401 Chaos

I do not specialize in this area and am not sure I follow what you mean by the fact that "they can choose between both pre-tax and after-tax benefits" but I do not believe the 125 rules pose a problem to what the employer desires here. While 125 plans can and often do allow for cash-outs, I am not aware of anything in the 125 rules that require that all (or any) employer amounts be subject to cash-outs--only that participants have an ability to elect between deferring a portion of their salary to purchase benefits under the plan or taking those amounts in cash. Under Code sections 105 and 106 seems an employer could pay for medical care / health insurance premiums on behalf of the employees without raising compensation / tax issues so I suppose they can do so through by way of contributions to the cafeteria plan without raising cash or deferred questions provided the employee is given a choice as to any salary deferral amounts. There are many variations on employer contribution arrangements which do not provide for cash-outs. Some plans, for example, provide "flex dollars" that allow all participants a set employer contribution amount from which to buy any of the various benefits offered under the plan (group health insurance, dental, vision, group life insurance, health fsa, etc.) with any amounts not used either forfeited or going automatically to a Health FSA which, by definition, is subject to the use it or lose it rules. That gives all employees the same amount but maximum flexibility to alter benefits for their particular situation. Or, as mrobets notes, the employer could design the plan such that all employer contributions go toward purchase of specific, limited benefits and remaining amounts pass to the FSA, etc. This is particularly popular for very high deductible health insurance arrangements where it is cheaper for employers to give everybody a huge contribution under the FSA that can be used to cover deductibles and co-pays, etc. rather than arranging for low deductible insurance for the group. As Pax notes, unused amounts could also go over to a 401(k) Plan offered under the 125 plan; however, I believe there is some authority requiring that 125 plans offering a 401(k) option also offer a cash-out option (see August 1994 IRS Examination Guidelines for 401(k) Plans) thus including a 401(k) option could potentially result in some employees taking unused amounts in cash rather than having the amounts deferred under the 401(k) Plan which the employer does not seem to want to risk. Also, keep in mind that such large employer contributions can change the nature of the Flex Plan for HIPAA Portability compliance purposes.

Thanks, Mr. Butler. I appreciate that there is a difference between the "termination" date and the last day of the plan year. Should I read your response to suggest that you must continue to count service "earned" after the 9/30 "termination" date through the end of the Plan Year for purposes of the 1,000 Hour requirement. That would seem to undercut the very notion that the plan has terminated. Blinky's responses (this one and his helpful response to my earlier post) make sense to me--namely that there is nothing forcing you to prorate or honor such requirements when the plan terminates midyear absent a specific amendment to the plan changing these limits.

This is a question I've had in the past and not been able to find much information so I'm looking forward to the ASPA response as well. Also, what about a 1,000 Hour of Service requirement--any need to prorate that for 3/4 a year if the plan terminates as of 9/30? Thanks.

What about situation where divorce decreee is entered generally discussing wife's right to receive a benefit under the husband's defined benefit plan by filing QDRO with the court. Discussion is not specific enough to constitute a QDRO. Wife dies shortly thereafter without ever getting QDRO. Plan Administrator cannot honor the original decree language because it is not a QDRO nor any later QDRO issued to deceased wife or wife's estate because deceased spouse is not one of the categories of parties for whom QDROs can be issued.

VEBAGURU, Could you expand on the "problems" associated with self-funded VEBA/MEWA arrangements. While I know such arrangements are subject to myriad regulations, reporting requirements, and other compliance concerns, are there new rules or changes that make their existence a problem where you have a legitimate professional / trade association that has established such an arrangement and plays by all the rules? Thanks.

I agree with the others. A VEBA is simply a tax-exempt entity that allows contributions to grow tax-free. A VEBA is not generally funded with pre-tax dollars so "disqualification" of a VEBA is different from disqualification of a qualified pension plan where there are pre-tax contributions that may potentially be kicked out and subjected to income taxes. Employer contributions to a VEBA are generally only deductible to the employer if they are considered ordinary and necessary business expenses under Code § 162 and I believe in certain cases where a VEBA's tax-exempt status was denied (or I suppose revoked), the employers were allowed deductions for contributions provided they qualified under the ordinary and necessary requirements. In short, the VEBA's tax-exempt status is a separate issue from deductiblity of employer contributions. In addition to checking the VEBA documents, also note that Reg. 1.501©(9)-4(d) provides that upon dissolution or termination a VEBA must use all assets remaining afer satisfaction of liabilities to provide--either directly or through insurance--life, sick, accident or other benefits to participants in a nondiscriminatory fashion in order to avoid certain prohibited inurement concerns. I do not know the facts surrouding the disqualification but I cannot imagine the Service allowing the entity to avoid these distribution requirements without additional penalties if the entity was initially intended to function as a VEBA.

Blinky, thanks for your response, sorry for any confusion in the initial post. I do not think 410(b) will be a problem in this particular situation but we'll be sure to check that out before moving forward.

Thanks Blinky. I'm not oppossed to amending the plan as part of the termination but I guess that goes back to my original question. What should such an amendment say--is there a preferred way of calculating such pro-rated allocations? While willing to amend if necessary, the sponsor does not really have a desire to change the plan provisions or to go out of its way to allocate forfeitures to the recent employees without 1,000 hours at the expense of its veteran employees. They simply want to do what is required in the unique situation where the plan is terminated with a short plan year. By recommending that the Plan be amended, are you and Pax essentially saying there are not any special rules governing or requiring the proration of benefits in a termination situation and thus the plan sponsor is free to simply apply the 1,000 Hour rule as of the termination date? What if there were a termination very early in the Plan Year when nobody had 1,000 Hours and thus nobody would technically qualify for forfeitures. It just seems to me there would be some standard prorating procedure to cover such events but I have not been able to find regulatory authority for that. Thanks.

Pax, The Plan is being terminated because the company is essentially going away. The facts regarding the corporate reorganization are fairly complicated but amendment is not an option in this case. Thanks.

I have not had any direct experience in this situation but it seems you could argue that since you could have filed under the DFVC program on February 28 and paid the applicable DFVC penalty at that time that you should be able to file an amended return formally requesting DFVC status based on the February 28th date for penalty calculation purposes. Refusing to allow the use of the earlier filing date would essentially put the DOL in the position of saying they are indifferent between (or even look less favorably upon) having a plan file a slightly late return not formally requesting DFVC status and a Plan making no filing at all for a much longer period even though the later filing complies with all the DFVC formalities. I would think the DOL should prefer more timely filings and should administer their DFVC penalties accordingly. I am not sure the DOL will buy this but it seems it is worth putting the burden on them to justify using the longer period for penalty calculation purposes.

I would appreciate any thoughts on the following. We are preparing to terminate a 401(k) and Profit Sharing Plan that imposes a 1,000 Hour and Last Day requirement in order for participants to receive profit sharing and other benefit accruals. The Plan operates on a calendar plan year and will likely be terminated effective September 30, 2003. Plan will not have any profit sharing amounts this year but will have some forfeiture amounts which are also subject to the 1,000 Hour requirement. Plan essentially provides for immediate eligibility so there are new participants in the Plan that have recently started work and will not have 1,000 Hours upon termination. Some but not all of these new participants would likely have 1,000 Hours by December 31 and thus would share in the regular allocation of forfeitures if the Plan were not terminated. Is it appropriate and/or is there any regulatory authority for prorating the 1,000 Hour requirement for benefit accrual purposes in such a situation so that any participant with say 750 hours at the time of termination (i.e., the plan will have been operated for 9 out of 12 months thus 9/12 X 1000 hours = 750 hours) would receive a forfeiture allocation? Would some different prorated allocation formula be appropriate? Based on a quick glance so far, I note that DOL Reg. § 2530.204-2©(2)© provides that a Plan is not required to take a 12 month period into account for benefit accrual purposes during which an employee has less than 1,000 hours of service. However, given the 100% vesting requirements in plan termination situations, it seems only fair that the 1,000 Hour requirement should some how be prorated but I have not yet found any regulations directly addressing this issue. Thanks in advance for any thoughts.

I have not encountered this before and have never researched the issue but my initial thought is that the HIPAA Privacy Rule would not apply here and the information would not constitute protected health information if the information is received by the employer / 401(k) Plan directly from the participant or source other than a health plan. HHS does not have authority to regulate employers / plan sponsors directly so they are limited to indirectly regulating the flow of PHI from health plans. The pension plan should not constitute a "health plan" for HIPAA Privacy purposes. While HIPAA may not apply, other privacy rules may thus the employer / plan sponsor should treat such information confidentially even if HIPAA does not require it. I also wonder if the Plan could not obtain sufficient evidence of the medical hardship without getting detailed medical information. I am interested in others' thoughts.

Pax, thanks for your response. I did not mean to suggest that they legally could not amend the plan to accomplish what they desire, just that the number and variety of changes make it a complicated matter that can lead to problems if not done correctly. I agree with your advice that they seek professional legal assistance to handle this. I have, unfortunately, seen situations where plan sponsors attempt to make mass changes without professional help by virtue of amending and restating prototype or volume submitter plans and end up in a bigger mess than if they had terminated the initial plan and started over with a fresh plan.

Thanks for the additional info--their proposed plan makes more sense now. I am not aware of any reason why the company could not do the varying rates as they propose.

The pregnancy should, however, certainly increase her doctor visits and overall medical bills.

I also read the question to suggest they will provide retroactive matches on the hourly employees' prior deferrals since they are providing a higher rate for the hourly employees--sounds like the only hourly employees at issue are the ones already terminated. I hate to further the cynicism, but if that is the case and the hourly employees that are to get a greater rate of match have already been laid off and the company (or at least the plant) is going under, it seems like everyone probably has bigger fish to fry than amending the plan for a new match at this point. If I were a laid-off hourly employee I suspect I would much prefer some additional severance amounts, even a minimal amount, than having a match added to my 401(k) Plan. It is my understanding that 401(k) plans can have different rates of match for different groups (types of employees, length of service, etc.) but that these different rates become a separate benefit, right or feature thus requiring each group to pass separate testing. Shouldn't be any problem here but multiple rates can create some additional concerns in some cases.

PJB, not clear that you have to do a new plan but with all the structure changes sounds like you may want to. If the profit sharing piece didn't have a vesting schedule before and the you definitely are doing away with the match I would think everybody is going to have to be fully vested in old amounts so forfeitures / vesting isn't really an issue either route. Although terminating old plan would be a distribution event, it just sounds to me like it might be better to make a clean break even if you could keep the existing plan.

Powers, I assume the client also understands that termination will cause accelerated vesting of all unvested amounts if the profit sharing contributions are subject to vesting schedule. As others note, I am interested to know why they want to terminate and distribute.