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You may also be limiting your correction options. The 401(m) regs specifically provide that NOT making a match is an impermissible correction method. So, should you run the ACP test in May and fail, you are beyond 2 1/2 months (assuming it's a calendar year plan) and you'd either have to make an additional contribution for the NHCEs to pass or refund vested matches to the HCEs and pay the 10% excise tax. The key is that the excise tax applies if you correct by making distributions after 2 1/2 months.

For deferral purposes, the only standard is that the definition be reasonable. It doesn't have to be nondiscriminatory. I don't have the specific cite on this handy - it might be in the BFR section of the (a)(4) regs. While not directly on point, the rule was reiterated in Notice 98-52 dealing with ADP safe harbor plans. The best example I can think of as to why it's just a resonable definition is where employees get tips. You can defer out of cash tips and the HCEs probably have no tips.

There are different levels of testing. For the cafeteria plan, the 25% test is based on all of the benefits. In addition (and not in lieu of), each benefit may be required to pass its own nondiscrimination test. For example, dependent care has separate tests under 129 (a 25% test and a 55% average benefits test plus eligiblity tests). There is no separate test for medical insurance premiums (it's been a long time now, but hurray for the repeal of IRC 89). The health FSA is subjet to 105(h) although the benefits tests is not a problem as long as everyone can elect the same maximum. Nondiscrimination testing for a cafeteria plan is area where IRS guidance would be very welcome.

If you were to give a distribution to everyone in the plan, it would be w-2 wages and I'd do everything to show that it's a bonus. The problem is the DOL technical release 92-01 (I think that's the correct cite) stated that even though you don't have to set up a trust, the amounts are still plan assets. Paying these for anything other than medical expenses or administrative costs could raise some issues. Of course this gets very gray where the assets are commingled with employer assets. It's difficult to trace where the funds went. One option might be for the employer to make an amount available in the FSA for everyone next year. There are other options. I just wanted to point out that there are some issues for you to consider.

You can have a match that exceeds 100% of deferrals. However, that doesn't answer your question, which is a plan document issue. In order to satisfy the definitely determinable allocation requirement, you need to be able to determine how to allocate the forfeitures under the terms of the plan. So, I'd look at the plan language again. If it just states that forfeitures are be used to provide a discretionary match, then I'd interpret that to mean the forfeitures are allocated pro-rata based on all deferrals. But, that's just my interpretation...

I'm sure Harry has said it can be done. You can add the new benefit and have an initial short coverage period for the benefit, but participants can't change any existing elections just b/c of the addition of the DCAP.

I agree with Tom. The IRS is aware of the issue (I know it has come up at various ASPA conferences). They could have addressed it in the proposed 401(k) regs yet they were silent (just like they were silent on the entry date issue when dealing with those under 21/1 YOS). They don't want to address the issue so it's open to a reasonable interpretation of the rules. I don't think you're situation is an abusive situation of changing methods (which is prohibited regardless of when you amend) so I agree with Tom that amending within the statutory correction period is reasonable.

I haven't seen anything addressing it. But, I'd have to say they can't participate in the HSA through the cafeteria plan. I think it's similar to dependent care -- Sub S shareholders can be in a dependent care program outside of a cafe plan but not inside.

mab - To answer your question, the rules on MSAs were not changed to permit them to be funded through a cafe plan. And, you can't establish a new MSA after this year and it doesn't appear likely that Congress is going to extend the deadline. HSAs will replace MSAs.

Not to start up an argument again, but I would reimburse the expense for "clear" braces - assuming the person needed braces in the first place. I'm being consistent with a prior post where I argued that a remote control for a hearing aid device should be reimburseable. If you start getting into the differences of various medical appliances, you'll go nuts. I used the example of the electric wheelchair. Do you only reimburse for a manual wheelchair b/c an electric one may only be for convenience? Or, if someone gets glasses do you only reimburse for plain black ones - wait, those are back in style so maybe you only reimburse for cheap metal frames b/c no one wants those anymore? And, let's not go down the path of contacts or colored contacts... As you can see, it can get absurd. The person needs braces. As long as the expense was for braces I wouldn't question what type or color they are.

My vote - You just have to be in compliance and be prepared to show that you comply should you get audited (which isn't likely to happen).

There is nothing in writing on this. Here are your 3 choices: 1. The amendment must be made before the beginning of the year to which it applies. 2. The amendment must be made before the end of the year to which it applies. 3. The amendment must be made by the deadline for running the test for the applicable year (i.e., 12 months after the end of the plan year). At one point, the IRS informally stated 1 was the right answer b/c of anti-cut back issues. Personally, I don't agree with that. Possibly not everyone at the IRS agrees with that as well. Maybe this is one area where we don't want any IRS guidance. It's open to a reasonable interpretation and I can live with option 3.

What I'm referring to are changes permitted to the plan even though there is no "other" option in the approved prototype. Although, the IRS is supposed to require that there be an "other" for the 417 coordination. The change to the trust/custodial agreement and the 417 override is found in Rev. Proc. 2000-20. Below is Section 5.11 of that rev. proc. dealing with changes to the trust/custodial provisions. The addition of 411(d)(6) language is actually found in the LRMs. I don't have the specific LRM #, but in the section dealing with plan amendments, there is a note to the reviewer stating the addition of 411(d)(6) protected benefits is not considered an amendment that destroys prototype status. As far as reliance, the rules (e.g., Announcement 2001-77 and the later Rev. Procs) specifically refer to 5.11 below so you're safe with that, as well as the 417 override (but have reliance on everything other than the changes you make). It's not clear about the 411(d)(6) attachments although some prototypes specifically include language permitting this so arguably you would still have reliance. There is an old IRS newsletter stating that the use of "other" options does not destroy reliance assuming you follow the parameters associated with the "other" selection. 5.11 Adopting Employer Modification of Trust or Custodial Account Document - An employer that adopts an M&P plan other than a standardized plan (or paired plans) will not be considered to have an individually designed plan merely because the employer amends administrative provisions of the trust or custodial account document (such as provisions relating to investments and the duties of trustees), provided the amended provisions are not in conflict with any other provision of the plan and do not cause the plan to fail to qualify under § 401(a). For this purpose, an amendment includes modification of the language of the trust or custodial account document and the addition of overriding language. An employer that adopts a standardized M&P plan may amend the trust or custodial account document provided such amendment merely involves the specification of the names of the plan, employer, trustee or custodian, plan administrator and other fiduciaries, the trust year, or the name of any pooled trust in which the plan’s trust will participate.

There are a few limited exceptions that apply to prototypes. Some that come to mind: You can add overriding language to coordinate 2 plans for the top-heavy minimums; You can add overriding language to ensure that no 411(d)(6) protected benefits are eliminated, and for non-standardized plans, you can make changes to the trust or custodial provisions. I can't think of any other changes that are permitted.

You are correct. An HRA can't be offered through a cafeteria plan.

I presume you're referring to an FSA as one offered through a cafeteria plan. Otherwise, it would just be a self-funded health plan funded by the employer and the only limit would be that the limit be nondiscriminatory (but there is no statutory or regulatory limit). When offered through a cafeteria plan via salary reduction, once again there is no stautory or regulatory limit. However, due to the nondiscrimination requirement, I've always wondered whether there is a problem where an HCE earns more than an NHCE. If there is no limit on their contribution, the HCE can obtain a larger benefit than the NHCE. Someone earning $100,000 could put in slightly under $100,000 and anyone earning less can't get that same benefit. So, I've always considered the limit to be something lower than the lowest paid participant. That would avoid the above argument. It doesn't mean it's right, but I know you can't go wrong with that approach.

Proration is required if there is a determination period (not a plan year) of less than 12 months. If the determination period is the plan year, then I agree it's the killer if there is a short plan year (which there would here based on the effective date of the plan). But, if the determination period for calculating compensation is the calendar year ending within the plan year, it's not clear (to me) whether there is a short determination period where the employer wasn't in existence for the entire 12 month period.

I agree that if you file with a proposed restatement, you have 90 days after the issuance of a favorable letter to actually adopt it. One point on this. You can adopt (or submit based on the above) by January 31, 2004 and pay the $250 sanction if you were entitled to an extension of the GUST RAP in the first place. In other words, if your deadline was the later of the 2001 plan year or 2/28/02, then you can't use the new streamlined procedure with the lower sanction. You would need to follow the traditional EPCRS process with the higher sanction. If you were entitled to a later deadline (e.g., Sept. 30, 2003 for most plans), then you have until January 31, 2004 to update the plan and file.

The same rule applies to HRAs (i.e., OTC drugs are reimburseable).

If you define compensation as compensation paid for the calendar year ending within the plan year, I'm not sure you need to prorate the limit. I realize the employer wasn't in existence for the full year, but technically you are using a 12 month computation period.

I think it falls within that exclusion. But, the regulation is very vague and I'm not aware of any guidance on this issue. FYI, you could use wages for withholding (rather than W2 wages) and GT Life over $50,000 would be excluded.

Somewhere in Rev. Proc. 2000-20 (I don't have it in front of me) it will state the IRS is not supposed to issue an opinion on a prototype plan that permits multiple employer arrangements under 413©. But, IRS reviewers are only human and mistakes are made. So, it's possible you may have a prototype that permits multiple employer plans. You need to look at the terms of the prototype. And, even if it allows two unrelated employers to adopt the plan, you need to be careful in operating the plan in compliance with 413© - more than likely the prototype won't map out the rules for you because it was a mistake to permit the multiple employer plan in the prototype in the first place.

I agree with the prior posts that a 401(a) plan is the term used for governmental plans that aren't subject to ERISA. However, one thing that has confused me is that many of the 401(a) plans have employer pick-up provisions under 402(h). The plans provide for mandatory employee contributions and the employer picks these up so that they in essence become pre-tax contributions by the employee. It sounds very similar to a 401(k) or 457 arrangement.

I'm also not aware of any guidance on this issue (but that's not a surprise). My personal opinion is that the person counts. My reasoning is the situation where the person actually did participate in the DCAP. It's hard to argue that the amount put into the plan is totally disregarded b/c the person terminated employment. If you agree with that, then to be consistent, it would seem that a terminee is counted regardless of whether any benefit is elected under the plan. But, due to the lack of guidance, any reasonable interpretation of the rules works.

As pointed out, there is no deadline because filing is optional in your situation. However, it is advisable. And, in order to get a retroactive letter covering GUST, the submission should have been made by the later of 2/28/2002 or the last day of the plan year beginning in 2001. However, for the plan established in 2001, I think you could use the general remedial amendment period and file by the due date (plus extensions) of the employer's fiscal year beginning in 2001. For a calendar year plan, that would give you longer than 2/28/02. Of course, regardless of the plan year/fiscal year, the deadline for getting a retroactive letter has passed. You could file now, but you'd only get a prospective letter and you'd need to be prepared to explain to the IRS reviewer why you weren't required to get a letter earlier.