401 Chaos

Can a company grant phantom "units" which basically function the same as cash-settled SARs granted with a FMV exercise price come within the exemption to 409A or must they be true SARs?

36+ views and no replies. Can I assume then that everybody is in agreement that there is no real problem or harm to be corrected here? Thanks

Was thinking I had seen this issue covered before but cannot find a discussion of it now. Situation involves recordkeeper error in transferring funds to the wrong investment option. Error is discovered and funds are transferred to correct fund in fairly short order. While invested in the wrong fund, participants accounts earned more than if they had been invested in the correct fund. Is there anything to be done about this? Does it matter how much is involved or whether any of the participants are HCEs? In this case all the amounts that went in were correct, the excess amounts simply came from earnings so not the case that anybody else's account was harmed or that testing should be impacted, etc.

Thanks. I think my original post was both too long and confusing so I'll restate my biggest concern which, after living with this deconstructed SPD for awhile, is still a concern but not sure it's all that big of a deal. Used to be, company provided its SPDs electronically. It's just that each plan had its own separate stand-alone SPD. You could open the document up, hit print, staple the thing together and you basically had a hard copy just like the old days when they provided hard copies to everybody. With new website, the health plan spd and 401(k) Plan spd (among others) are basically all together in different sections. You can click on the 401(k) section and get basic overview of 401(k) (and even print out that whole section) but the required ERISA information and claims information is all sort of jumbled up in a different "ERISA information" section they provides basic ERISA information / claims info with a few notes regarding differences among the different plans. Now when a person wants to read the 401(k) SPD like reading a hard copy version they have to basically go to / click on three different sections of the electronic document. In some ways all of that seems troubling and like a step backward to me.

Thanks. In this case, we're looking at from the participant's (friend of colleague) perspective and employer is not our client so not sure we really care in this instance about what's cheapest or easiest for the plan sponsor (other than we expect that to factor into their response). Individual here is willing to pay in additional amounts that he received after-tax to fund the Roth account to the maximum amount elected but just wondered if there might be thought that the employer should have to cover some portion of this (like when they erroneously exclude an eligible employee making regular 401(k) deferrals.) Employer here initially seems to be shy about doing anything other than switching existing amounts and taking out applicable withholding but that leaves a good bit less in the account than what individual elected.

Anybody worked to correct situation where employee elected Roth 401(k) deferrals for the year but doesn't discover that plan sponsor misread or made a mistake and treated deferrals as regular (pre-tax) deferrals until employee gets their W-2. Seems the regular deferrals for 2010 need to be rechacterized as Roth deferrals but that's going to require putting in some more money in order to get to the full Roth deferral amount that was elected once you deduct taxes from the regular deferral amounts, etc. Does plan sponsor have to make that up entirely on their end or can they request participant to pay the additional amounts they had already elected / agreed to contribute on an after-tax basis. I have not researched but wonder if there is an EPCRS-type solution for this? Thanks for any thoughts or assistance you may provide.

Sieve, thanks very much. The plan does include a provison capping hours of service at 501 in cases where amounts are credited but work is not actually being performed, however, it appears to apply only to vactation, holidays, sickness, disability, lay-off or leave of absence. The back pay provision appear to be in a separate category not capped by 501 hours. Not sure if that is typical or required but based on my reading it seems like we will need to credit full number of hours for each hour covered by the back pay awards.

Thanks very much. That seems consistent with Treas. Reg. § 1.415©-2(g)(8) which provides that "Payments awarded by an administrative agency or court or pursuant to a bona fide agreement by an employer to compensate an employee for lost wages are compensation within the meaning of section 415©(3) for the limitation year to which the back pay relates, but only to the extent such payments represent wages and compensation that would be included in compensation under this section." So, sounds like we are talking about adjustments to both the safe harbor nonelective contribution plus possible elective deferral corrections for two separate years? Yuck!

I have found a few prior discussions regarding how to handle back pay awards in 401(k) plans but none that are particularly current or seem to address all the potential issues. We have a former employee who is about to receive a settlement that will be treated as W-2 wages. The amounts will be paid tomorrow but relate to wages she would have received from both 2009 and 2010. We have a safe harbor 401(k) that provides a 3% nonelective contribution. Questions: 1. I assume the back pay should be counted as compensation for plan purposes and the hours represented by the back pay recognized as hours of service? 2. Assuming the answers to 1 are yes, do we have to recalculate the amounts attributable to 2009 in the 2009 safe harbor contribution or can we simply factor everything into 2010--the year the amounts were paid. 3. What do we do about elective deferrals that would have been possible over this period? If former employee was participating in 401(k) when she left, do we assume that deferral would have continued and deduct these amounts from the settlement award?

I would be interested in any additional thoughts on the comment above about being able to default either the first or second loan in a situation such as this. It seems to me an argument could be made that so long as the first loan is outstanding and the second loan was made in violation of the one-loan limit, then the second loan should be the one to be defaulted. Do the regulations permit a plan administrator to choose among the loans to be defaulted in such a situation?

Thanks. My concern about other terminated participants being upset was really focusing on currently active participants who may later be terminated but not offered the same deal but I guess former employees still participating in the plan could gripe as well. The third point raises lots of concerns because, under these facts, the individual would likely be let go first (and may be gone no matter what). The extra benefits in this case probably function more like severance than a typical window program with the primary aim to reduce a target number of employees but no pre-set determination as to who should take it.

Thanks SoCal. Assuming the AFTAP will permit the amendment, I wonder if you ever see plans and plan sponsors run into trouble doing these sorts of things? Even if that's trouble outside the plan where the special arrangements create a precedent with respect to other NHCEs that may be let go in the future shy of maximum years of service. Also, any reason to worry about this from general fiduciary perspective? Even if the plan can cover the special provisions now, the long-term economic prognosis for the plan sponsor is not great which, in part, led to the prior plan freeze. If I were a participant and found out about a special deal for one individual that potentially left the plan less sound for other participants, it would at least cause me to scratch my head. If I were terminated and didn't get a similar deal, however, I'd really be asking questions I think.

I am looking for guidance with respect to early retirement windows and specifically just how narrowly an early retirement "window" may be under a defined benefit plan. Can anybody recommend a good resource that discusses the various issues or concerns associated with providing early retirement benefits? So far I have not been able to find a detailed discussion in the ERISA Outline book but wonder if I've missed that. What are the issues if a plan wants to basically provide one particuar employee with a enhanced age and service credit (say 5 and 5) under the plan's regular early retirement formula. The participant is an NHCE earning $50k per year. The plan has never provided early retirement windows / benefits before. Plan is currently frozen and basically underfunded.

Thanks very much. I think that is clearly how the plan documents read and, as far as I know, how the plan counts benefit service. I had a friend who participates in a DB plan ask about this and just wanted to make sure I had not missed anything or misconstrued. I'm used to the 401(k) Year of Service requirement where there really isn't typically an ability to accrue benefits prior to satisfying the initial eligibility requirements.

Forgive me if this is an overly-simple question but I do not normally work with DB plans and was asked a question recently and wanted to see if I was way off-base. Individual participates in a DB plan that requires a Year of Service in order to satisfy general eligibility service requirement. The Year of Service requires 1,000 Hours within a 12 month period. That period is initially measured from Hire Date to Anniversary Date with the 12 month period shifting to Plan Year if the individual does not earn 1,000 Hours within the first 12 months of employment. The Plan operates on a fiscal rather than calendar year plan year with 6/30 plan year end The Plan efines Benefit Service and Vesting Service for purposes of calculating benefits as each Plan Year in which an "employee" earns 1,000 Hours of Service beginning with the Plan Year in which the individual was last hired. (The Plan also includes typical Break in Service provisions for crediting prior service following re-employment after Break in Service.) As I read these provisions, it seems an individual could basically accrue 2 Years of Service for Benefit Service / Vesting Service purposes at the point they first satisfy the basic Year of Service eligibility provisions at the point of their 1 year anniversary. For example, PYE is 6/30, individual hired in December 2009 earns 1,000 Hours of Service in first Plan Year they were hired by getting 1,000 hours by 6/30/2010. Individual will not satisfy the basic service / eligibility requirement until the first anniversary of employment (December 2010) at which point they will have worked 5+ months in a second plan year starting 7/1/2010). Is this correct? Are such provisions common in DB plans? I know I have seen DB plans where individuals below a certain minimum age (e.g., 21) get credit for Years of Service with 1,000 hours earned in Plan Years before turning age 21 get credit for those years but not sure I've really dealt with that in connection with the regular Year of Service requirements. Thanks.

Bird, Many thanks. One of the interesting things with the PER arrangement is that you apparently get a W-2 from MBO rather than a 1099 so they in essence have what they describe as a single employer 401(k) plan with 1,000+ participants who are seemingly treated like employees for 401(k) and tax purposes but each have the ability to select their individual 401(k) contribution amounts. Their website describes them as basically setting up a separate division with it's own P&L, etc. for each individual consultant. It just seems strange to me that you could have one single employer plan that in essence seems to permit all these independent contractors to participate and set their own level of participation, etc.

Anybody familiar with MBO Partners (f/k/a mybizoffice.com) and the 401(k) Plan they offer. Based on their website, they indicate they have created a unique sort of set-up for independent contractors and consultants that they call a portable employer of record (PER). Basically if you are an independent contractor or service provider, it appears you can sign up with MBO and have them bill your client, etc. and they will provide you with a W-2 instead of a 1099 for your receipts. They say that basically they establish a separate division or group under MBO Partners for each consultant then the consultant more or less hires themself through the separate MBO division. Of particular interest to me is the 401(k) Plan they offer to their consultants and advertise as one of the key advantages to going with their PER model rather than typical indendepent contractor arrangement. They say that their arrangement / plan will permit consultants to defer up to the maximum annual contribution $49,000 each year. Apparently you make elective deferrals on the employee side and because each consultant is also a separate employing group or division under the MBO Executive 401(k) Plan, the division can also make employer matching and profit sharing contributions (presumably determined on a division by division basis). I'm trying to figure out exactly how their 401(k) plan can permit this and whether that all seems viable. Would welcome thoughts from anybody with experience with this or similar arrangements.

I'm guessing the deferred amounts are already fully vested such that it's not an acceleration of vesting and payout? If the amounts are not fully vested, seems the change in control rules may permit you to revise automatic vesting provisions upon a change in control and thus presumably push back payment.

I think this will depend on the terms of the particular states' continuation coverage rules and/or spousal continuation rules. I may not be following all the particulars here but I wonder if the ex-spouse would not have a separate continuation coverage right under the original plan in which ex-spouse participated prior to divorce (i.e., Company A's plan) per state statutes (as I think would generally be the case under COBRA rules) such that employee's later termination of employment with Company A and subsequent employment with Company B (and employee's enrollment in Company B's health plan) would not have a bearing on the spouse's right to COBRA coverage under the original (Company A) plan?

Interesting discussion. As to Peter's question, I too have only encountered groups that charge a fee (well, actually I think there are several fees for each little service) but they don't base that on the number of disqualified dependents. In actuality, all of the groups I've encountered have generally been fairly participant friendly and helpful in trying to qualify people (assuming it appears they really are married). Off the top of my head, I'm not sure that a plan sponsor would be prohibited from entering into such an arrangement but I'd want somebody to opine on the fiduciary and legal aspects of all of that before pursuing. Regarding retroactive removal, I agree with you on the difficulties with all of that. The programs I've seen generally try to head some of that off by announcing that coverage will stop as of the date (or shortly after the date) of the first notice requesting documentation so that people are squarely put on notice of the need for documentation before racking up additional expenses. I also know employers that are planning on doing these audits that have told their employees about it in advance--including during open enrollment at the end of the previous year--as sort of an fyi / think twice if you are going to be including ineligible dependents. As noted, I'm not sure there is a bullet-proof system unless the employer was to search out / require marriage certificates and then do some ongoing / periodic search for divorce records. With the tax forms, I guess I would expect the most obvious abuse would be that two unmarried people (maybe common law marriage??) would file as married in order to try and get group health coverage notwithstanding the marriage penalty on the tax front. Seems like group health coverage for somebody that is otherwise uninsurable will outweigh any marriage penalty amounts. Lots of employers we've seen only require a copy of the tax forms with no other documentation. I would think a better approach might be to require a copy of a marriage certificate plus one additional source of proof of marriage (which might include federal tax forms). Given that the use of the tax forms has its own pitfalls, I definitely would suggest that an employer provide some alternative documentation options other than just tax forms. Finally, it is not clear to me what responsibilities an employer has to the IRS / taxing authorities and/or with respect to spousal conditions under other plans if it thinks it has clear evidence that married individuals have filed incorrectly. I'd welcome thoughts from others on what, if any, legal obligation an employer might have to pursue and/or report that.

I don't know how it works in a multiemployer situation but the difficult thing to grasp to me is how a regular plan could continue if the owner really is not working at all. (If the plan itself is terminated, so to does the COBRA obligation generally.) I suppose if the owner basically became a passive "investor" or shareholder in the company but the company / employees truly continued working then it would be possible for the owner to terminate but the plan to continue. I'm with Sieve--seems like they have pretty broad ability to define a termination here and could say hours were reduced to zero or whatever. Could I suppose have company provide him an official termination notice of some sort--afterall, if the company is continuing somebody somewhere would need to be able to provide that. Would there be likely pushback on this from anywhere? Seems unlikely anybody would challenge eligiblity for COBRA here where the alternative would be to continue them on regular coverage--i.e., seems like the usual thing you worry about would be the reverse of this where an owner really isn't working sufficient hours to qualify for regular coverage but tries to keep on regular rather than COBRA status.

Interesting and timely post. We've seen a number of folks working through these issues in conjunction with dependent eligibility verification audits lately that seek to review dependent eligibility status and drop ineligible dependents going forward if the requested documentation is not provided. (Sounds a little different than your situation but I think general issues are likely to be the same.) For example, many state health plans are currently conducting or have recently conducted such audits along with private employers. If you do a google searh for "dependent eligibility verification" I think you will get several samples of forms, etc. requesting existing participants to submit documentation as part of their audit. Based on what I've seen, I think a copy of the federal tax form is one of the most common documents "accepted" to prove marital status. Some employers seem to require this alone as your client may be contemplating. Others provide folks an alternative approach. The most common approach I've seen is that the employee has to produce a copy of the most recent federal tax form or (1) a copy of a marriage certificate, and (2) some recent utility bill, tax bill, etc. listing both individuals or a copy of a joint bank statement listing both individuals. Some also will accept copies of current beneficiary designations for say group life insurance or 401(k) Plan benefits that list the individual as the spouse and primary beneficiary of the benefits. My general sense is that none of these approaches are fool proof and each is likely to be somewhat burdensome. I like the alternative of permitting folks to provide something other than tax info for the reasons you suggest. Seems if they are married, they will have to have or be able to obtain a copy of a marriage certificate. The other stuff, however, I think can be more difficult. Particularly the utility bills, etc. which in my family are all just in one name. We do have a joint checking account and we could provide beneficiary info too (which the employer probably already has) but in the end it was easiest for us to provide a copy of the federal tax return. Our audit allowed us to black out financial info, SSN, and other non-critical information. We filed electronically (turbo tax) so in addition to providing a copy of the first page showing both individuals' names, we also had to provide a certificate of electronic filing that listed both names. For folks that do not file electronically, seems they had to provide a copy of the first page and signature page of the form. What we've found in these audits for clients is that, as you predict, a number of individuals have some rather "unique" tax strategies and do not file as married (either jointly or separately) to avoid the marriage penalty or whatever. I'm not sure there are many, if any, situations where it is legal to file as unmarried if you really are married so this does put the employer in a bit of an awkward situation. For those reasons, I think some permitting some alternative to the tax form approach is advisable. In looking at the various alternatives, I've had clients say they feel the non-tax alternatives could be easy to manipulate. For example, some divorced people maintain joint accounts for whatever reason and some also have beneficiary designations with their ex-spouse listed as a primary beneficiary, etc. My response to that, however, has been that it seems to me it would be just as easy if not easier to forge a federal tax return if these individuals were the type that they were already cheating on their taxes--i.e., they could just go get a blank form, black out the appropriate boxes and list both individuals on the fake form and sign (or fake the other's signature). Afterall, the spouse or ex-spouse will have reason to want to do this if they are pretending to be a spouse for health insurance purposes. We've had others suggest that they may allow individuals to produce a marriage certificate and a separate affidavit providing that the individuals are currently married, have not been divorced, etc. and acknowledge that dishonesty with respect to the form is grounds for termination, etc. Perhaps that's another alternative--would be similar to domestic partner affidavit. As noted above, I'm not sure any of these are really foolproof if somebody is trying to fake marital status but your client definitely is not alone in thinking requesting a copy of the federal tax form is an appropriate documentation requirement--and permitting only that option. You are also correct in pointing up that there are likely to be some issues with that, particularly if there are no other alternatives. (You may be surprised with how many folks have a unique interpretation of the marital status for tax purposes.)

Not to hijack this thread but I wonder if I can broaden the question a bit. This comes up fairly frequently but I never am certain I have the full picture of potential issues. Question is basically this, can an employer who generally pays 100% of individual coverage for all employees but requires employees to pay for additional family coverage premiums strike a one-off deal with an employee (in this case the office manager) to basically pay that individual's family coverage premiums as well. Obviously, they are free to pay this individual a greater salary and could do indirectly what they are doing here but would have to gross the individual up for additional taxes if they simply paid him a larger salary to cover the additional family premiums (i.e., they want to save money by paying the family coverage premiums tax free). Are there any ERISA rules that would be violated by such an arrangement? They wouldn't do this via the cafeteria plan or flex credits, etc.--they would just pay the family premiums directly so it's not clear to me that they would be violating the Section 125 cafeteria plan rules but clearly he is receiving greater employer contributions overall.

Thanks. Good point about keeping a printed copy of each version or amendment to the SPD. In answer to your question, yes the website will have a "print this page" feature so it will be possible to print out each page / section and thus I suppose print out and retain a copy of each change to the agreement.

Matthew, Thanks for your comments. Providing online access to full pdf was my first thought as well and that seems to make sense to me. I think that may be possible for the immediate future since they have basically just shifted from old paper forms to online version. However, I'm concerned about future updates as I believe the current thinking / advice they have received is to just focus on keeping the online version updated going forward and if somebody doesn't have access to the website they will receive either a CD version of the website information or, if they really want a paper copy, will basically get a print out of the website information. In short, I don't think the consulting firm really contemplates maintaining / updating the paper SPDs going forward. The insured benefits (LTD, group life, AD&D) will, however, presumably still get printed certificates / SPDs from the insurance company so I suppose those will be available going forward but otherwise I think the plan is to basically just maintain electronic SPD info and print on demand. I think they are concerned that maintaining both the online and paper would be too burdensome as the formatting information between the two is not exactly the same and so updating both for some changes may require more than making identical changes. Any thoughts on that? On a related front, I'm also puzzling over whether or not there is a need to provide the full certificate for those fully insured LTD and group life benefits or might they simply note that copies of the policies / certificates are available on demand and not include on the SPD site all aspects of the certificate the insurer provides to them for distribution? Thanks