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Ultimately it depends on the language in the amendment. Many plans state that when there is a change to a new vesting schedule, it only applies to those participants who have an hour of service after the effective date of the amendment. For example, look at the EGTRRA good-faith language issued by the IRS which does this with respect to the change in the vesting schedule for matching contributions. As mentioned, if you are you changing to a less favorable schedule, those with 3 YOS have the right to elect to stay under the old schedule - but that's not really the issue here.

It really depends on how the LLCs are treated for state law purposes. You indicate that the individual LLCs are disregarded, but I'm not sure what you mean by that. Just b/c they are a controlled group for plan purposes, doesn't mean they are disregarded for purposes of state law purposes. If state law doesn't recognize these individual LLCs as separate legal entities, then they don't need to adopt the plan. Otherwise, they need to adopt it the plan.

I would think the ASG ruling could still be relied upon providing there haven't been any changes to the facts. But, I can't point to anything confirming this. Also, one consideration regarding the timing of a filing (if you decide to file). I agree that b/c you updated before the end of the unextended deadline, you are not required to submit. However, if you decide to submit and you want a retroactive letter covering GUST, then you need to submit by 9/30/2003 which is the extended deadline. In other words, if you submit after 9/30/03, you would only have a letter that would apply to the current year of the submission (and possibly the prior year if you submit by the due date of the employer's tax return for the prior year). But, that's about as far back as the letter could cover, whereas if you submit by 9/30 the letter would go back to 12/94 (the beginning of the GUST Remedial Amendment Period).

As long as it is only offered to NHCEs, there is no problem. You'll pass the ACP test and you'll pass the benefits, rights and features test of the 401(a)(4) regulations.

Are they auditing cafeteria plans? I"ve heard of a couple of situations that arose on a corporate audit where the cafeteria plan was briefly looked at. But, I haven't anything recently about specific audits on cafeteria plans.

JerseyGirl, I think several laws have been proposed to change the rule for OTC drugs. Personally, I'm not advocating one position or another. I'm just looking at the statute which provides that OTC drugs aren't reimbursable. I agree that as a TPA you need to administer the FSA in accordance with the law. But, I wouldn't be so quick to call it a loophole. I realize that most TPAs will just use the EOB from a hostipal bill and will reimburse expenses that aren't covered. However, I have a question for you or anyone else handling claims from hospitals - I'm asking b/c I don't know how it's handled in practice. When a hospital bill is submitted to an insurance company, does the insurance exclude the OTC drugs? I know that a hospital bill is rarely paid at 100%. The EOB will indicate what portion when to a deductible, etc. But, do you really know from the EOB whether OTC drugs were paid or whether they were somehow buried in the other non-covered expenses? Again, I don't know the answer to this. But, I'd be interested in comments on this. If the insurance company does reimburse you for all or a portion of OTC expenses, then arguably those amounts should be included in income (and I know that's not happening). So, perhaps there is some other provision in the Code that allows these to be excluded that I'm not aware of. If there is no other provision in the Code (and I'm fairly confident there isn't), then if an OTC is buried in the expenses but isn't paid by the insurance company, I wouldn't consider reimbursement based on the EOB as a loophole. Rather, I'd say that relying on the EOB would be improper. I know that from a practical standpoint, neither you nor any other TPA is going to change the way EOBs are relied upon. However, there's nothing in the 125 regs indicating that you can rely on an EOB. I think amounts that are applied to a deductible are safe - b/c to be applied to the deductible they must both be a proper medical expense and be covered by the policy. Anything other non-covered expenses could be questionable. To me it depends on how detailed the EOB is on non-covered amounts. For example, suppose I go to the Dr. for massive therapy and as part of that it's suggested that I get something questionable, such as a pool. If I submit that expense to the insurance company I'll get an EOB showing $0 paid. Can you tell from the EOB whether it wasn't covered because it is not a medical expense or that it wasn't covered b/c even though it might be a medical expense, the policy just doesn't cover it? If you can tell from the EOB, then I'd suggest you have a fairly reliable EOB and even if the insurance company happens to treat OTC drugs as medical expenses, it's wrong but even I would rely on the EOB. But, if the EOB doesn't make a distinction, I'd advise every participant to submit every expense to the insurance company - bandaids to aspirin - just to get an EOB showing it wasn't reimbursed by the insurance company. Then I'd submit the EOB to the health FSA and get reimbursed b/c the TPA relies on the EOB. Of course that sounds absurd, but I only raise this point out that reliance on an EOB might not necessarily be safe. I'm not a TPA and I haven't been in the hospital so I don't know how detailed the EOB is.

I would use all of the deferrals but apply the cap on the match (6%) based on compensation from date of entry into the matching component of the plan. I presume from the person was eligible for the match on 10/1/2002 and would therefore only use comp from 10/1/ - 12/31/02 to determine whether the 6% threshold was exceeded (but I would use deferrals for the entire year).

It's option 2. But, it's probably easier to state it as: you're eligible unless you terminate with less than 500 hours. You share if (1) you're employed at the end of the year, OR (2) if not employed at the end of the year, you had at least 500 hours. Once an individual has 500 hours, he or she will share regardless of what happens in the future. Therefore he/she is entitled to share in the allocation for that year. I also agree that it's debatable as to whether you're entitled to share based on compensation up to the date of the amendment changing the conditions. When terminating a plan I think a good argument can be made for that position. But, when the plan is onging, it's tougher to make that argument.

With a cross-tested plan, you are not satisfying 1.401(l), even if you use imputed disparity in testing the plan. Thus, as pointed out, the answer to 3(g) is no.

I'm not pretending to be an expert on labor organizations. Rather, my only point was that the term "union" is meaningless. If you look at the actual language defining the statutorily excludible group under 410(b), you won't see that term used at all. Rather, there is description of employees subject to collective bargaining, etc. (there are various requirements). For example, you can have a union employee who doesn't have "retirement" benefits that were subject to collective bargaining. I don't know if you can have a non-union employee subject to a collective bargaining agreement (but maybe that's possible and that's my point). That's ultimately a labor law issue.

The health FSA plans I've seen don't specify "no OTC." Rather, they just refer to IRC 213(d). And, IRC 213(d) would prevent the reimbursement of any drug that is available in a form OTC. The distinction is drugs vs. other medical items. Looking at MSMA's items, baindaids would be allowed. Ibuprofen and Claritin are drugs - therefore the OTC rule applies. In fact, if you show me a plan that prevents reimbursement for any OTC items (non-drug items), then I'll show you a plan that has an operational violation of its terms. In fact, I could probably find a violation of the OTC drug rule as well. All I need to find is one hospital visit that was reimbursed. I'm sure you can find a charge for a bandaid or bandage (that probably cost $50) or ibuprofin or other OTC pain reliever.

I'm a little confused and am not familiar with right to work laws. But, I don't know how an individual is considered non-union but is subject to collective bargaining. You need to look at the actual regulation in 1.410 defining who you can exclude. They don't use the term "union employee." Rather you'll find it's something like "an employee who is subject to collective bargaining that the Secretary of Labor finds ..". So, don't let the term union or non-union confuse you. Use the actual definition in the regulation and see whether the these individuals fall within the actual language. Please excuse me for being unfamiliar with linking to cites. If I knew how to do it, I'd give you the direct link to the regulation which I know can be accessed through benefitslink.

I saw that in the priority guidance plan as well. I'm not sure what it is they have in mind, but the IRS can't change the Code.

Some prototype plans include an eligibility option of ____ hours of service within ___ month(s), but in no event more than 1 YOS. Right now you stated that the plan has no eligibility condition. If you were to require 100 hours within one month, that would impose an eligibility condition but the employer might be willing to live with that. Of course, if a part-time employee actually completes 1000 hours during a year, then the person would need to enter the plan under this type of condition.

I agree. The person first becomes eligible on July 1st. Also, the other comments here are correct. Under the 401(k) and 402(g) regulations, a one-time irrevocable election made before a person is first eligible is a safe harbor. The election must also apply to all plans of the employer -- even ones not yet established. If someone elects out, the person is treated as not benefiting which could cause a coverage problem if it's an NHCE. The person is not included in the ADP test at all. If you have a revocable election, you run the risk of having a disguised CODA. If the IRS can prove that someone received additional compensation in lieu of an employer non-elective (or profit sharing contribution or whatever in the heck you want to call a contribution other than a match), then it's a CODA. The entire plan could be disqualified b/c arguably all particpants had the right to make such an election. Thus, what you thought were non-elective p/s contributions actually become elective contributions. For whatever it's worth, many prototypes allowed revocable elections. But, the IRS tried to crack down on that for GUST. So, many prototype and volume submitter plans now only contain the safe harbor election. It creates an interesting situation where a plan had revocable elections in effect, and now you want to use a prototype that only permits irrevocable elections. The IRS position is that if you use the prototype, the people with revocable elections now must enter the plan and they don't have the opportunity to make an irrevocable election (because it's past the time they were first eligible). I've seen people attempt to accomplish the same result by excluding individuals from the plan by name (which can be done if you satisfy the ratio % test). Whether this works or not would be based on the facts and circumstances. I was told by an IRS agent (but haven't investigated) that the IRS publication on determination letters states that a determination letter on eligibility exclusions doesn't give you reliance on certain items such as the disguised CODA issue. And, you arguably have the same concern in a cross-tested plan where each employee is in his/her own group. Having a favorable determination letter might not mean that you're safe on this disguised CODA issue. If you have revocable elections or exclude people by name, the point is to not leave the smoking gun on the table. If you ask a young Dr. why he/she wants out, you'll probably get the answer that he/she can't afford it. To me that's a disguised CODA. On the other hand, I've heard of people who think they already have too much in a plan (this was prior to the market correction that has taken place) or b/c of the deductible IRA rules. As pointed out previously, a small allocation of forfeitures can result in a limit on deductible IRA contributions. So, there are legitimate reasons as to why someone might elect out. But, this being America, if I were an IRS agent I'd be very suspect whenever I see someone electing not to receive a "free" employer contribution.

It's open to debate. As long as you aren't trying to use the cafeteria plan as a wrap type arrangement (i.e., so that there is just one "welfare" plan of the employer), I don't think an SPD is required. The reason is because an SPD is only required under ERISA. A cafeteria plan is just a tax vehicle under the Code. It doesn't actually provide benefits - it's just a mechanism to pay for benefits. Since the underlying welfare benefits have an SPD, the cafeteria plan wouldn't need one. Of course you still need to communicate the terms of the cafeteria plan to employees and many people use an SPD to accomplish that.

I can't confirm whether the IRS will accept a photocopy or not. But, since the IRS isn't auditing cafeteria plans, it would seem the most likely place this would come up is on an audit of an individual's tax return. And, unlike a health FSA, for deduction purposes it's based on when the expenses are paid, not incurred.

I'm a little lost on this one. I don't understand jfp's first 2 points, but agree with the third one. Here's my view of the situation. Section 129 allows an employer to provide dependent care on a tax free basis to employees. Section 125 provides that employees don't have an inclusion in income solely b/c they have a choice of cash or a permissible tax-free benefit. (Section 129 is a permissible just like health insurance so I was a little confused at the distinction GBurns made). As we all know, having a choice between your full compensation or a non-taxable benefit is a classic 125 situation. And, aside from the 3rd situation mentioned by jfp, I can't think of any reason why a cafeteria plan would NOT be needed. Under the 3rd situation, it's really like salary negotiation. I'll hire you for X dollars. But, if you want a little less than X dollars a year, I'll provide you with additional fringe benefits. That's why jfp referred to "no paper." Employers/employees are free to contract the terms of employment. It's only when you give choices every year that you have potential problems if you don't structure it correctly (e.g., using 125). In this 3rd situation, it would get rather difficult in testing for nondiscrimination under 129. The employer isn't providing the benefit to everyone, and if it's a one time election when first hired, I had have a tough time applying the eligibility tests by using an "availability" approach. In other words, in a 125 plan where 129 is offered, you generally pass eligibility as to nondiscrmination under 129 b/c everyone has the benefit available, regardless of whether they elect it (similar to a 401(k) plan). But, if you're locked out of the benefit after you've negotiated your employment contract, I don't think I could make that argument. It would probably be based on those who actually have the 129 benefit.

I guess I assumed the initial question related to whether the plan document should include a statement that it complies. And I based my response on that assumption. As Katherine pointed out, you do have to explain that you intend to comply with 404©. But, that's for the participants. Thus, while my comments relate to the actual plan document, there are clearly certain explanations and disclosures that must be made to participants - either in an SPD or other material. I'll leave my comments to that. No... I guess I can't. I agree that the regulations state that all the requirements must be satsified to have compliance. But, that doesn't necessarily mean a court can't disagree with the DOL regulations. While we know bad facts make bad law, every once in a while good facts make good law. Personally, I'd be happy if the only item not satisfied in the list of requirements is that directions went to a nonfiduciary agent of the fiduciary (based on instructions provided by that fiduciary). Of course it would be better to ensure I satisfy that requirement as well. But, some say that it's impossible to have total compliance with 404©. I guess now that I've started...I like directing my 401(k) account, but I wouldn't lose any sleep if my employer eliminated that option. Personally, I think participant direction is bad for participants and potentially increases employer liability. But, our industry has evolved into what it is so it's here to stay... at least until we start getting some good litigation.

I sort of think of those 2 as one item. If a participant sues, the first step is to attempt to prove 404© compliance. If you have complied and satisfied your other duties (such as monitoring the investment choices that were made available), then the fiduciary has protection from loses attributed to a participant's direction of investments. If there is no 404© protection (either the fiduciaries don't claim it or they fail to prove that have complied), then you go to the next step whic is attempting to determine whether there was a breach of fiduciary duty. That depends on the usual standards of diversification and prudency. Some plans contain language that the fiduciaries "intend" to comply with 404©. That would presumably be a defense if the IRS or DOL were to claim you failed to comply. I guess there is no harm including such a statement in a plan. However, it's also not clear that it helps.

I've never been comfortable with page replacements (mainly because I just don't understand how it works in operation - e.g., what happens to the original page and how do you deal with the effective date). However, there is nothing mandating a restatement for every minor amendment. While it may not be on point, look at the tack-on amendments we've already had to do for EGTRRA and 401(a)(9). I know those were mandated by the IRS. But, the point is you won't find anything dictating a restatement -- other than a rule in the determination letter rev. proc. (I think it's 2003-6) that if you have more than 4 amendments you must restate.

Yes, I think it should include that amount. The note being held by the plan is an asset of the account. Where you need to be careful is under the 72(p) regs regarding the repayment period. If the original loan is extended beyond the intial 5 year period, then both loans (the old one and the refinanced one) are treated as outstanding at the same time in applying the loan limits.

As Chris stated, ANY change destroys reliance. Once you no longer have reliance, you must submit the plan for a determination letter if you are using the GUST extension to update. Also, while I would take the position that Chris has taken regarding the addition of different classes, I could certainly make an argument that merely adding additional classes because the approved plan didn't include enough isn't really a modification. Again, it's an argument and to be safe, I'd submit. Where a minor change will make a difference is that if you must submit, if the change is minor then you can still qualify for the lower user fee (generally $125). If the change is major (in the eyes of the IRS), then you have to submit the plan as an individually designed plan. Also, keep in mind that under GUST, there may not even be any user fees for certain small employer plans.

The answer to the initial question is you can't have a change in status based on an anticipated event. The event must occur. Also, even if this were allowed, arguably the husband didn't elect to be in the plan until after the even so the prior expenses wouldn't count anyway (as already pointed out by others).

I'm sorry that I don't have the specific cite handy. But, there is a 1961 Revenue Ruling permitting an employer to pay for an employee's separate policy without an inclusion in income of the employee. The employer can either reimburse the employee (proof of payment of the premium by the employee would be required) or the employer can pay the premium directly to the insurer. That ruling just deals with the exclusion from income of amounts an employer pays on behalf of an employee for health coverage. But, the thrust of IRC 125 is that it just provides for the exclusion of income where an employee has a choice of taxable comp (salary) or a tax-free benefit. You have to look for the sections of the code that permit tax-free benefits to be provided and then determine whether 125 specifically prohibits it in a cafeteria plan. Fortunately, there is no restriction on the payment of health insurance. Thus, the 1961 revenue ruling would allow an employee to exclude amounts for individual coverage. While I can argue with the IRS position on the payment of premiums from a health FSA, it has been acknowledged by the IRS that you can set up a separate premium payment account for the individual policy. Thus, an election is made for just that insurance. If the person drops the policy, then any unused amounts can't be used for other medical expenses. Having stated that, it's not a very common provision, especially if the employer already offers group health coverage. I can't rattle off all of the concerns but here are some reasons why it's probably not worth messing with: 1. You either have to pay the insurance co directly or handle it like a reimbursement account. If there are many employees, this is an administrative cost you need to be aware. 2. HIPPA is a big issue. Years ago some Blue Cross plans stopped allowing payments for individual policies to be paid by the employer. Remember that to the extent the employee excludes amounts through a cafeteria plan, it's an employer provided benefit. If 2 or more individuals elect the same individual policy and the employer is paying the premium (directly or through 125), you have HIPPA nondiscrimination rules. The insurance company might not be able to deny the 3rd person (who has cancer and is uninsurable) the coverage. 3. Again, it's employer provided so it's not clear if ERISA applies. 4. COBRA might apply.