outstanding balance of each existing loan, as under current rules. The refinancing rules discussed elsewhere; click do not apply because the new loan is not replacing the existing loan(s). However, Proposed Q&A-20(a)(3) [click] establishes a limit of two loans within the same calendar year. The plan may apply this rule on a plan year basis or on the basis of another consistent 12-month period, rather than the calendar year. If a loan is made in violation of this rule, the entire amount is treated as a deemed distribution, even if the limits of IRC §72(p)(2) are otherwise satisfied. The Treasury is concerned that too many loans within a year might circumvent the §72(p)(2) limits, particularly with respect to the $50,000 maximum loan limit under §72(p)(2)(A)(i). Note that this rule will not take effect until these proposed regulations are finalized [see discussion above]. For loans made before the effective date, the plan may allow more than two loans in a year, and the loan limits must be applied to each loan under a reasonable, good faith interpretation of §72(p).

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users!

Proposed Regulations Issued To Cover Loan Refinancing Transactions

[Effective date.] <a href="http://www.benefitslink.com/taxregs/72p-proposed-2000.shtml">Prop. Treas. Reg. §1.72(p)-1 [click]</a>, Q&A-9(B) and ©, Q&A-19, Q&A-20, Q&A-22(d), 65 F.R. 46677 (July 31, 2000), supplement final regulations issued today under IRC §72(p) ... The proposed regulations will apply to loans made on or after the first January 1 which is at least six months after the regulations are finalized. Since January 1, 2001, is already less than six months away, the earliest effective date for the rules contained in these proposed regulations will be January 1, 2002 (assuming final regulations are issued by June 30, 2001). For earlier loans, a reasonable, good faith compliance standard applies. Presumably, following these proposed regulations will satisfy this good faith standard.

* * *

One of the issues that has perplexed plan administrators is how to apply the rules of IRC §72(p) when an existing loan is refinanced, or a new loan is made that also repays the existing loan. Some administrators have employed a very conservative approach, prohibiting any additional loans until an existing loan is fully repaid and prohibiting the refinancing or renegotiation of an existing loan. In <a href="http://www.cyberisa.com/erisa_book.htm">The ERISA Outline Book [click]</a>, we have provided suggested methods for using refinancing transactions to replace an existing loan. See Chapter 7, Section IX, Part B.1.b., of the 1999-2000 edition. Happily, these proposed regulations adopt the arguments we have used in the Outline Book to support these suggested methods.

Definition of a refinancing transaction. Proposed Q&A-20(a) defines a refinancing as any situation in which one loan replaces another. This might occur because the participant wants to add to the outstanding loan amount, but does not want to, or the plan will not permit him to, have more than one loan outstanding at a time. This also might occur because the interest rate or the repayment term is being renegotiated (e.g., to reflect a lower interest rate, or to provide more time to repay the outstanding loan balance). A refinanced loan is treated as a new loan for purposes of §72(p). That means the interest rate and the security interest on the refinanced loan must be determined as of the date of the refinancing. Thus, the interest rate under the replaced loan might not be an appropriate interest rate under the refinanced loan, because the plan must now redetermine what is a commercially reasonable interest rate. In addition, the 50% limit under IRC §72(p)(2)(A) must be redetermined to take into account the participant's vested accrued benefit as of the date of the refinancing.

How to apply §72(p) to refinancing transactions. If the loan that is replacing the original loan (the replacement loan) has a term which ends later than the term of the loan being replaced (the replaced loan), then both the replacement loan and the replaced loan are treated as outstanding on the date of the refinancing transaction. See Proposed Q&A-20(a)(2). Thus, two loans collectively must satisfy the requirements of IRC §72(p), or there will be deemed distribution consequences, in accordance with the rules set forth in the §72(p) regulations. For example, if the sum of the amount of the replacement loan and the outstanding balance of the replaced loan (plus any other existing loans not being replaced) exceeds the amount limitations under IRC §72(p)(2)(A), the excess is taxed as a deemed distribution. However, if the term of the replacement loan does not end later than the term of the replaced loan, the replaced loan is disregarded in determining whether the replacement loan satisfies §72(p), and only the amount of the replacement loan (plus the outstanding balance of any existing loans that are not being replaced) are taken into account.

Exception. The rule described in the first sentence of the prior paragraph does not apply if the replacement loan would satisfy §72(p)(2) if it were analyzed as two separate loans - one representing the replaced loan, amortized in substantially level payments over a period ending no later than the last day of the original term of that replaced loan, and the other one representing the difference between the amount of the replacement loan and the outstanding balance of the replaced loan. In other words, if the replacement loan would effectively amortize an amount equal to the replaced loan over a period that does not exceed the original term of the replaced loan, the Treasury does not feel that the refinancing transaction is being used to circumvent §72(p), so there is no need to take into account the outstanding balance of the replaced loan to determine whether the amount of the replacement loan satisfies §72(p). When this exception applies, the plan only needs to take into account the amount of the replacement loan plus any existing loans which are not being replaced to determine if the §72(p)(2) limitations are violated. The following two examples illustrate these rules. Additional examples are provided in the proposed regulations.

Example - increasing loan and starting new 5-year term. Will has a vested account balance of $23,000 as of December 1, 2002. He receives a loan for $8,000. The loan bears the maximum 5-year payment term, so the loan will not be fully amortized until November 30, 2007. On June 1, 2004, Will has an outstanding balance of $6,000 on the original loan. As of that date, his vested account balance is $32,000. Will's loan limit is now $16,000 (i.e., 50% x $32,000), $6,000 of which is outstanding. Will needs $4,000 additional cash. The plan lends Will another $4,000 on June 1, 2004, and starts a new 5-year repayment term ending May 31, 2009. The new loan requires monthly amortization (deducted through payroll withholding). The principal of the new loan (i.e., the replacement loan) is $10,000, which represents the $4,000 of additional cash given Will and the $6,000 outstanding balance on the original loan (i.e., the replaced loan). In other words, the replacement loan pays off the outstanding balance of the replaced loan, and also gives Will another $4,000. The refinancing transactions satisfies the requirements of Proposed Q&A-22. The replaced loan had an outstanding balance of $6,000. The replacement loan is for $10,000. Since the repayment term of the replacement loan ends after the term of the replaced loan, the plan must treat both loans as outstanding on June 1, 2004, to determine if the §72(p)(2) limits have been exceeded. If we add the loans together, we get a total of $16,000. Will's 50% limit under §72(p)(2)(A) is $16,000 because, as of the date of the replacement loan, Will's vested account balance is $32,000. In addition, the repayment rules of §72(p)(2)(B) and © have not been violated by either loan. Compliance with the repayment rules is determined separately with respect to each loan because the replacement loan is treated as a separate, new loan. The replaced loan had a term that would have ended on November 30, 2007. The loan, during its existence, satisfied the level amortization requirements, and the refinancing transaction has resulted in that loan being paid in full. The replacement loan also does not violate §72(p)(2)(B) and ©. It has a repayment term that does not exceed 5 years from the date of that loan, and the loan provides for level amortization on at least a quarterly basis. The plan could have made a separate loan to Will in the amount of $10,000, assuming the plan permits more than one loan to be outstanding at a time. A new loan of $10,000 plus an outstanding loan balance of $6,000 would have equaled Will's maximum loan limit on June 1, 2004, which is $16,000. Will could then have used $10,000 of the proceeds from the second loan. The net effect of this alternative approach is the same as the refinancing example, illustrating why the proposed regulations approve of the refinancing transaction. By disbursing an additional $4,000 to Will and treating a new loan of $10,000 to have started on June 1, 2004, the plan is simply consolidating steps.

Example - 50% loan limit would be exceeded if replacement loan were added to outstanding balance of replaced loan. Let's modify the prior example slightly. Suppose Will's vested account balance as of June 1, 2004, is only $26,000, because of market fluctuations on his non-loan investments in his account. Now, Will could not have two loans outstanding that total $16,000, because his maximum loan limit is only $13,000. Therefore, the plan can't treat Will as receiving a second loan for $10,000, and using $6,000 of the proceeds from the second loan to retire the first loan, as suggested in the prior example. What options are available here?

<UL>

Option #1 - separate loans (i.e., don't do any refinancing). Make a separate loan for $4,000 (rather than for $10,000), which is the additional cash that Will needs. The origination date of the separate loan is June 1, 2004. Will continues to amortize his original loan over its remaining term (which ends November 30, 2000), which has a balance of $6,000 at this time, and he starts a new amortization period on the second loan of $4,000, which would have a separate repayment term that could end as late as May 31, 2009 (i.e., 5 years after the origination date). This option is available only if the plan permits Will to have more than one loan outstanding at a time. Since the original loan is not being replaced by the second loan, the plan simply adds the outstanding balance of the first loan to the amount of the second loan to determine if the limits of §72(p)(2)(A) are satisfied, using Will's vested account balance at the time of the second loan to make such determination.

Option #2 - refinancing of the original loan with original repayment term. Another option is to consolidate Will's loans into a single loan of $10,000 as of June 1, 2004, through a refinancing transaction. The replacement loan is for $10,000, but only $4,000 is disbursed to Will because the other $6,000 is used to payoff the original loan. However, the repayment term of the replacement term ends November 30, 2007, which is the same date as the original loan. Since the term of the replacement loan is not later than the term of the replaced loan, the plan does not treat the replaced loan as outstanding at the time of the replacement loan for purposes of §72(p)(2). Proposed Q&A-20(a)(2) applies only if the term of the replacement loan ends later than the term of the replaced loan. Thus, the plan looks only at the replacement loan to determine if the limitations under §72(p)(2)(A) have been exceeded. A loan of $10,000 does not exceed Will's loan limit of $13,000, so §72(p)(2)(A) is not violated. In addition, the replacement loan has a repayment term that does not exceed the 5-year rule under §72(p)(2)(B) and the amortization schedule satisfies the requirements of §72(p)(2)©. After the refinancing transaction, Will's loan payments will be greater because he is amortizing a greater amount over the remainder of the term of the replaced loan.

Option #3 - refinancing of the original loan with a new repayment term which amortizes the original loan within its original term. Under this option, the plan disburses $4,000 to Will and consolidates the first loan and the second loan into a refinanced loan for $10,000, as under Option #2, effective June 1, 2004. The difference from Option #2 is that instead of having the $10,000 loan fully amortized by November 30, 2007 (as under Option #2), the new loan has a full 5-year amortization term that ends May 31, 2009, (or an earlier date that is later than November 30, 2007). However, the amortization schedule is structured so that at least $6,000 of the principal (which was the loan balance on the replaced loan at the time of the refinancing) is amortized by the original term of the replaced loan (i.e., November 30, 2007), and the difference is amortized on a level basis during the new 5-year term. This would be accomplished by having Will's payments through November 30, 2007, equal the payments under the replaced loan (as adjusted, if necessary, to reflect a change in the applicable interest rate under the refinanced loan) plus an additional amount needed to amortize the additional $4,000 over a 5-year period starting June 1, 2004, and his payments from December 1, 2007, through May 31, 2009, equal only to the amount needed to finish amortizing the additional $4,000. To illustrate, suppose the replaced loan had monthly payments of $100, and monthly amortization of an additional $4,000 over 5 years requires additional monthly payments of $65. Also suppose that there has been no change in the interest rate. Under this option, Will would pay $165 per month under the replacement loan until November 30, 2007, and then only $65 for December 2007 through May 2009. Since the outstanding balance of the replaced loan is still being repaid by November 30, 2007, the plan does not treat the replaced loan as outstanding at the time of the replacement loan for purposes of §72(p)(2). See Proposed Q&A-20(a)(2). Thus, the plan looks only at the replacement loan to determine if the limitations under §72(p)(2)(A) have been exceeded. A loan of $10,000 does not exceed Will's loan limit of $13,000, so §72(p)(2)(A) is not violated. In addition, the replacement loan has a repayment term that does not exceed the 5-year rule under §72(p)(2)(B) and the amortization schedule satisfies the requirements of §72(p)(2)© (the drop in the amortization payment after November 30, 2007, is not treated as violating the level amortization requirement).

Option #4 - bridge loan to repay first loan. Under this option, Will obtains a third-party loan for $6,000 to repay the outstanding balance on the first loan. He then requests $10,000 as a new loan from the plan. The $10,000 will not violate Will's 50% limit under §72(p) because the $6,000 outstanding balance on the first loan has been repaid before the $10,000 loan is taken. The $10,000 loan can have a 5-year amortization term. Will then uses $6,000 of the proceeds from that loan to repay the third-party lender. The guidance in Proposed Q&A-20 makes this option the least desirable, because the other options, which satisfied the proposed regulation, eliminate the need to involve an outside lender. However, if the plan does not permit refinancing transactions, and also does not allow for more than one loan to be outstanding at a time, Will would have to use this option to accomplish his desired result.</UL>[Edited by Dave Baker on 08-01-2000 at 11:44 AM]

"Too Many Secrets-- How Money Managers Hide Illegalities From Investors" has been published online by Benchmark Financial Services ( http://www.benchmarkalert.com/current/ - August 2000). Excerpt:

What do you make of this?

I work in the Human Resources dept. of a group of healthcare specialists. We currently have a TPA administering our health/dental/STD claims. I would like to explore the possibility of administering our own self-insured plan. I have 4 1/2 years of experience in running a self-insured, self-administered plan but I need some particulars of how other companies have started their own and how it runs, etc. Is there anyone out there who is doing that type of plan? I am well aware of the risks as the feasibility was constantly questioned when I worked at the other self-administered plan but it saved us a ton of money in administration costs. I'd appreciate any information or comments. Thanks.

A calendar year self-employed employer with 4 other employees wants to establish a safe harbor 401(k) profit sharing plan as of 8/15/00. Does the first plan year have to be a short year? If so, are the $30,000 sec. 415 limit and the annual $10,500 deferral pro-rated (I know the comp. limit would be)? Or, can the plan be effective 1/1/00? If so, does a 3% safe harbor cont. have to be made for the full year's comp. or just on comp. since the deferrals became effective (8/15)? I am confused about how the sec. 415 limits would be calculated, especially if the employer wants to make an additional non-elective profit sharing contribution.

I have two sales companies that consitute a control group. Each company sells the same product but different brands than the other. Each company has its own Standardized Prototype Document that is a clone of the other. Both companies have calandar year plans, but the one company did not come into existance (Company "B") until 6/15/99, thus they will have a short plan year ending 12/31/99. I am filing 2 separate 5500's since they have two serarate plan documents. I am fairly sure an Audit is not necessary for 12/31/99 5500 filing since Company "A" only had 50 employees on 1/1/99 and Company "B" didnt exist. (Company "B" will have about 85 to 90 EE's on 1/1/00)

Please confirm!

Also, won't two 5500's need to be filed for plan year end 12/31/00 and since 2 separate plans. Since separate plan documents are being used does an Audit need to be done for the 12/31/00 plan year end? If so, would you attach the same Audit info to each 5500 being filed for each plan?

I have two sales companies that constitute a Control Group. Each company sells the same product but different brands than the other. Each company has its own Standardized Prototype 401(k) Plan Document that is a clone of the other. The one company has 85 employees, the other has 50 employees. Must the plans be audited?

A CLIENT WISHES TO AMEND THEIR PLAN TO MAKE THEIR PLAN YEAR COINCIDE WITH THE CALENDAR YEAR, PRESENTLY THERI PLAN YEAR ENDS JANUARY 31.....

IF THIS PLAN IS AMENDED TO BE A 12/31 PLAN YEAR END, CAN THE PARTICIPANTS CHANGE THEIR ELECTIONS TO ACCOMODATE THIS SINCE THEY ORIGINALLY SIGNED UP TO HAVE DEDUCTIONS TAKEN OUT THROUGH JAN 31?

Our company has recently switched 401k plans and something just came to my mind. When money is deducted from my paycheck every two weeks and transferred to our accountant who transfers it to our 401k -- doesn't this take some time? Doesn't this time add up to a lot of time in the long run? I have read that by law you have until the 15th of the following month, and to be sure ours doesnt take that long. But doesn't even a few days every month over say 10 years mean a lot less earning potential?

So with this "logic" I'm going to approach our inhouse bookeeper and find out the skinny. My question is how long is too long? We are a small company with a brand new self-directed TD Waterhouse 401k plan. I believe we are relying on regular old mail to move money from us to the accountant (I dont think we wire transfer or do it electronically). Is there a way to show them how much earning potential we could be missing out on (I might need to convince them a bit). Also, what are our alternatives - is wiring money simple? Should our accountant be taking care of this?

Thanks for the help.

Jonathan

FACTS:

The C Corporation maintains an Employee Stock Ownership Plan ("ESOP") and has two types of stock. The first type has special formula dividend rights, no voting, but is convertible to common if dividends are not paid ("Preferred Stock"). The second type has all voting rights and may receive dividends if the Preferred Stock has first received its accumulative formula dividends ("Common Stock"). C Corporation currently maintains an ESOP that holds 25 to 30% of the C Corporation's Common Stock.

ISSUE I: IRC Section 409(l)(2) Compliance.

Is Common Stock held by the ESOP "employer securities" under IRC Section 409(l)(2)? Put another way, when determining whether the ESOP held stock has the greatest dividend rights, do you look only at stock with voting rights, or does the ESOP's stock have to have equal or greater dividend rights than the non-voting "Preferred Stock" has?

Would it make a difference if the outstanding Preferred Stock was not convertible to Common Stock?

ISSUE II: Correcting IRC Section 409(l)(2) Compliance Failure.

Assuming that ESOP held stock must have equal or greater dividend rights than the Common Stock and the Preferred Stock, would the exchange of existing ESOP Common Stock for a new type of stock ("Hybrid Stock") that has the same voting rights as the Common Stock, but has special dividend rights, where it first gets Preferred Stock dividends and than, if the Common Stock also gets dividends, it would get an additional dividend once the amount of the Common Stock dividend exceeds the Preferred Stock dividend.

For Example: Preferred Stock gets formula dividend of $1 per share; Common Stock gets dividend of $0 per share; and resulting Hybrid Stock dividend equals $1 per share. Alternatively, Preferred Stock gets dividend of $1 per share; Common Stock gets dividend of $2 per share; and resulting Hybrid Stock gets dividend of $2 per share. Basically the Hybrid Stock gets a dividend that is equal to the greater of the Preferred Stock and Common Stock dividend amounts, instead of getting both the Preferred Stock and Common Stock dividends.

I'm looking for any input on an issue with the Women's Health and Cancer Rights Act. I have a plan member seeking a precert for breast reconstruction under a plan that provides mastectomy benefits. The twist in this case is that her original mastectomy was performed 12 years ago, before her effective date with this plan. Pre-existing exclusion is not an issue in this case.

The original reconstruction used a saline implant, which is now causing constant pain due to contracture since the implant. The physician is proposing to remove the implant and perform a new reconstruction.

Having read the Act and numerous Q&A's, I see nothing addressing the issue of mastectomy performed prior to the passage of the Act or prior to existence of the plan. My inclination is to recommend it be covered, but it would be nice to have a cite or anything else to back it up.

Has anyone out there encountered this issue? I would appreciate any opinions.

What is the definition of an "unpaid" leave of absence? If an employee goes on STD or LTD, can they be allowed to change their benefit elections? Specifically, drop coverage because they cannot afford their share of the cost while on leave. I know the regulations state "a commencement of or return from an unpaid leave", but I am unclear if STD or LTD is technically an unpaid or paid leave.

Our employer is a Sub S corporation. For FY 1999, we had a SIMPLE IRA. The Employer made a 3% contribution covering the first half of 1999, but to date has not sent in the 3% covering the last half of 1999. It is his belief that he can defer the contribution until he is ready to file his 1999 taxes, including extensions.

Is his assumption correct?

A few posts back, I saw where employers who do not make the contribution risk the employees contributions being declared as income by the IRS, which would certainly be a blow to the employees.

Carl C

The company I work for initiated a SIMPLE IRA plan on August 4, 1998. Contributions had been made until January of this year, when an employee leasing firm took over as our employer. While the leasing firm couldn't continue with our existing SIMPLE IRA plan, they did recently start a 401K plan for us.

I have a Traditional IRA, Roth IRA, and the new employee leasing firm 401K plan.

I would like to move the funds from the SIMPLE IRA to any of the other vehicles. Can this be done, and if so, are their any tax consequences on moving the funds to one plan vs. another?

I also heard that moving the SIMPLE IRA funds should be done after a certain date or holding period. Can anyone elaborate?

Carl C.

Our company offers employer paid medical, dental, std, ltd, and group life and dependent medical and dental is offered on a pre-tax payroll deduction. Our renewal was July 1 and we wanted to make some changes but due to TPA delays were not able to. Can we change the plan before July 1 next year to a cafeteria plan to include vision and supplemental life? We were thinking of offering "benefit dollars" and any benefit dollars not spent would automatically go into the flexible spending account we offer which includes unreimbursed medical and dependent care. In setting the benefit dollars we were also considering using the cost per employee from last year for fixed costs and claims. Any suggestions would be appreciated.

We have a self-funded plan with about 875 participants and a $50,000 specific deductible with a $100,000 deductible for one dependent child. Our contract until July 1 was a 12/15 and now the TPA has changed it to a 12/12 for specific and aggregate with the intention of changing it to a paid contract in 2001. Can someone explain the difference between a 12/12 and a paid contract? I am afraid we won't be able to change carriers next year because of this type of contract.

I am seeking recommendations for a Service Provider for a large (2,000 + participants) 401(k) Plan. Sponsor requires standard services (daily valuation, customer service representatives, interactive voice response and fully transactional internet capability).

There would be $0 to manage in assets - everything is in separate accounts.

Recognizing there will be recordkeeping fees,do you have any suggestions?

New DB plan effective 4/1/2000 with 9 month plan year, switching to calendar year 2nd year on. Plan sponsor is on Calendar tax year.

For section 412 minimum, charges & credits are prorated for a short plan year. I could not find such a requirement (or restriction) for Section 404 maximum, which implies that full Normal cost etc can be deducted!

Any one disagree, and if so why?

1. Where in the Code/Regs/Ruling etc can I find the medical expenses that can be reimbursed from a Section 125 plan? From general reading, I understand that the reimbursable expenses are those that can be deducted under Code section 213 (without regard to the 7.5% exclusion - but I can't find express reference!

2. Can a participant pay premiums from his/her Section 125 plan account for an individual health insurance policy to cover the benefits not provided by the employer's medical plan or if the employer does not have a medical plan?

Thanks for your help.