401 Chaos

We have a company that is considering establishing an intranet or web-based site for providing all of its required ERISA SPDs. This includes various health and welfare benefit plans combined under a wrap document plus it's 401(k) plan. Previously, the company basically prepared paper copies of the various SPDs and then sent a pdf or copy electronically per the applicable ERISA rules so that participants received an electronic copy of the SPD but really had a document that resembled the paper SPD. (Company is aware of special rules required for delivery to those without email / intranet site as part of work functions and need to provide paper copies to COBRA participants and former employees, etc.) The new arrangement--organized by a national benefits consultant--however takes a new format and delivery approach. In essence, it attempts to provide all the same basic content as the old form SPDs but in a "deconstructed" manner. For example, they try and divide up discussion of the key terms and provisions of each of the various plans / benefits. That also has a separate "administrative" and regulations section that gets cross-listed in the separate benefits descriptions and includes the required ERISA rights section and epparently even the general ERISA-required provisions for the individual plans (e.g., plan administrator contact, plan number, plan funding info.) In some ways, I think this approach will be easier and quicker for participants--e.g., if you want to see just the eligiblity provisions for the LTD plan, you can click just on the eligibility bar or button and get a page that discusses only the eligibility provisions without getting bogged down in other details. However, on the other hand, I can see how this approach may deprive some participants of the full info they might otherwise obtain if they had a paper copy of the SPD with a table of contents, etc. that more readily listed out other sections and provisions, including provisions that the participants might not have even been aware of or known to take a look at if they didn't stumble across them in getting to the provision they were looking for, etc. Maybe I'm just too old fashioned but this approach arguably makes the overall SPD more difficult to read and be sure that I've found all the pertinent information when you have to jump from section to section or link to link and might even fail to ever click on or get to the ERISA rights info unless you read all the pages or are otherwise specifically hunting for this. I am curious if others have gone to a similar system? (Seems that others must have as this is product of a national benefits consulting firm.) If so, I am curious if there have been any particular issues or concerns or if this has been an improvement. I also have some specific questions or concerns about this approach that I'd be glad for any thoughts on: 1. What do you do with insured benefits (e.g., group life and LTD) where the insurer typically provides a certificate of coverage with a signed letter and seal, etc. from the insurer per applicable dept. of insurance rules, etc. Do you include a copy of this in the SPD for the insured benefits or is it ok to just provide the general summary info? Have the insurers approved delivery of a scaled-down version? (Note, in the sample I've seen, the pertinent info on the plan and benefits is included but not the typical opening page with the certificate and policy info--it just skips to a summary of the pertinent eligiblity, benefits, claims provisions, etc.) 2. Have you encountered any concerns that the choppy and divided nature of the information may fail to satisfy iwth the general format and content requirements for an SPD--i.e., seems like this may make it tougher for some participants to read the SPD than a paper approach but I suppose an argument may be made by some that this is easier. 3. How do you comply with requests for paper copies or sending copies to those without access to the site. It seems to me ideally a paper version of the SPD in its regular written SPD format really should be provided rather than simply printing out all the various sections related to a single plan or benefit but I suppose simply printing out the intranet content should technically satisfy the requirement. Do you provide copies of the entire intranet site on a CD so that you eliminate the problem re lack of access to the intranet site but also avoid having to print out paper copies? (Note, I'm assuming a participant always has the right to request a paper copy although some without intranet access (e.g., former employees) may simply prefer getting the info electronically on disk.) Do you give such individuals a choice between paper and CD? 4. Do you include the provider list for the health plan on the site or just a link to an external site. I understand per the DOL rules updated provider lists should automatically be made available but seems a link to a continuously updated provider list should satisfy that requirement. 5. Do you provide initial COBRA notices through this site. Don't you still need to send those out by mail when participants' spouses and dependents are included and don't have access to the site? Thanks for any thoughts or insight on this.

Thanks. My understanding is that 2009-92 only applies if the compensation at issue is subject to an Advisory Opinion by the Special Master--e.g., cases of those receiving special assistance under TARP that have their compensation provisions specifically amended or adjusted by the Special Master and so need assurance that the amendments or changes won't cause problems with 409A. I don't know all the particulars of that but it does not appear that the Special Master is likely to grant any particular Advisory Opinion to permit paying out SERP amounts in our case.

Interested in any thoughts or experience with the following situation. Bank has a SERP subject to 409A that provides for accelerated vesting and lump sum payout of benefits upon a single-trigger change in control. Bank is considering a transaction which will result in a change in control. The Bank is a TARP recipient. The transaction would actually result in repayment of TARP simultaneous with or shortly following the CIC transaction. Under the Interim Final Rule (IFR), it appears the single-trigger CIC benefits would be regarded as prohibited parachute payments and thus may not be paid. This appears to be the interpretation even if the TARP amounts were repaid simultaneous with the CIC. Under Section 30.14 of the IFR, the SERP benefits apparently would be ok if they they were double-trigger benefits (i.e., payout upon a 409A separation from service following a CIC). (CIC deal involves acquisition by non-TARP entity so the 30.14 exception would seem to allow double-trigger benefits.) All parties involved here would like to amend the existing SERP provisions at this time to provide for double-trigger benefits as all of the SERP participants are to continue employment. The catch (22) here though appears to be that there is no way to amend the single trigger payout to a double trigger at this time under Code Section 409A. (The deal will happen within the next few months so there is no way to make a subsequent deferral election 12 months in advance of the CIC date--assuming that would work if timing permitted.) As a result, seems the TARP rules prohibit receipt of the accelerated vesting and payout of the CIC benefit in accordance with the existing 409A-compliant single-trigger distribution provision while the 409A rules prohibit amending the payment date to track the TARP rule exception. Has anyone dealt with this before or see some way around we are missing? Thanks.

JMN, Does the provision in your bonus plan document provide for the offset to happen prior to the time the payment would otherwise be made or does it merely contemplate that once the bonus payment is to be made per the terms of the plan, that amount might be offset by other amounts owed to the company? I'm curious because I've always been confused by the offset restrictions. When you read the preamble discussion, it seems to me Treasury's concerns in this area are such that they would have a problem with any sort of offset, even if that only occurred after the deferred comp amount had become due and payable under the terms of the plan and resulted in no ability to manipulate or accelerate timing. But then when you look at the actual regulations, they appear to provide an exemption to the offset restriction of up to $5,000 per year, even if that essentially means accelerating the timing of the deferred comp payment to reach the offset. I'm not sure if I'm reading the offset rules correctly or if this would be the case with your facts but it seems to me that a plan might provide for the settling up of amounts due provided there was no acceleration of the payout under the plan. I have a hard time seeing how the parties manipulate the benefit if the settling up does not happen until after the plan distribution is due. If you tax the full deferred compensation payout to the participant, why would the IRS care if you deduct other amounts owed as part of the final check? Would be delighted for you to confirm that is a correct reading.

Masteff, Thanks very much. The 2 month forward approach is pretty consistent with what we have done as well.

Just out of curiosity, how would the nonelective contributions work in this case. Would they simply be a fixed amount across the board for all? Trying to understand the goal and mechanics here for a 501©(3) that I think may be interested in something similar to this.

Curious to hear what most people see regarding hardships to prevent foreclosure. If you have a participant who obviously is having some severe cash issues, can you provide a few months of mortgage payments once they get in arrears in order to help get them back on track and give some breathing room or does the individual have to be in late payment mode (with foreclosure looming and threatened, etc.) with future months before they can get a distribution for those months. Thanks.

Steverino, Thanks, I think that's a good question and points up some of the issues involved. I guess I would argue in our case that there really may not have been a legally binding right to benefits prior to age 65 since it was completely discretionary and in the control of the company whether or not to make an exception in the case of an early retirement. As J Simmons noted, however, I think the actual facts could color that a good bit depending on what the employer did. Seems as if the final 409A regulations talk about an example of an employer establishing a discretionary bonus for the upcoming year but retaining discretion as to who may get that bonus and in what amount. In that case, I think they basically said there was no legally binding right to the bonus before specific person / amount was named. Also, they seem to carve out from legally binding right those rights which are subject to unilateral reduction or elimination by the service recipient. This isn't exactly the same situation they envision but I think you might could make an argument that there was no legally binding right--i.e., that basically the employer just said that it retained the power to do some different if and when they elected to do that but didn't promise anything. Certainly I don't think an early retiree likely could prevail in court based solely on the language in the plan if they did not receive a reduced benefit. Not sure it is a winning argument but I do think one could be made. FWIW, the employer in this case ultimately decided to revise the plan to remove the early retirement reference. That was not popular with the employees as most felt that they really did have an expectation (if not a clear legal right) to early benefits which is, of course, the very reason for the concern.

Jim and Sieve, Many thanks. Glad to have confirmation that we do not appear to have missed any argument for being able to exclude. 401 Chaos

Just FYI in case anybody has new or different thoughts, based on our research we have concluded that service prior to the effective date of the plan must be counted even for rehires that were not actively employed on the effective date. We looked at trying to stretch the plan provisions to mean the "first hour of service" or employment commencement date starting after the effective date for those not actively employed upon start up of the plan. Obviously that flies a bit in the face of allowing those that were employed on the effective date to get in immediately based on their prior service but we were wondering if that could be distinguished since the applicable employment commencement date there necessarily was the one linking back to their service on the effective date. In Chapter 2, Section III, Part C of Sal's ERISA Outline book, he noties that "All service with the employer must be credited, even service before the plan is established, unless disregarded under the break in service rules (discussed in Section V of this chapter). See IRC 410(a)(5)(A) / ERISA 202(b)(1)." That seems pretty clear but we then considered his example 1 under that section indicating that service may be completed as of the plan's effective date noting "When an employer first establishes a plan, a current employee may already have completed the minimum service requirement" and whether there was meant to be any magic to being a current employee or if that was just part of the facts of the example. We also considered in 410(a)(5)(A) where it says ". . . all years of service with the employer or employers maintaining the plan shall be taken into account in computing the period of service for paragraph (1)" to see if there was any way to interpret that to mean you only had to count service with the company if the company was maintaining the plan during your employment computation period. Again, that sort of flies in the face of immediate eligibility for current employees but we wondered if you could distinguish that situation since service there would necessarily include some point while the plan was in place while looking back to prior service as compared to simply looking or using some computation period ending well before the plan was established. Ultimately, we did not find any support for any of those thoughts and it seems the better argument is to view all prior service with the plan sponsor (and any predecessors or affiliates) as counting toward service. There was apparently some thought by some of our colleagues that the rules might actually permit you to draft a plan that would require all participants to accrue a Year of Service after the effective date and not give any credit to anybody for prior service but that obviously is not what is usually desired and in any event is not the way the volume submitter plan in our case works. Interestingly, several experienced benefit people here and at volume submitter provider when asked this question initially said they were unsure but thought you would not have to count the prior service for those re-hired after the effective date. With the help of the volume submitter's Compliance Department, however, we think we've arrived at a different but correct answer, at least for most volume submitter plans. The fact that many volume submitters and prototypes also permit elections not to have the break-in-service rules apply means this is likely even more of a compliance issue. Wonder how many employers out there never go back to consider prior service for eligiblity purposes with re-hires--particularly those that have some significant gap since their last employment?

OK, that makes it seem a little better I suppose--and hopefully less expensive for the employer to correct. When we've had clear history of the deferral election percentage that was desired, I think we have always historically corrected by providing the full amount as well.

Nice windfall for somebody that is apparently making so much that they don't notice the lack of a 15% deduction from their paycheck for almost 1.5 years, huh?

When an existing company establishes a 401(k) plan, does it have to count service for eligiblity purposes for periods prior to the effective date of the plan for those individuals not actively employed with the company on the effective date of the plan but rehired at a later time? Facts are as follows: Company has been in existence awhile. It sets up a 401(k) Plan effective January 1, 2010. Plan includes basic 1 Year of Service requirement for eligibility. Plan SPD provides that "in determining whether an indiviudal satisfies the minimum service requirements to participate in the Plan, all service the individual performs for the Employer will generally be counted." On January 1, 2010 there are a number of regular employees that have been employed with company continuously for a long time. They all have a Year of Service based on their prior service and begin participating in the Plan immediately. The company also has some seasonal summer employees--some of whom come back and work multiple summers. During the summer, the seasonal employees may work 1,000 hours or more and so would earn a Year of Service for participation purposes. My question is when do these seasonal employees enter the Plan. In particular, if the company had a seasonal employee that worked the summer of 2009 and earned 1,000 hours that summer--does that employee have to be permitted to participate in the Plan June 1, 2010 (upon return for 2010 seasonal work) or does that individual have to earn 1,000 hours in the 2010 summer season (i.e., the first period following adoption of the plan) before getting into the plan? No dispute that the seasonal employee would be entitled to participate June 2011 if he returns in 2011 after working 1,000 hours in summer 2010. Just not sure if they get in right away based on service earned prior to the time the plan went into effect when they were not a current employee on the effective date. (Note, I have also seen plenty of guidance that indicates prior service must be counted for active employees in place on the effective date as well as plenty of guidance regarding the need to track prior service for rehires that previously worked during periods when the plan was in place but this is a different question.) The plan document does not seem as clear as it might be on this point because it speaks in terms of employment commencement dates and tracks eligibility based on computation periods starting on the employee's employment commencement date. The Year of Service definition in the Plan notes that "the initial computation period shall begin with the date on which the Employee first performs an Hour of Service (employment commencement date)." The seasonal folks arguably have multiple employee commencement dates though (i.e., they come and go each year) so question would be which commencement date counts and does first hour of service mean first hour of service once the plan has been adopted. In particular, do we look at the first commencement date beginning after the effective date if the individual was not actively employed on the plan's effective date?

We have an employer with the potential for a number of seasonal / temporary employees that come and go during the year (Spring and Fall seasons). Some of these individuals will likely accrue 1,000 Hours of Service during the course of a 12 month period / Plan Year. The Plan historically has required a Year of Service to be eligible. My understanding of the eligibility rules is that these individuals likely have to be permitted to participate in the 401(k) Plan once they have 1,000 Hours of Service even though they will not be employed on the last day of the Plan Year or work continuously throughout the year. First question, is there any way to generally exclude these sorts of seasonal employees from entering the Plan? For example, the volume submitter plan document includes one eligibility option which provides for "______ (not to exceed 12) consecutive months of employment from the Eligible Employee's employment commencement date. If the Employee does not complete the stated number of months, the Employee is subject to the 1 Year of Service requirement in f. above." My understanding is that this option still may not work to exclude the seasonal employees who come and go and come back under the Plan. That is to say, unless an employee has an extended break in service, service spanning rules could require the period(s) of absence to be counted as eligible service. Does that seem correct? Any way we may be missing to exclude these sorts of seasonal employees from entering the Plan? Second question, the 401(k) is deferral only so no match and thus not that much of an issue to permit the seasonal employees to make elective deferrals if they desire. Employer is thinking about adding a profit sharing contribution to the Plan now, however, and does not want to have seasonal employees receive that profit sharing contribution. Assuming that the eligibility provisions are such that the seasonal employees with 1,000 Hours of Service are in the Plan and assuming they continue to accrue 1,000 Hours in each Plan Year, can the employer impose a Last Day requirement on the profit sharing piece and effectively deny the seasonals a profit sharing contribution? Because of the seasonal periods, none of the seasonal employees would ever generally be working on the last day of the Plan Year (December 31)--although they may or may not return to seasonal employment the next spring.

Just wondering if anybody has any additional thoughts or guidance on this issue. I actually have another similar question that seems to raise some of the same concerns. In this case, employment agreement provides that individual will be entitled to reimbursement of continuation coverage premiums under group health plan upon involuntary termination for severance period of 6 months. As a result, I think the original arrangement / reimbursement plan approach would be exempt from 409A under special rule permitting reimbursement of group health expenses for up to maximum COBRA period. Both parties would now prefer to change the COBRA reimbursement to a straight lump-sum cash payment that would approximate the amount to be paid for COBRA reimbursements but the employee would not be obligated to use it for COBRA or any other medical expenses--can use it for whatever they want and will be taxed on it just like additional cash severance amount (which it is). Because the new payment will be paid in a lump sum at termination / separation from service, that arrangement itself would not provide for a deferral--i.e., it would be paid out within short-term deferral exemption period. Does completely ignoring old employment agreement provision for reimbursement of continuation coverage raise 409A issues here. The switch seems to me to be one of swapping one previously 409A exempt benefit / right for a new 409A exempt benefit. Thanks.

I'm assuming from your post that there is no argument that the lump sum payment was exempt from 409A because it provided for payout within short-term deferral period (i.e., that these amounts were already vested and the lump sum arrangement was intended to provide for 409A-compliant fixed time of payment. If that is the case, seems to me switching over to 4-year arrangement probably would create a violation. I do think though that the 409A preamble or maybe some earlier guidance indicated that the medium of payment did not necessarily have to be fixed as part of the up front terms so maybe you have an argument that you can safely switch from securities to cash if you can get around the subsequent deferral issue?

Any thoughts on possible ways to work the following scenario: Company has long-time employee who has history of going out on disability (STD and LTD) and returning to work. Employee is about to go out on LTD again. Company likes the individual (sympathetic disability issues) but is tired of the back and forth and would like to terminate individual's employment. Company would give individual "severance" amount equal to 6 months salary in exchange for termination and signing a release, etc. Problem is that the severance payment would offset amounts to be paid under the LTD plan so company would like to delay that payment until individual's eligibility for LTD stops. Problem is there is no way to predict when the individual will no longer be eligible for disability. Plan provides coverage up to age 65 if disability continues. In the past, the individual was only on LTD for a few months and that is likely to happen again but there are no guarantees of that so it's theoretically possible (although very unlikely) that the payment could be delayed for a number of years--well past S-TD exemption and separation pay plan exemption requiring payment by end of second year following year of separation. I'm not seeing a clear way to exempt this or make this comply with 409A. Thanks.

No, no discrimination in the usual HCE vs. NHCES sense anyway. I suppose though that it could be discriminatory (or maybe inequitable is the better word) to an instructor who works more than 500 (untracked) hours but doesn't get there under the deemed hour rules. What do you think about Belgarath's notion about this being spelled out in the plan going forward. Seems it needs to be in there. If so, wouldn't the Service's reasoning in the JCEB excerpt present problems in getting that approved (i.e., just because there may be no actual discrimination doesn't mean it complies with all the rules or that the Service may permit)?

The current plan document does not address this in any way. This was done in-house as an administrative / interpretative matter to try and apply the standard hours of service formula to the instructor group. The big problem with that group is that nobody really has an idea how many actual hours they work. Not precisely on point but the following is from the 2003 JCEB Q&As with the IRS: 28. §411(a) – Vesting Service Crediting Method A profit-sharing plan covers only the salaried employees of a plan sponsor. A year of vesting service under the plan is credited for each plan year in which an employee is credited with at least 1,000 hours of service. Since all participants are salaried employees, actual hours of service are not tracked by the plan sponsor. Rather, the plan sponsor credits 40 hours of service for each week a salaried employee is employed. Is this a permissible method of crediting service? Proposed response: No. If actual hours are not measured, one must credit hours based on an equivalency permitted under the regulations. However, under Labor Reg. §2530.200b-3, 40 hours per week is not a permitted equivalency. Rather, under subsection (e) of the regulations, the plan sponsor would be required to credit 45 hours of service for each week for which an employee would be required to be credited with at least one hour of service. IRS response: The IRS agrees with the proposed answer. A sponsor cannot do “do-it-yourself” equivalencies. The DOL equivalency rules are the only permitted exception to counting hours for plans.

Tom, Many thanks. I don't have the exact numbers but the instructor group is heavily NHCEs.

Thanks, I don't doubt that rule of thumb is pretty good--if anything I would worry that it is too low--but I guess my concern in looking at the DOL Regs on hour of service equivalencies is that a plan sponsor has to follow one of the set formulas there if it doesn't actually count hours and that what the university is doing does not follow those. If they actually counted hours, I bet things would work pretty close. However, if you use one of the DOL formulas and have to count an instructor that only teaches one class but works continuously throughout the year, wouldn't you end up with more credit under the DOL formula than under the university's formula.

Mike, Thanks for the response. FWIW, I don't think this is a governmental plan as it is a private university. As to whether this provision keeps people out that wouldn't otherwise be included, I would not think so but that is difficult to answer under the current regime because the instructors do not track their actual hours worked. The 2 hours out of class for each hour spent in class is apparently an old academic rule of thumb. I suppose it is possible though that an instructor who teaches several classes may actually not work the required hours if he just "wings it" on the prep (or has a lot of teaching experience in that area, etc. and so doesn't have to prepare much) while an instructor that only teaches one class but hyper-prepares, is new, etc. could go over the required hours if actual hours were tracked but fall well short under the deemed hour approach. Thanks.

Can a plan sponsor craft their own rules for counting Hours of Service under a 401(k) Plan? In this case, the plan sponsor is a university and has historically permitted instructors (similar to adjunct professors) to participate in the 401(k) subject to the plan's 500 Hours of Service requirement. Instructors are paid based on the number of classes (and class hours) they teach per semester. The university has historically tracked instructors' Hours of Service for 401(k) Plan purposes by crediting them with 2 Hours of Service for each 1 "hour" (really 50 minutes) spent in class. Thus, each hour taught by an instructor results in 3.0 Hours of Service (1.0 hour for the in-class time plus 2.0 hours of prep time). Based on a quick read of the regulations, it does not seem to me that a plan sponsor can craft it's own system for crediting service or establishing Hours of Service equivalencies. Am hoping I am missing another way to think about that. Thanks.

Harry O, Was just curious if your post should be read to suggest that 1.409A-3(i)(5)(iv)(B) is not available at all in this situation or just intended to suggest that it would not provide a complete fix for any SERP benefits that are already vested? Thanks

Thanks to all. I have been trying to figure out exactly what Treas. Reg. § 1.409A-3(i)(5)(iv)(B) really means in this particular context. It seems to me there may be reasonable argument that this permits an amendment of the single-trigger SERP rights to basically keep the regular vesting schedule (and thus continued service requirement) in place after a CIC but with a new right providing for accelerated vesting and payout upon an involuntary separation from service. Not completely comfortable with that but I'm wondering what 1.409A-3(i)(5)(iv)(B) is intended to provide if it would not permit some relief in this context, at least with respect to amounts not already vested. Harry O, I'm not sure from your post whether you think 1.409A-3(i)(5)(iv)(B) would not be available to help at all with the SERP piece or would just only be available to help with the nonvested portion?