Ken Davis

A public university has a NQDC plan subject to 457(f). The annual benefit is never subject to a substantial risk of forfeiture so that amount is always reported as W-2 wages in box 1. However, the annual benefit is paid out to the employee only upon retirement, so it is not subject to income tax withholding while the employee is still employed. Because of this, the plan provides for annual distributions to help the employee pay the income tax bill on April 15. My question is whether the annual tax distributions are subject to income tax withholding reported in boxes 2 and 17. Seems like they should be since they are a plan distribution. Thanks, Ken

I see it differently. In addition to taking full-time employee equivalents into account when determining applicable large employer status, you also must take the number of full-time employees into account to see if you meet the 95% test provided in the tax regs. If you fail that test, then the 4980H(a) $2,000 tax applies, because under the tax regs (if I'm reading them correctly) the employer has failed to offer its full-time employees MEC. That was the point of my post. Including those employees who would never get the credit (because they are dependents of another) can push the employer into an especially burdensome 4980H tax situation. For example, if the employer offers coverage to 96% of its full-time employees who are not dependents of another, but fails the 95% test because full-time employees who ARE dependents of another must be counted, then the employer is faced with the possibility that the 4980H tax would be calculated under 4980H(a) at the rate of $2,000 per full-time employee and not under 4980H(b) at the rate of $3,000 per full-time employee who gets the premium tax credit. Is my analysis incorrect?

In determining whether an large employer offers insurance with minimum essential coverage to at least 95% of full-time employees, is there any exclusion for employees who will not qualify for either the premium tax credit or the cost-sharing reduction. I'm thinking of employers where at least 6% of the full-time workforce is composed of young adults or teenagers who are still claimed as dependents of their parents Form 1040. It's my understanding those young adults and teenagers would not qualify for either the tax credit or cost-sharing reduction because they are dependents. So, it seemed to me unfair that counting these young people would cause the employer to fail the 95% test and be thrown in a possible 4980H tax situation when the young people would never get a tax credit or cost-sharing reduction. But I couldn't find any authority for excluding them from the FTE count. Thoughts? Ken

Those Q&As are too general for a question this specific and don't give an answer. But thanks for directing me there. Ken

Beginning with 2013, our employees must be at least .75 FTE to be eligible to participate in our self-funded health plan. At the same time, we have a health flexible spending arrangement that requires only a .5 FTE for eligibility. The health FSA is entirely funded through the employees' salary reduction elections. So, we have a group of employees who are eligible to participate in the FSA, but who are not eligible to participate in the health plan. I read the section 4376 tax regulations to say that a heath FSA that is an "excepted benefit" is not an applicable self-insured plan, which would mean that for an "excepted benefit" FSA, the FSA-eligible employees (including the .5 - .74 FTE employees) would not be counted for the PCORI tax. The section 9831 tax regulations state that an FSA is an "excepted benefit" if a "class" of participants meets both of two requirements. One of the requirements is that other group health plan coverage must be offered to the "class." My question is this. Is the group of employees with FTEs from .5 - .74 a "class," if we don't identify or define them in any other way as a class for HR and employment purposes? If that group is a "class" then our FSA would be an applicable self-insured health plan and the group's lack of eligibility to participate in our self-funded health plan would require the PCORI covered lives count to include each employee in that group. Correct? Thanks, Ken Davis

We have a money purchase pension plan that began January 1, 2004. The plan year is the calendar year. For purposes of determing the employer contribution under the plan, an employee's annual compensation is multiplied by 25%. The first employee covered by the plan to retire will retire at the end of this month. The employee's salary from January 1, 2013 through June 30, 2013 will be approximately $280K. The 401(a)(17) limit for the 2013 plan year is $255K. I've attached a copy of a page from the plan and a copy of part of the section 401(a)(17) regs. My reading of the sentence in the plan I've drawn a line around and the sentence in the regs that I underlined is that the $255K 401(a)(17) limit does not have to be prorated to half for the part of the year worked by the retiring employee. So, the employer contribution as limited by 401(a)(17) would be $63,750. However, the actual employer contribution will be limited to $51,000 by the section 415©(1) limit for defined contribution plans. Is this correct? Thanks, Ken Davis facopier@usouthal.edu_20130612_113432.pdf

We have a 401(a) money purchase pension plan that has a provision for which I'm trying to find the source. If a participant continues working after his/her required beginning date the employer would continue making plan contributions to the employee's account. But the plan has a provision that requires those post-required beginning date contributions to be distributed to the employee by December 31 of the first calendar year following the calendar year of the contribution. Is there an IRC or tax regs requirement for that provision? If so, please supply the cite. We are a governmental employer, if that makes a difference. Thanks, Ken Davis

Chaz, Basically that is what I was asking. But you do bring up an interesting point, which is the definition of "offer of coverage." If an offer of coverage must offer both the opportunity to enroll and to decline to enroll, then doesn't mandatory coverage with no opt-out fail to be an "offer of coverage"? If so, this seems to bring in 4980H(a), which brings me back to 36B which says that for any employee covered by an employer plan the affordability or minimum value tests need not be met in order to escape the 4980H penalty. If an employee has mandatory coverage with no opt-out, can't they still obtain coverage under an exchange? I'm trying to piece all of this together to get a good understanding of how 4980H works, and have many questions. And seem to have more questions the more I read. Thanks, Ken

Chaz stated "While I understand that this does not require employers to provide coverage to dependents, they need to in order to avoid the penalty." With respect to the quoted sentence, is an employer able to provide coverage (mandatory) to all employees and dependents and avoid the 4980H penalty even if the coverage is not affordable or does not provide minimum value? It appears that providing coverage overrides the affordability and minimum value requirements, with the result that the employee does not have a coverage month. This means no subsidy under IRC 36B or PPACA 1402, and no penalty under 4980H. See 36B©(2)©(iii). Might not make economic sense, but I suppose it could in the right circumstances. Might have some usefulness to governmental self-insured plans. Thanks, Ken Davis

All, IRS Notice 2008-115 (attached) has a special rule for withholding income taxes on 409A income included in income on 12/31/12, but not paid until January 2013. If the withholding tax is withheld from the actual payment in January 2013 and is paid to the IRS by the December quarter 941's due date, then no failure to deposit taxes penalty will apply. Our question is what do we do on the 941 to indicate that we've met the 2008-115 requirements. Without some indication, isn't the IRS going to see on Sch B of 941 a liability on 12/31/12, one that for us would normally have to be deposited in the first week of January, but then see a deposit actually made on January 20, 2013 when we cut the check to the employee and withheld the taxes? Or, are we just forced to sit back, receive a late deposit penalty letter and deal with it then? Thanks, Ken Davis Univ. of South Alabamafacopier_usouthal.edu_20121214_150243.pdf

Thanks, Tom. That's exactly what was behind my question. Just seemed that universal availability should drill down all the way into investment options. But, as you say, for now it's not an issue. Ken

We are a public institution that is generally exempt from the non-discrimination rules applicable to retirement plans. However, the "University Availability Rule" for elective salary deferrals to 403(b) plans applies to public institutions. We have been told by a 403(b) plan provider that this rule is to be applied at the plan level. By that they mean all employees (with some exceptions not important here) must be allowed to make an elective salary deferral to the 403(b) plan, but that certain investment options may be restricted to a group of less that all employees. Is that a correct interpretation of the Universal Availability Rule? Thanks, Ken Davis Univ. of South Alabama

Do arrangements subject to 457(f) have available a short-term (2-1/2 month) deferral rule similar to the one available in 409A. For example, a 457(f) arrangement says the substantial risk of forfeiture lapses on December 31, 2012 and the payment of the deferred compensation will occur on January 2, 2013. Is the deferred compensation taxable under 457(f)(1)(A) in 2012 (no short-term deferral rule available) or 2013 (short-term deferral rule available)? Thanks, Ken

PensionPro, No, I can't say that I've found anything that says that in so many words. What causes my confusion is that in the 415©(3) regs, specific mention is made of wages RECEIVED (plus amounts deferred under 457(b) among other deferrals) and then later on amounts INCLUDED under 457(f)(1)(A). Then, in the 403(b)(3) regs, includible compensation means compensation RECEIVED (plus amounts deferred under 457(b) among other deferrals), but no mention of amounts INCLUDED under 457(f)(1)(A). It's the absence of specific mention of 457(f)(1)(A) in the 403(b)(3) regs that is confusing. I can't help but wonder why mention of 457(f)(1)(A) was omitted in the 403(b)(3) regs but is found in the 415©(3) regs? Thanks, Ken

Thanks, PensionPro. Where I still come up against a wall is a little further in that reg., at -2(g)(1). There, it says that for 403(b) annuity contracts includible comp is determined under 403(b)(3), and that neither the IRC section 415©(3) nor reg. 1.415©-2 rules apply (except for 415©(3)(E), which merely circles back to 403(b)(3)). So, it appears to me that the -2(b)(7) rule for 409A, 457(f) and constructive receipt doesn't apply. Thoughts? Thanks, Ken

Wondering if someone could tell me the signifance of the word "received" in the 403(b)(3) definition of "includible compensation." Would it be to exclude income recognized under 457(f) but not paid to the employee? Thanks, Ken

Want to check my interpretation of the regulations definition of "includible compensation." In 1.403(b)-2(b)(11), includible compensation means compensation received from the employer for the last year of service. Since income included under 457(f) has not been received at the end of the last year of service, it seems to me that 457(f) income is not within the definition of "includible compensation." Correct, or incorrect? Thanks, Ken Davis

Does income inclusion at December 31, 2011 under 457(f) make 409A a non-issue for 2011? Or, must the actual payment of the income occur by March 15, 2012? I'm struggling with the short-term deferral regs. Specifically the first sentence in 1.409A-1(b)(4)(i) that seems to first require that the payment must not be a "deferred payment." Reading further at (i)(D) a payment is a "deferred payment" if the plan provides it will be made after March 15 for a calendar year service provider. So, is it correct to say that the short-term deferral exception will NOT be met if the income is recognized at December 31 under 457(f), but the plan provides that actual payment will be made the following June 15? Thanks, Ken Davis Univ. of South Alabama

So far in 2011, we inadvertantly used the wrong salary number (base versus gross) when withholding from employees' paychecks for 403(b) elective deferrals, with the result that elective deferral contributions were understated. We need to correct this by contributing the correct amount to the plan provider, preferably in 2011. How do we handle getting the additional contributions from the employees? There is not enough payroll remaining in 2011 to catch up and still leave the emplyees with enough money to live on. Are we stuck with our company making the contribution in 2011 and withholding the money in 2012 to make the company whole. Would that mean the employees' W-2 is higher in 2011 than it should have been, and in 2012 lower than it should be? Thanks, Ken

Is a money purchase plan maintained by a governmental entity subject to the 25% deduction limit under 404(a)(3)(A), even though the governmental entity needs no tax deduction? Thanks, Ken Davis

Can someone point me in the right direction to find a plain-English writeup of how, if possible, to correct the following situation? For 2009, one of our employees checked the box for Dependent Care on our pre-tax contribution form for our cafeteria plan/flexible spending account. But, he meant to check the Medical Care box. He didn't catch the mistake then, nor did he catch it after he read the confirmation sent to him by Human Resources showing which box he checked. And, I guess he didn't catch it all during 2009 when he didn't receive any medical reimbursements, or because he didn't look at his check stub. So, he filed his 2009 tax return and had to pay tax on the unused dependent care benefit. I realize he could have avoided the tax by subtracting the forfeited benefit on Form 2441, but he didn't do that and, anyway, that might mess up what he really meant to do, which is to use the money for some dental work. Which brings me to my question. How do we fix the error he made on the election form? Send a corrected W-2 showing $0 in box 10? Then let the plan administrator know to transfer the money from the Dependent Care account to the Medical Care account? Anything else? Thanks, Ken Davis Univ. of South Alabama

A two-year deferral is a short-term deferral?

E'er and E'ee agree that E'er will pay E'ee $xx if E'ee works two more years. Payment will be made the day after the two-year period has passed and the plan doesn't provide that this timing may be changed by the E'ee. Am I correct that the deferral election requirement under 409A(a)(4) is not applicable? Thanks, Ken Davis

Does the E'ee have a legally binding right to deferred comp in the following situation. E'er promises to pay E'ee $xx if E'ee works two more years. The payment is due to be paid the day after the two-year period has passed. If E'ee quits before the two year period has passed, he/she receives nothing. Neither E'er nor E'ee can change the amount of, timing of, or E'ee rights to the payment. Thanks, Ken Davis

Under the 409A regs, if an employee must include deferred comp in income because 409A rules are not met, and later the account balance is permanently lost (employer becomes bankrupt, for example), an income tax deduction equal to the lost deferred comp is allowed. The regs. don't say whether it's an above the line deduction or misc. itemized deduction. Any insight on which it is would be appreciated. Second question. Suppose the 409A rules are met, but the deferred comp must be included in income under 457(f). Does the employee get a deduction under 457(f) if the deferred comp is later permanently lost? Thanks, Ken Davis