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You raised a lot of issues in this one posting. A few thoughts - if you have a safe harbor match, then presumably you are satisfying the ACP test safe harbor so I'm not sure what you mean about testing all matching contributions. If it's not an ACP safe habor plan, then I agree that all matching contributions are tested in the ACP test - it doesn't matter that a match is being made on a catch-up contribution, it's still a match that must be tested. You can only charchterize an amount as a catch-up if a limit is exceeded. So, if you have a payroll based plan imposed limit, someone who defers a large % in the earlier months might have a portion be treated as a catch-up. At that point, you know you have a catch-up and you don't fund the match. Unfortunately, many plans impose a deferral limit based on the full year (e.g., you can only defer up to 6% of annual compensation). In that case you don't if the plan imposed limit was exceeded until the end of the year. Thus, if you are matching throughout the year, you may find that some deferrals were matched and at the end of the year you find that they were catch-up contributions and shouldn't have been matched. That's an operational violation. The same could happen where someone defers below the plan imposed limit but you exceed another limit. For example, if it wasn't an ADP safe harbor plan, then you can have amounts recharchterized as catch-ups after the end of the year. If these amounts had already been matched yet the plan provides for no match on catch-ups, then you have an operational violation. You may be able to self-correct under EPCRS, but that only works once (b/c you need to have procedures in place to prevent it from happening again). The key is that if you don't match catch-ups, you should only be funding the match after the year is over. I don't think you'd have a problem with the ADP safe harbor if you don't match catch-ups (i.e., I don't think NHCEs are precluded from deferring the maximum amount that is matched).

Actually, this is a very confusing area at best. You can't reimburse premiums from a health FSA per 125 regs. (even though I think the regs are wrong I would still follow them). But, the reg doesn't prevent a separate "premium payment account." I think the insurance in your case is a legitimate medical expense. The key is if you had expenses over 7 1/2% of adjusted gross income, would the premiums be deductible. They are for a dependent and I think they would be deductible. That means an employer can reimburse an employee or pay the premium directly on behalf of the employee and it would be excludible from income. I'm pretty sure the cite for this is Rev. Rul. 61-102. If an employer can pay it outside of the plan, then it can be provided through a cafeteria plan. And, it can't be paid through a health FSA. So, you would have the employee elect to have salary reduced just for the payment of this premium (i.e., a premium payment account is set up). If the employee wants to drop the insurance mid-year, then unless you have a qualified change in status, money is still taken out of pay but the money can't be used for any other medical expenses (otherwise it would be an FSA). I'm not sure about the Medicare insurance. I think you may be correct that you can't run those through a cafeteria plan, but it's not something I typically deal with so I can't tell you for sure.

I don't have the cites handy, but there is an EGTRRA remedial amendment period. For pre-approved defined contribution plans (volume submitters and prototypes), the process of updating plans for EGTRRA will probably begin in 2005, the IRS will take 2 years to approve the underlying plan, and employers will have 2 years to update (it looks like the deadline for employer will be around 2009). For individually designed plans, the process will probably begin in 2006 and employers will need to update based on the EIN of the employer (e.g., if EIN ends in 0 then updates will be 2010, 2015, 2020, etc.). The rules and dates haven't been decided by the IRS yet. Expect more guidance later this year or in 2005. And, you probably won't need to worry about EGTRRA updates for employers until 2006 -- at the earliest.

Unfortunately, there is no clear guidance. The relevant provision in the code is (emphasis added): (2) Key employees In the case of a key employee (within the meaning of section 416(i)(1)), subsection (a) shall not apply to any benefit attributable to a plan for which the statutory nontaxable benefits provided to key employees exceed 25 percent of the aggregate of such benefits provided for all employees under the plan. For purposes of the preceding sentence, statutory nontaxable benefits shall be determined without regard to the last sentence of subsection (f). Harry Becker (of the IRS) has stated over the years that you use the full premium b/c it appears the benefit is based on the benefit attributable to a plan, i.e., the benefit is the coverage which is obtained only by paying the full premium. I know some will say the benefit is the exclusion from income. While that makes sense, one could also argue that if you think that is the "benefit" then the amount someone defers isn't the correct amount. Shouldn't it be the actual tax savings to that individual? Of course no one would apply the test on that basis so the idea of using the full premium does make some sense. I'm not saying it's correct, but hopefully the explanation will explain why you hear different interpretations.

If the RMD amendment was not adopted timely, then you can only correct under EPCRS as a non-amender.

You are correct. A more than 5% owner who is 70 1/2 may continue deferring and receiving allocations but is also required to receive RMDs.

That's a tough question to answer. But, you can never go wrong by requesting a determination letter. I know we're in the EGTRRA remedial amendment period, but if you want some comfort on this one I'd submit now.

I think it's open to interpretation. Literally you are correct - it refers to the "Plan." Whether that term was meant to encompass the component plan concept isn't clear.

I think you can have an irrevocable election for just the match. The person would be a non-excludable employee for purposes of running coverage under the 401(m)component of the plan. Excluding the person from eligibility creates 2 issues. First, you can only exclude someone by name if you pass the ratio % test. For the ABT, excluding someone by name is not a reasonable classification. The other issue is that the irrevocable opt out is a safe harbor (assuming you comply with the other requirements) so that the IRS won't argue that you have a disguised CODA. If you try to make the election effectively revocable (by excluding the person by name), I think the IRS could argue that you have a disguised CODA if the individual has enough control over the employer to get compensation in lieu of a benefit under the plan. Excluding the person is probably safer than having an outright revocable election, but I don't know that anyone can tell you with certainty that you're safe. And, submitting the plan for a determination letter won't help because the disguised CODA issue is an operational issue not covered by the letter.

I tend to agree. The fail-safe is easier to administer but it is less flexible. But, it does allow you to reallocate a contribution. If you don't have the fail-safe and you fail both the ration and ABT, then you must do a corrective amendment under 1.401(a)(4)-11(g). That requires an additional contribution and you can pick who will receive it -- provided you don't pick someone who is not vested. The fail-safe can give an allocation to non-vested participants b/c it's an allocation formula under the terms of the plan whereas -11(g) is a correction to prevent a coverage failure. So, without a failsafe you have broader testing options but have to watch out for the requirements of -11(g) should you end up failing the tests.

As long as at any rate of deferrals, the rate of match for the HCEs is never higher than the rate of match for NHCEs, then I think you'd still satisfy the safe harbor.

It is open to plan design. Either option is technically o.k. But, you do need to be careful if you allow someone to get a reimbursement of expenses "incurred" after termination. In general, dependent care expenses are expenses for child care so that you can work (or go to school). If a person has terminated employment it's possible subsequent child care expenses aren't qualified unless the person has a new job or is a full-time student (and there are a few other exceptions).

Agreed. And, I've wondered how this provision in the rev. proc. would be applied in today's environment (so I'm a little warped). For example, you have a 401(k) prototype plan subject to the J&S rules that has been updated for GUST. You adopt an EGTRRA good-faith amendment. You adopt the model amendment for the 401(a)(9) regulations. You adopt an amendment for the deemed 125 compensation provision. You adopt an amendment to deal with retroactive annuity starting dates. Lastly, you adopt an amendment to deal with the elimination of the reduction in the 402(g) limit due to a safe harbor hardship distribution. Assuming all of the above are required and you do these as separate amendments, do you now have to restate the plan if you submit for a DL? Under the Rev. Proc. yes. Does it make sense? No. I didn't even amend anything in the underlying adoption agreement so why restate it. And looking at it again, a restatement doesn't mean one single document. We know that at the very least the EGTRRA amendment for a prototype must be a separate amendment. Oh well....

I'm not aware of any projected implementation date. Personally, I think it will take quite a few years to get it rolled out.

I would use the effective date of the restatement. You are restating the entire plan so all components should have the same restatement effective date - unless you want a later effective date for a particular provision that you are changing as part of the restatement.

I believe there are a few other areas where it's not clear as well (such as discrimination as to eligibility for IRC 125 - a highly compensated employee is someone who is highly compensated). What's interesting here is that the has come up at all. I presume you are either excluding a group of employees from the health plan or are providing different levels of benefits for different groups.

Unfortunately, I think there is a lack of guidance on this. As pointed out, a plan must generally be for the benefit of employees. Informally, I think the IRS doesn't have a problem if you let someone defer out of the last paycheck (e.g., person terminates and is paid a week or two later for the last week or so of employment plus unpaid vacation). But, if a person is getting severance pay for a long period of time, the IRS informal position is the person can't defer, even though it is reported on a W-2 and may be included in the plan's definition of compensation (and if the plan excludes comp while not a participant, then it might not even be included at all).

I understood that you meant MEWA (I just thought you referred to it as MWA). But, I'm still not sure what difference it makes as to whether it's a MEWA or not. I agree that each of the underlying benefits has its own rules and that 125 is layered on top. There are clearly some benefits where S Corp shareholders can participate but can't use 125 to fund those benefits (e.g., dependent care). I still think that there is no issue for the 125 plan or the underlying benefits if the person participates as a C Corp shareholder - assuming the C Corp has adopted the 125 plan and the underlying benefits. I guess I made that assumption based on the way the question was worded.

I'd suggest that you look at Rev. Rul. 2003-43. In the 2 cases (examples 1 and 3) where reimbursement was allowed followed by a lack of substantiation, the employee is indebted to the employer to repay the amount. That's why the use of the debit card was permitted. And, as pointed out, it's why some people aren't wild about using debit cards for their clients.

I don't understand G Burns' comments. I think you indicated that the C corp has also adopted the plan (it's part of a controlled group). I don't think it matters what the underlying benefits are. Owners of a C Corp can participate in any of the underlying benefits (that I can think of). So, the issue is whether the person can participate as C Corp employee with respect to his C Corp compensation. I think the answer is yes and it doesn't matter what the underlying benefits are. I'll admit, I have no idea what being a MWA under state law has to do with it. Have to defer to G Burns for that one...

I don't see anything wrong with it. You'd have a 12 month plan year beginning July 1st and ending on June 30th.

There is no guidance on this issue. But, for whatever it's worth, I think the individuals in your situation can participate b/c they are participating as employees of a C Corporation.

As Tom pointed out, you don't have to bring everyone in. You can be selective as long as it is nondiscriminatory. You should note that if you are using a pre-approved plan (prototype or volume submitter), then the amendment might destroy reliance unless the amendment is merely selecting options available under the plan. For example, if it's a standardized adoption agreement, you can't bring in just one person unless you modify the prototype - which destroys reliance. The Rev. Proc. provides the plan amendment as a safe harbor. However, it doesn't preclude other correction methods. Many people would provide for a refund of the deferrals and earnings. Since it's not a safe harbor correction method, you never know whether the IRS would accept it unless you file under VCP. But, based on prior experience, the IRS seems to allow this as a correction method.

Rather than create a new plan, just spin-off the plan from the multiple employer plan. You need a separate plan document, but by structuring it as a spin-off you can see that what you want to do is permissible. It's the same plan with respect to that employer for the entire year - it's just that two different documents were used for each half of the year.

I don't understand the facts that you have. However, you raise a good question - what happens if you fail to meet the HRA requirements? The worst case scenerio would be an inclusion in income and all applicable payroll taxes. The employer would still get a deduction b/c it's compensation.