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The issue was raised with the IRS several weeks after Notice 2005-5 was issued (i.e., several months ago). So, I'm not holding my breath for an answer any time soon. I think a literal reading of the IRS Notice would lead someone to conclude that a mandatory distribution upon termination of a non-J&S plan would be subject to the rule, even if it exceeds $5,000. The DOL regs don't really contemplate this issue although the the preamble to the regs states that there will be non-enforcement (i.e., that you can follow the regs) even though the amount of the rollover is over $5,000. But, I think that contemplates prior rollovers causing it to exceed $5,000, not a mandatory distribution upon plan termination. To make it more confusing, if you actually look at the DOL reg, it refers to 401(a)(31)(B). So, if the IRS interprets that code section to apply to distributions on termination, then maybe the DOL safe harbor automatically applies (even though the preamble doesn't contemplate that it only applies to mandatory distributions due to the $5,000 rule).

Yes.

There are several of these types of arrangements floating around. Supposedly, the IRS is looking into these. As pointed out, whether this is legal or not will depend on whether there really is collective bargaining. Generally, the union does have requirements that make this look this look legit. For example, the union will provide a plan, even though, as pointed out, not providing a plan might be o.k., and the employer must implement greivence procedures, etc. Keep in mind this may be a win-win for unions and employers using these arrangements. Unions are hurting for members and you may find that this technique will be used by the large, long-established "mainstream" unions. Of course this doesn't pass the "smell" test. But, if these pass muster with the DOL, then there's not much that can be done w/out legislation.

After-tax employee contributions are always subject to ACP testing. The fact that they may, or may not, be matched doesn't matter.

I agree with Grafals. If you look at the actual law, it appears that you can have other coverage (such as an FSA) as long as it covers expenses not covered by the HDHP. However, the IRS stated that for drugs, that's not the case. In other words, you could have a HDHP that doesn't cover drugs, yet the IRS position is that after the transition period, having outside drug coverage blows eligiblity for an HSA. Makes no sense to me based on the statute - but I don't know who wants to fight the IRS on this one. Thus, if you have an FSA that covers nonprescription drugs, it's still drug coverage and blows eligiblity for the HSA unless the FSA only pays after the HD has been met (or is limited to dental, vision, etc. which in this case it isn't limited).

As pointed out, it's rarely used. But, the IRS even permits this in defined benefit prototype plans. They have proposed a change in the rules to no longer permit it in prototypes, but I've heard they are rethinking that decision.

I agree that this could pass w/out much advance notice. I'm not sure what impact it would have on cafeteria plans. Clearly employers use the FICA savings to offset plan costs. Without that savings, employers might put more pressure on cafe providers to lower their fees. But, I think employees have become so used to cafe plans that I really don't see them being discontinued. Deferrals to a 401(k) plan don't escape FICA taxes. And, if you think about, why should you even need a cafe plan to get the income tax savings. It should be an above the line deduction that isn't contingent on whether an employer offers a cafeteria plan. But, that would increase the defecit... The point is that there are a lot of inconsistencies in our tax laws that don't make much sense.

At the end of this is a portion of Notice 2001-57. If you follow it, you end up at the same place as A16 of Notice 2005-5. Now, suppose reducing the cash-out to $1,000 is integrally related to EGTRRA (and I think it probably is). If so, then it's subject to the same good-faith amendment deadline. The only relief provided by Notice 2005-5 is A9. And, I agree that it could apply even if the plan has already adopted the good-faith amendment. It would allow you to adopt the amendment now but not follow it until you are ready to deal with the IRAs (by the end of 2005). Or, you could wait to amend by the end of 2005 -- but you'd stuck implementing the automatic IRA rollover provision. The point is that in either case, A9 ONLY applies where the plan provides for cash-outs and will implement the automatic IRA rollover rules (if you look at the question in A9, it's only allowing you to suspend distributions where the participant has not made an affirmative election). You are just suspending the automatic IRA rollover rule requirement until the end of 2005. By suspending that, you are ignoring the terms of the plan - prior to amendment the plan requires a cash-out and you can't do that b/c it would violate the law or the after the amendment the plan provides for the rollover but you can't do that b/c you don't have a provider yet. The Notice is silent about lowering the threshold to $1,000. Again, I think such an amendment is integrally related to EGTRRA and could be adopted by the end of the first PY ending after March 28. But, it would have been great for the service to address this b/c large institutions would like some comfort. And, it would be even better to get some relief - i.e., maybe a 12/31/05 plan amendment deadline for either of these amendments regardless of the plan year (it would be relief for any plan year ending between 3/28/05 and 12/30/05). ________________________ From Notice 2001-57 There are two circumstances in which a good faith EGTRRA plan amendment is required. First, a plan is required to have a good faith EGTRRA plan amendment in effect for a year if the plan is required to implement a provision of EGTRRA for the year and the plan language, prior to the amendment, is not consistent with the provision of EGTRRA. Second, a plan is required to have a good faith EGTRRA plan amendment in effect for a year if the plan sponsor elects to implement a provision of EGTRRA for the year and the plan language, prior to the amendment, is not consistent with the operation of the plan in a manner consistent with EGTRRA. A good faith EGTRRA plan amendment is timely if it is adopted no later than the later of (i) the end of the plan year in which the EGTRRA change in the qualification requirements is required to be, or is optionally, put into effect under the plan or (ii) the end of the GUST remedial amendment period for the plan.1

I haven't read the case so this may be premature on my part. But, based on what you provided it seems to me that it is consistent with the position of others (and myself) that there is a distinction between insured vs. self-funded plans. As you stated, there is ERISA pre-emption for insured plans. There is no ERISA pre-emption for self-funded plans. What you suggested with the insurance policy won't work -- the insurance company can't provide coverage unless it complies with the state mandated benefits. Now, if they are self-funded where the insurance company is just a contract administrator, it's a different story. In fact, that's another reason, albeit minor, as to why HSAs might be more popular than MSAs. MSAs were limited to small employers where self-funding typically doesn't make sense (from an economic perspective). For HSAs there is no employer size limit so large companies can self-fund the HDHP and avoid state mandated benefits.

Don, I'm confused by your position. As stated earlier by others, the key is that ERISA does not preempt insured products (although I'm not sure what the issue is in Hawaii). But, for everywhere else, the state can dictate what health insurance policies must provide. An insurance company can't change its policy in violation of the law. Thus, if a state such as NY mandates that mental health benefits be covered with a low or no deductible, in order to do business in the state an insurance company must comply. And, by complying it blows the definition of HDHP for HSA purposes. That's why the IRS provided a transition period - so states can change their laws if they want to. The only way around the state law is to self-fund the HDHP. Then it's not an insured product subjec to state regulation and ERISA preemption would apply. That's one significant difference between HSAs and MSAs (which were limited to small employers so self-funding wasn't as economically viable). Unrelated to this is the fact that some states have income tax laws that don't allow exclusions or deductions for HSA contributions. I suspect we may see some changes in this area as well.

The issue has to do with operating in accordance with the terms of the plan. The IRS gave us relief (not really new -- see below) if you're going to comply with the auto IRA rollovers. You can operate the plan in a mannner that is contrary to the terms of the plan if (1) you are going to comply with the auto IRA rollover by 12/31/05 AND (2) you amend by the end of the first PY ending on or after 3/28/05. If you don't want to comply with the auto IRA rollover rules by 12/31/05 (by eliminating cash-outs or lowering to $1,000), the issue is do you need to amend the plan first (i.e., can you operationally change the operation of the plan by modifying the cash-out rule and amend at a later date)? Arguably -- and this is where guidance from the IRS would help -- the change is intergrally related to EGTRRA. We know amending to add the auto IRA rollover language is. And, the prior EGTRRA guidance already allows you to amend by the end of the PY in which it's put into place. That's why I'm not sure the latest notice really gave us anything we didn't already have. But, it's silent on an amendment to change the cash-out rules to eliminate them or reduce them to $1,000. If that amendment is integrally related to EGTRRA, you'd have until the end of the plan year in which the change is made to actually amend. So, a calendar year plan could suspend forced cash-outs of amounts over $1,000 beginning 3/28/05 and amend by 12/31/05. But, most of us would prefer something from the IRS stating that the amendment is integrally related to EGTRRA. And, we'd like relief for either of the amendments for non-calendar year plans. My guess is the IRS will issue something in the Employee Plans Newsletter --- but only time will tell and the clock is ticking...

Austin, I think you stated it accurately. The IRS doesn't recognize them. It doesn't mean they aren't allowed - it just means that you may need to go to court to prove that you're right. I should add that there is a possibility they may change their position on this. Essentially the concern is whether you can prove it was an error and that fixing it doesn't result in a reduction of benefits that are due under the plan as written. While not what we normally think of as a scrivener's error, dhow about the memo stating that if you updated for EGTRRA prior to GUST and didn't re-execute the EGTRRA amendment when the plan was restated, that the IRS would deem it as though you "meant" for the EGTRRA amendment to remain in effect. Sounds like a scrivener error...

Mbozek: I understand your comments. However, it seems as though there is always some hidden liability when it comes to paying death benefits. That could happen when there is a divorce (without a QDRRO) and a remarriage w/no info being provided to the plan. If you follow the terms of the bene designation, you'd still have liability for paying the wrong bene (b/c the new spouse is entitled to all or a portion of the death benefit). So, I've always wondered whether there is some sort of due diligence that is required whenever a death benefit is paid, i.e., verifying who the current spouse is. I just can't see any other way to be absolutely sure that the proper beneficiary is being paid.

Wow. Looks like this could go on forever. This long post doesn't help. Try not to get too technical - step back and think about this in "concept." Think of the FSA as an insurance policy where each individual sets the policy maximum. The employer is the insurance company and the employee pays the "premiums" pre-tax via a cafeteria plan. That alone explains the uniform coverage rule and the use-it-or-lose it rule. Just like an insurance policy -- either you have full coverage or you have no coverage. And, if you pay more premiums than what you spend, tough luck - you lose it. The debate going on here is what the employer (insurance company) can do with the money. If this were an insurance company I'll take a wild guess that they invest the premiums received and don't pass along those gains to policyholders (o.k. - every once in a while there could be a premium reimbursment to all policyholders). Of course the insurance company is regulated and the setting of the premiums does take into actuarial assumptions. But, they have taken on a liability and there is regulatory oversight to ensure that there are funds available to pay the promised benefits. Now back to the FSA where the employer is the "insurance company". There is limited regulatory oversight. These are plan assets under ERISA. However, there isn't the same level of protection b/c there is no trust or adequate funding requirement. In fact, what happens if in the first month of the FSA, the total reimbursements exceed the amounts collected? Where does the money come from to pay the benefits - does it come from the employer's bank account as a "loan" to the plan (I know - a poor choice of words)? I've actually heard of plans limiting the total payments to the total amounts collected (on a plan wide basis, not per participant). This is consistent with the point GBurns and others are making -- there is a plan and it has assets. It's just that these assets are commingled with the employer's general assets. And, that leads back to the original question. The employer has general assets that can be invested. It's not inconsistent with any of the rules. Yes, there could be a loss and possibly no funds to pay benefits. But, the employer could go bankrupt and the employees would be in the same situation. The DOL is aware of that ... the reason for 92-01 is that it's not clear whether the benefit to employees in protecting the assets is worth the costs associated with maintaining a trust. That issue has been out there for almost 13 years now. GBurns point is that the fiduciary rules under ERISA still apply, i.e., one must still put on a fiduciary hat when dealing with these assets. Sure, the employer could use the assets for whatever purpose it wants b/c there is no trust to prevent it. But, that doesn't mean there hasn't been an ERISA violation. And, I think that's the point GBurns is making. Is investing the plan assets in a "prudent" manner an ERISA violation? I'd say no. But, prudent here may mean it's likely we'll have to pay out everything we collect so we may need to stick with a money market account. If the money is invested prudently and there is a gain (or a loss), does that mean the gain belongs to the plan? Probably so. But, I go back to the tracing rules. How do you distinguish between which assets of the employer belong to the plan and which are general assets. As long as you have a general cash account that equals the value of the benefits owed, then I'd just argue that the funds being invested are the employer's general assets and the funds in the cash account are the plan assets. Or, as stated in a prior thread, I'd say that the earnings are being used to defray plan expenses. Let's face it, if an employee elects $1200 in an FSA and pays $1200 to the employer (oops - I mean to the employer that is holding the assets on behalf of the plan), then there are costs that are not being charged to participants. The employer is entitled to recoup these amounts. If this were an insurance company, the costs would not just be the administrative costs. It would also reflect experience gains and losses due to the use-it-or-lose it rules and the uniform coverage rules. End of story (for me)....

I've been rethinking my prior post and think it's wrong. If you don't know what to put in the notice, you use the grace period (suspend distributions and rollovers until you have the notice ready). Belegrath, I understand your concerns. Until there are a number of IRA providers out there, you probably don't want to work out an agreement with a provider since, as you allude to, it may be years before you even have to deal with the issue. The only solution I can think of is amend the plan to provide that amounts between $5,000 and $1,000 are only distributed with the consent of the participant. You won't have to deal with the auto IRA rollover rules -- but you won't be able to force a distribution on these people either. It's not a perfect solution, but I think it's what many plans will be doing until the dust suttles on this (which take a few years).

Yes, the notice requirement does conflict with the grace period. Also, it appears that the grace period only applies if you will be applying the rules by the end of 2005. If you are going to modify the cash-out rules in the manner mentioned by MGB, then you'd generally need to amend your plan by 3/28/05. Otherwise you'd have an operational violation for failure to follow the terms of the plan (assuming the plan currently provides for an automatic cash-out of amounts $5,000 or less). And, there's no model or sample amendment provided for any adjustments of a plan's cash-out rules. There are numerous other issues relating to that Notice that may warrant further clarification from the IRS.

GBurns is correct. Under the old DOL tech release (I think it's 92-01), the funds belong to the plan and must be used for plan purposes. It's a DOL issue and that's why the IRS regs don't address this. The tech release provides that the DOL won't enforce the trust requirement (that FSA contributions be held in trust). But, it goes on to provide that all of the contributions are still plan assets. But..... as a practical matter, when an FSA isn't funded, it's rather difficult to trace the funds. For example, assume the employer has been paying the costs of administering the FSA for the past umpteen years. I'd just state that those fees were paid with the FSA forfeitures and the employer is just recouping those expenses that it may have "advanced" to the plan. Thus, the forfeitures are just a reimbursement to the employer for the plan expenses - and the employer is taking those amounts and making a contribution out of it's own pocket b/c it's the right thing to do. The key is that with unfunded FSAs (which is typically the case), it's very difficult to trace which shell the money is actually under (employer vs. FSA).

If you're hired to provide legal advice, then I'd write an opinion referring to the 105(h) regs - it's not clear from the regs but I agree with you on this point. If you aren't their legal counsel, I'd put your position in writing and state that you are merely a service provider and have no responsibility for any erroneous legal positions that they may take.

It depends on whether the employee's spouse's coverage is individual coverage or family coverage. If it's family coverage then the employee isn't eligible to receive or make HSA contributions b/c the employee has other coverage that doesn't satisfy the HDHP requirements.

As jquazza is pointing out, you're not going to find a definitive answer on this and there are lot's of opinions floating around. In general, I agree with jquazza's general premise -they are new employees to A and are therefore NHCEs in the first year unless they are more than 5% owners. However, there might be a distinction here (and it's not clear from the facts exactly what is going on with the plan year). But, if you are testing for the period beginning 10/1/03 to 9/30/04, then for the period 10/1/03 - 12/31/03 they were not employees of A. Thus, I would argue that if they were HCEs with B for that period, I'd continue to treat them as HCEs for the entire 12 month period. Is that correct? Who knows - I just have a problem arguing that it's a resonable interpretation of the rules where B's plan is merged into A's plan in the middle of B's plan year. Had there been a short plan year under B's plan prior to the merger (i.e., 10/1/03 - 12/31/03) then I'd feel more comfortable taking the position that they are all NHCEs under A's plan.

I've heard the same thing as Blinky - the schedule applies to the source. Thus, once they are 100% vested, they are 100% vested in all old and new contributions. Yes, if you could do it in 2 plans it makes sense that you be allowed to do it one. But, that concept isn't always true. Also, as far as the issue on the source, the only exception I've seen is under EGTRRA. The law specifically provided that the more restrictive matching schedules could be applied to just new contributions. Of course b/c of the administrative headaches, not many people used that provision.

The problem is that contributions might not be allowed to be made to the spouse's HSA. One of the requirements to eligible to make HSA contributions is that the individual generally have no other coverage for amounts below the high deductible. A typical health FSA covers expenses of the participant, the participant's spouse and his/her dependents. This would make the spouse ineligible for an HSA. The way around this is to either drop or modify the health FSA (which generally can't be done mid-year absent a change in status). If the spouse has inidividual only coverage, the FSA could limit expenses to just those of the participant (i.e., exclude any expenses incurred by the spouse). Or, the health FSA could be a limited one -- no amounts below the high deductible are covered or the expenses covered by the FSA are permissible (preventative care, dental, vision, etc.). Thus, a typical health FSA is problematic when you want to establish an HSA for the participant, the participant's spouse, or the participant's dependents.

I think the triggering event is the termination of the 403(b) plan. I've been reading the comments in this thread and have a few thoughts. It remains to be seen whether the plan document requirement will pass muster. I'm sure there will be a fight on this -- the key issue being whether the Treasury/IRS has the authority to require a written plan (until these regs came out, they consistently said they didn't have the authority). Assuming they can impose a written plan requirement, then the next issue is whether this will subject an employer to ERISA. I'm sure this will be the subject of many a debate (if ERISA does apply, then all of the fiduciary rules would kick in). If both of the above happen, all of you may be correct. Mix it all up and what do you have? Higher admin costs, some plan terminations, maybe lower investment fees, maybe the investment fees stay the same and the higher admin costs are eaten by the investment providers, etc. Obviously, no one knows what the impact will be. However, those who have the "big brother" attitude (e.g., the IRS) think that oversight in this area is long overdue (of course the IRS concern is compliance, not investments). In any event, I think the fireworks related to the first 2 items being fought out will be interesting to watch.

Agreed. But the trick is how to move the child from a "qualified child" to a "qualified relative." By definition, if the child is a "qualified child" (which is based on residency, not support), then the child can't be a "qualified relative."

I think it may be covered by the EGTRRA remedial amendment period. Under Rev. Proc. 2004-25, any new plan established after 2001 is generally covered by the EGTRRA RAP. However, I think you would still need to adopt an EGTRRA good-faith amendment by the end of the general deadline (9/15/04). Also, just because it's unapproved for GUST doesn't mean it's automatically defective.