g8r

Yes, as long as you meet the requirements to make contributions to the HSA (e.g., you are only covered by a high deductible health plan).

Yes, you can contribute different amounts based on the coverage they have. As long as you treat all those who have family coverage the same, then you're o.k. Likewise, as long as you treat those with single coverage you're o.k. And, the fact that one group has a higher or lower contribution does not create a discrimination problem.

I don't know of any reason why that can't be done.

Varying it based on position is probably discriminatory. And, varying it based on service is definitely discriminatory. The following is from 1.105-11 which applies to the health FSA because it is a self-funded heath plan: A plan may establish a maximum limit for the amount of reimbursement which may be paid a participant for any single benefit, or combination of benefits. However, any maximum limit attributable to employer contributions must be uniform for all participants and for all dependents of employees who are participants and may not be modified by reason of a participant's age or years of service.

I had trouble following Tom's analysis (maybe it's just too late). I agree that Roth deferrals are treated just like any other deferral (it's just the tax treatment that differs). And, no word from the IRS on whether they will issue a model or good-faith amendment.

Actually, it depends on what the proposed regulation provides. Generally, the preamble will indicate if the regs can be relied upon. The Roth regulations do not contain the reliance statement. Therefore, the regs cannot be relied upon and the standard is whatever reasonable interpretation you want. However, I don't think there was anything unusual in those regs that would be challenged should you follow them.

When you make the corrective amendment, you are in essence waiving the accrual requirement. But, regardless of how you view it, the individual is receiving an employer contribution and must get the gateway if you want to use cross-testing to pass (a)(4).

My vote is that it's a catch-up. One way to look at it - The limit on deferrals is 30% minus the after-tax contributions. On that basis, the limit was exceeded.

No, they are not the same. On plan termination you can't rely on the opinion letter. If you want reliance, you'd need to file for a determination letter using IRS Form 5310.

You may find the cite below helpful (it's a thread that touches on the subject). My connection is incredible slow right now, but I'm sure if you search this topic you'll find other relevant threats. The section of the reg. that you are referring to is one that puzzles everyone. The IRS is clear that a health FSA can't reimburse premiums. Whether this is a correct interpretation of the law is open to debate (at least to me). Nevertheless, it's not worth fighting. Especially because of the last sentence. My take on the last sentence is the acknowledgement of Rev. Rul. 61-146 which allows an employer to pay for individual health policies with no inclusion in an employee's gross income. Thus, this is a permissible benefit in a cafeteria plan (unless specifically prohibited under 125, 125 avoids constructive receipt over a choice of cash or a non-taxable benefit that the employer could have provided). So, you have the reg stating that you can't reimburse premiums from a health FSA and you have the issue of how to use 61-146 in a cafeteria plan (i.e., how can insurance can be reimbursed through the normal operation of a cafeteria plan). The answer is you set up a premium payment account. It's just like an FSA except that it's limited to premium payments such as COBRA, individual policies not offered by the employer such as dental, vision, etc.). Why would someone want to do this in a cafe plan? Because you don't have to worry about the 7 1/2% threshold to deduct the premiums and you save SS taxes and FUTA. What's the hitch? Lots of issues, such as: is the benefit now "employer" provided and therefore subject to ERISA, HIPPA (if 2 people have the same policy then no pre-existing may be imposed, etc.), and COBRA? I suspect you can find more on this by searching the board. http://benefitslink.com/boards/index.php?s...t=0entry34180

We're still waiting on guidance from the IRS.

It shuts down the GUST program for opinion (M&P plans) and advisory letters (volume submitter plans). It does not shut down the GUST determination letter program. As to whether you should submit or not, that's a loaded question. However, we don't have the EGTRRA determination letter procedure yet so there's no telling when you will be able to submit and get an EGTRRA determination letter. Presumably it will open on Feb. 1, 2006. But, if you submit out of the cycle that applies to the employer, then you may find that you have to resubmit when the cycle for the plan actually occurs (could be anytime within 5 years if an individually designed plan or probably 2008 or 2009 if using a prototype or volume submitter plan).

Universal availability doesn't apply to Roth K. While the proposed regs are silent on this, the statutory language doesn't impose this requirement.

I'd suggest using the language in IRS form 5305-C (link below) or B (for trusteed HSA). As pointed out, an HSA is very close to an IRA (with obvious differences in contribution limits and tax effects). But, it belongs to the individual just like an IRA. Thus, there is no SPD requirement - the IRS HSA forms are all that is needed. Maybe the IRS publications will also help (publication 969 - also cited below). http://www.irs.gov/pub/irs-pdf/f5305c.pdf http://www.irs.gov/pub/irs-pdf/p969.pdf

I don't think it would have any direct impact on terminees. Anyone who terminates is treated the same as when termination happened while there was a 12 month period of coverage. Most plans stop coverage on termination - then it's up to the individual to elect COBRA (if applicable). I guess where this could get tricky is whether termination might entitle someone to a refund (and how that might affect the COBRA amount). For example, I elect $1200. Do you take out $100/month or $1200/14 1/2 per month. If you take out $100/month and I quit mid-year, have you been accelerating payments so that I'm entitled to a refund (if coverage ceases on termination of employment). In other words, you're taking out $100/month and the actual cost is less than that because it should now be spread over 14 1/2 months, not 12 months. I can't imagine the IRS would take this position...but I don't know....

But....one could argue that this is "integrally" related to EGTRRA and therefore falls w/in the scope of EGTRRA good-faith amendments.

I agree with SLuskin's conclusion that this is O.K. (and it's irrelevant to the question as to why the employer wants to do this). There are 2 issues. 1) Is this even subject to the cafeteria plan rules? The answer is no -- at least with respect to the employer contributions. Why -- b/c there's no cash option. Of course there is a need for the cafe plan due to employee contributions. 2) Is this discriminatory? IRC 105(h) nondiscrimination is based on eligiblity, not utilization. Thus, as long as the option is available to a nondiscriminatory group, then I don't see a problem. It's not clear how 125 testing (the 25% concentration test) is applied. The issue is whether the employer contributions (subsidies in this case) are pulled into the 25% concentration test even though these contributions aren't part of a cafeteria plan (per 1. above). The IRS has informally said that employer subsidies for health insurance are included (e.g., if the employer pays 80% of a premium w/no cash opt-out, some think the 80% is in the test b/c the employee pays the other 20% through the cafe plan). The theory is that you either have full coverage or no coverage --so the 20% from the employee results in full coverage and therefore 100% of the premium is the benefit obtained through the cafeteria plan. But, it's not clear whether the same would apply to the FSA. Since the benefit varies based on the contribution, one could argue that the $300 employer contribution is not part of the cafeteria plan and is not counted in running the 25% concentration test b/c the participant could still obtain FSA coverage w/out the employer contribution. Personally, I wouldn't include the $300 in the concentration test.

It sounds like here the plan has a discretionary contribution with one allocation method. And, the employer wants to use that one contribution and one allocation formula and give different amounts to 2 different groups. The IRS would have a problem with that. Look at the guidance regarding cross-tested plans. Each group must be specifically defined in the plan and the plan must permit a discretionary contribution for each group (with an allocation formula for each group). The employer then notifies the trustee (per IRS but I think it really should be to the administrator) as to the contribution for each group. In essence the administrator is supposed to be able to allocate a contribution w/out looking to outside documents. And, it sounds like that wouldn't be the case here - if the plan only provides for 1 discretionary contribution.

There is no IRS rule. Assuming the expense was incurred during the applicable period, you can allow a claims period (often referred to as a run-out period) as long as you want. Of course from a practical view, you want to have some finality to a period of coverage and that's why you see a period such as 90 days.

The methodology is correct, but I'm not sure what you mean regarding the catch-ups. In step 8 you determine the amount of refunds. But, for those who are catch-up eligible, you recharachterize as a catch-up (up the applicable catch-up limit) instead of refunding. So, you're conclusion is correct if the reason for the catch-up is b/c of a failed ADP. The HCEs just get a smaller or no refund.

I believe those may go to whether there really is a termination of employment. I could argue that all of these payments are for services. An employer provides disability coverage as a benefit for service. The disability payments are arguably the result of this service (albeit it prior service). Severance pay is also for services -- an employer generally only pays severance b/c of prior employment. I think the concept with severance pay is that if a person isn't a current employee, then you have an exclusive benefit problem. FYI, the IRS has been promising to issue guidance on this -- it will part of the 415 regulations. For disability pay, I don't have a definitive answer. However, there is a safe harbor exclusion -- taxable fringe benefits, nonqualified deferred compensation, etc. can be excluded from compensation (I don't have the reg cite but it's in the 415 regs nor the specific language). I believe that payments for disability could be considered a taxable fringe benefit and excluded under that provision w/out any nondiscrimination issues. Of course that exclusion means you had concluded that it's counted for plan purposes in the first place. We know it's on the W-2 but there are some good arguments as to why it might not necessarily be counted. And, that exclusion only helps going forward (if you amend the plan).

Unfortunately, I think the answer may depend on the facts. If you're referring to the IRS (i.e., a "plan" for purposes of the IRC), the IRS doesn't like references to outside documents unless the reference is in the plan and is something that is outside the unilateral control of the employer (such as collective bargaining agreements and prevailing wage laws). But, with job classifications the employer does have latitude so I can't say it's a hard-and-fast rule. But, if you're referring to the DOL (i.e., if participants bring a suit against the plan), you're at the mercy of the court. There are numerous court cases where documents outside of what the IRS considers to be the "plan document" for ERISA purposes. Just look at the cases where the SPD conflicts with the plan and the courts say the SPD controls (especially when there has been detrimental reliance). In some respects, one could argue that what the court recognizes has now become part of the "plan." Based on your question, you said the employer wants to go outside of the plan. Depending upon what it is the employer wants to refer to, I'd be very careful.

By my prior post, I wasn't trying to say treat a loan like any investment (the fact that it is performing better than assets right now is true, but I really only use that as a joke). My point is that from a pure economic standpoint (at least as far as the known factors), it really can be viewed like an investment. The tax effects of borrowing from the plan vs. another lender is neutral. And, taking funds from an account to make a loan to yourself vs. to an outside party (e.g., buying a bond) is neutral. With either you have the same market risks - opportunity cost, changes in interest rates, etc. I absolutely agree that it's the immeasuarable risk of default that is a problem. The consequences of defaulting on a plan can be horrible. However, consider my last point about financial planning. If someone is paying 18% on a credit card and can pay it off with a plan loan - AND not rack the card back up, there's your protection should you lose your job. Just use the credit card to pay off the plan loan. Yes, there are costs associated with doing that (transfer charges, etc.) but they are somewhat measurable and may still make the plan loan a better choice -- from a pure economic choice. And no -- I don't recommend that. I suspect there are numerous studies out there showing that people will rack the credit card right back to where it was. There goes the protection, there's now more debt, and losing the job would just make the situation doubly worse. Which is exactly why some people say a line of credit on a home is equally as bad an idea b/c you can lose your home. It's really contingent on how disciplined someone is on not getting further into debt.

If they are still employees, I don't think that amending the plan to exclude them creates a distributable event. It's no different than a plan that excludes union employees. If someone changes to union status, the employee is no longer entitled to additional benefits but continues to vest, etc. and doesn't have a distributable event.

Agreed. That, to me, is the biggest risk with a plan loan. I'm one of the ones who argues that there is no double taxation -- or more accurately, the tax effects are no different in borrowing from a plan vs. borrowing from another source. I'll spare you the math. Suffice it to say -- it takes after tax dollars to pay off the credit card today. And, money that is kept in the plan by not taking a plan loan earns interst and is taxed when withdrawn. If the loan is made from the plan, it still takes after-tax money to pay off the loan. Yes, the interest paid to the plan will be taxed when withdrawn -- but that happens regardless of whether the interest income was from a plan loan or from interst earned on the funds had they been loaned out. As far as the rate of return, I'd suggest that right now a loan may be the best investment someone has in the plan. My 401(k) is fairly diversified and I lost money this quarter. Outside of the risk of default, the loan from the plan should be viewed like any other fixed income investment. It may perform better or worse than other investments and that's just investment risk - not something particular to a plan loan. So, I think paying off a credit card is a good use of a plan loan -- assuming the plan loan gets paid off. That's the real risk -- as well as the other traditional financial risks that are not unique to plan loans (such as not racking up the credit card again).