401 Chaos

Am hoping those with more DB plan experience may be able to help. Details are below but the basic questions are: (1) how easy is it to get waiver of excise taxes for a late 204(h) notice if you provide participants the additional benefits as if notice was timely sent and (2) if that's not easily done, can you rescind or revoke prior plan amendment (freeze) and just provide additional benefits due through present, amend / terminate with proper notice now, and avoid excise taxes where that ends up a cheaper fix than paying the excise taxes? We have a new client with large cash balance plan. They adopted an amendment to do a hard freeze last year. The 204(h) notice was sent to participants 23 days before the freeze took effect. It appears the actuary thought the 204(h) rules only required 15 days' notice and was unaware large plans had to provide 45 days' notice. This is not a situation where any exception to the general 45 days' notice appears to apply. Employer relied on actuary for advice and guidance on the freeze but is not necessarily looking to recover against the actuary. Just trying to address and move on. This has come up because the company is about to be sold and the plan will be terminated in connection with the sale, etc. If I read the 204(h) rules and regulations applicable on or after June 7, 2001 (and Sal's interpretation), it appears the freeze amendment can stand but significant excise taxes will be assessed at the rate of $100 per day per missed individual for each day of noncompliance. Where the notice was sent to all applicable individuals on the same day but was sent 22 days late, that would result in an excise tax of $2,200 x the number of individuals receiving the notice. Assuming round numbers of 250 people, that would add up to $550,000. Perhaps an argument could be made to waive the excise tax if the Treasury Department determined that the employer did not know the failure existed and had exercised "reasonable diligence" to meet the notice requirements? I've not researched but a complete miss on the basic timing rule would seem tough to argue reasonable diligence although the employer had no clue of the issue until now. At the very least, hopefully the annual $500,000 cap on "unintentional failures" could apply? Welcome any thoughts or suggestions on arguments on a waiver or possible reduction of excise taxes and how that normally plays out. For example, does one have to submit a PLR requesting waiver due to reasonable cause and not willful neglect to get clear IRS response / waiver or is it possible to get relief for an "unknown failure" (See ERISA Outline 3B.644--5.b.1) without having to actually submit a PLR reasonable cause request? Part of our issue here is needing to reach clear result and clear up for the buyer in the sale without leaving open issue and future audit risk. In addition to the excise tax issues above, what if the employer is willing to concede the late notice was an "egregious" failure such that the freeze cannot take effect until everybody has at least 45 days notice? For example, what if the employer gives everyone an extra month of benefits beyond the original freeze date to make up for the 22 days the notice was late? It seems like that is possible under the current rules as an alternative to any argument the attempted freeze is completely ineffective? And if the failure was truly "egregious" it seems like that extra benefit accrual is arguably required? As I understand the rules, however, giving folks the extra month of benefits would not eliminate the excise taxes as those apply in addition to the potential for accrual of additional benefits? See ERISA Outline 3B.666. Seems that means you cannot simply "buy your way out" of the excise taxes (at least without some waiver by the IRS) in these situations by making up benefits over the missed notice period? In this case, the extra month of benefits would only be ~$50,000 but the excise taxes may be $500,000. Perhaps there is an argument the plan could stick with the original freeze date and avoid not having to give the extra month of benefits (i.e., they could argue the failure was not "egregious" under these facts) but the excise taxes still apply. If they have to pay the excise taxes, the additional month of benefits is not that huge of a deal though. Which brings me to our other question--can the plan just revoke, rescind, or otherwise completely ignore the prior 204(h) notice and attempted plan amendment / freeze as ineffective, give everybody the additional benefits that would have accrued through the rest of 2020, and thus avoid paying any excise taxes? Is that possible or are they clearly stuck with the excise tax issue in all cases because of the attempted freeze? If they went ahead and honored the additional benefits accruing during the last part of 2020 as if no freeze had been implemented, that should be significantly cheaper than the excise taxes due given the number of plan participants. They could then go ahead and proceed with a termination of the plan quickly now before anybody accrues anything in 2021 and come out cheaper than paying the excise taxes. That doesn't seem exactly right but they would much prefer to give extra amounts to participants than in excise taxes. Thanks.

Thanks, Alonzo. Just to be clear, my understanding is the set up fees and monthly fees to be paid by the company here are all in addition to regular COBRA premiums passed on to participants. I suppose if all COBRA participants in the regular course trigger the $75 monthly fees then maybe that is arguably part of the employer portion of regular coverage costs that arguably could be passed along as part of the employer portion of regular coverage costs but the PEO does not seem to be looking to participants to pay that monthly fee. I have a hard time squaring the $500 set up fee, however. It seems that's only possible under the COBRA rules if the PEO can legally argue that it has no obligation to extend COBRA coverage in cases where the client organization disappears and/or drops participation in the PEO and its group plan.

Just a follow up on this situation. We have confirmed that the arrangement here is a true PEO type arrangement with the individuals treated as W-2 employees of the PEO. It appears the PEO's proposal assumes a Chapter 7 with the company going away and appears to reflect a willingness by the PEO to provide COBRA continuation coverage under the PEO's plan even though the company has gone away and no longer an active participant in the PEO arrangement. Presumably the PEO takes the position that they would not be obligated to provide COBRA coverage in a Chapter 7 unless the client organization provides for the $500 per employee set up fee and the $75 monthly administrative fee up front. I suppose a company might make a reasonable argument for that expense in a bankruptcy context if COBRA were otherwise unavailable. I wonder, however, what the legal basis for the ability to deny COBRA coverage to the PEO's own employees (co-employees) without added administrative and set up fees. I assume there is some solid legal basis for this position but it seems troubling to me, particularly where a company on verge of Chapter 7 is required to pay all these up front costs for employees to receive any COBRA. It's unclear to me whether the employees themselves could pay these added fees rather than the employer in order to receive COBRA coverage. If that is legally possible for the the PEO to do (which I guess it must be), then I suppose this is all helpful and favorable but, on the other hand, I question why the PEO would do this ever in a COBRA context with the risk of adverse selection. I assume they must come out ahead financially at this cost level? Apparently in the normal (non-bankruptcy) context the PEO will provide COBRA coverage without the $500 set up fee but still charge the $75 monthly fee for COBRA participants. Under the company's regular arrangement with the PEO, they are to pay a $200 monthly fee for each active employee so the $75 monthly fee reflects a reduced charge given that the PEO is no longer receiving the full fee. This is apparently the same approach the PEO would provide in a Chapter 7. Just curious if this seems standard or typical and, if so, if anybody is aware of how the PEO legally justifies these additional fees in a Chapter 7 context? Seems a good argument could be made that the COBRA beneficiaries are the PEO's employees for COBRA purposes, their employment is being terminated so they have a COBRA qualifying event, and the group plan providing coverage (i.e., the PEO multiple employer plan) continues even if the client organization ceases to participate / exist. Thanks.

Thanks, Alonzo and Luke. Regarding Alonzo's question, we understand the employees are employed in the name of the PEO but still trying to determine how COBRA has been handled in the past--apparently there may be some gaps in their compliance with proper COBRA notices and a number of years when they were below federal COBRA requirement. Luke, nothing ceases to amaze me with PEOs anymore. I feel they operate outside the law on a lot of fronts--not above the law but maybe below it! I've not had this exact situation with the bankruptcy aspect before but recall some other situation where the company was involved in an asset sale and winding down or something similar and there was a willingness to make COBRA available (really they had to it seems) but the way they calculated the rate was very suspicious and just led me to conclude they were really under-pricing group health premiums as part of the regular bundled package prices or were otherwise taking a strange and less than transparent approach in how they set COBRA rates. I'm with you in wondering why their operations are not under intense regulatory scrutiny. Or some class action lawsuits.

So, small client has benefits through a large, national PEO. Things are not going well for the company and it is facing bankruptcy. Unclear at present if that will be a Chapter 7 or Chapter 11 and whether some employees will remain on staff to wind things down for a short period, etc. but likely to involve terminating most employees in a few days. Client asked PEO about COBRA in the event of bankruptcy and was told that "PEO is willing to offer COBRA for a company in bankruptcy if the fees are all paid upfront. Fees would be $500 per employee as a set up fee (presumably for all current employees whether or not they elect COBRA) and then $75 per month per employee. All amounts to be paid up front with any unused amounts returned if someone doesn't sign up for COBRA (or takes less than 18 months). Again, all of this appears to be by way of COBRA / administration fees just to get to point of employee being able to pay regular COBRA premiums. Does this make sense. I suppose at one level it might be generous if we assume some complete liquidation and this envisions allowing employees to participate in the PEO's multiple employer plan even though client no longer exists and no longer participates in the group health plan. On the other hand, it seems strange to me for the PEO to be saying it is "willing" to permit COBRA coverage and then to assess some employer administration fees to make that happen. What if they are trying to reorganize and a handful of employees stay on to help and the company continues the group health plan participation but just for those few employees. Wouldn't the terminated employees have a legal right to participate in COBRA?

Thanks. Understood. Not looking for definitive or detailed analysis here but just hoping for a take on whether something was so out of bounds as to present an obvious issue. They have a large regional FSA vendor already but are not getting warm fuzzies with their testing prowess.

Brian (or others), I'm back with some additional information and follow up questions. To refresh and provide a bit more information, for one group above there is a clear brother sister controlled group with 2 separate companies (and separate EINs) but with virtually identical ownership among small group of owners. In one company (the larger of the two) there are the primary officers / executives plus a mix of some other highly comped and non-highly comped employees. They have the ability to participate in a fulsome fully insured group health plan plus dental, vision, group life insurance, AD&D, LTD, and health FSA and DCAP. Employees can elect to pay their share of premiums through a cafeteria plan. The second company in the controlled group (smaller of the two) has some highly comped employees as well but fewer than company 1 along with lots of nonhighly comped. I do not have the exact breakdown of HCEs to NHCEs in either company. The second company offers all its employees a bare-bones group health plan but no other welfare benefits. They have allowed employees to pay premiums for the bare-bones health plan on a pre-tax basis. Originally they thought they were permitting pre-tax payments under the cafeteria plan sponsored by company 1 but now say that isn't the case and intent was to offer through a separate POP cafeteria plan for just Company 2. (They don't seem to have an actual POP plan document . . . yet.) In any event, they are wondering if this design and the maintenance of separate cafeteria plans among the separate companies could work from a testing perspective. I note from the article linked above there is a note that the ability to maintain separate plans is "not entirely clear" from the proposed regs. which is consistent with what I've seen elsewhere. In this case, I suppose they might also get the benefit of the safe harbor testing for the POP plan if they can maintain separate plans. Everybody at that Company 2 gets to participate in the one health plan with equal employer contributions so there isn't anything on it's face that suggests the cafeteria plan arrangement standing alone poses any problem. I just cannot seem to square this result though with Company 1 being able to maintain a different cafeteria plan that allows employees (albeit a mix of highly and non-highly) pay for a host of other plans pre-tax that aren't even offered to employees of Company 2. Including participation in the Health FSA and DCAP. As with Company 2, everybody in their Company 1 plan (highly and non-highly) participate on an equal footing and receive equal rates / contributions so there is nothing within the operation of the plan standing alone that suggests a problem. It's just the huge disparity between the benefits offered through the cafeteria plan at Company 1 versus Company 2 that has me concerned. For example, while the Company 1 Plan covers a broad mix of Company 1 highly and non-highly employees, it also excludes from participation in a number of component benefits (group life, health FSA, DCAP, etc.) that are not available at all to a large number of non-highly (and a few highly) Company 2 employees. A few questions Is there anything obvious in the set up with the two plan approach noted here that would suggest this isn't possible at all--like having a cafeteria plan with an FSA in one company of the controlled group but not the other? Perhaps all this turns on testing and mix of highly and non-highly in both companies but, if that's the case, guess I wonder why since some of the guidance suggests this really turns more on setting up different plans at a different, separate entities than the make-up of the work force. Brian, perhaps ABD performs this sort of work but where can the controlled group at issue in my case go to get definitive guidance on the testing and compliance of the separate plans for separate companies approach assuming certain reasonable assumptions. Current 125 provider suggests they cannot (or will not) provide testing guidance on which clients may rely when dealing with multiple plans within a controlled group. I get some of the regs are not clear and are proposed, etc. but is there a group that can run mock tests and advise on approach provided certain aspects of the regs are interpreted in a stated way? Thanks for any assistance anyone can provide.

Thanks, Brian. This is very helpful. In response to your question, I'm not well versed in 125 NDT but I guess my main answer would be the benefits availability aspect. Putting aside the potential for separate 125 plans because there is only one plan in these cases, it seems discriminatory on its face that all the HCPs in the group (along with a lot of non-HCPs) are permitted to use the plan to pay for benefits (dental, vision, life insurance, disability) that a large number of non-HCPs cannot participate in at all, even paying all premiums on an after-tax basis. And elect to participate in the health fsa and DCAP under the plan that is not made available to employees in the sub. That's putting aside too the fact that the sub employees don't have access to the better health plan (with greater employer contributions), In my quick reading of the 125 testing in the EBIA manuals, it didn't seem that some employees (including all the HCPs) should be able to elect more and better benefits than others (even though they are permitted to participate in certain aspects of the 125 plan). Again, I know very little about the intricacies of the testing so just trying to understand.

Sorry, I'm not a health and welfare plan expert but I've come across a couple of situations recently that have me confused. In both, there has been a clear controlled group with at least 2 different companies set up and with different welfare benefits at the different companies. In the first group, they offered the same health plan and 401(k) plan across different companies but the company with all the execs also had group life insurance, vision, disability, etc., some of which was partially paid through a group cafeteria plan. Other companies in the group, however, did not offer welfare benefits beyond the group health but had folks, of course, participating in the cafeteria plan for health insurance premiums. In the second group, they offered a robust, highly-subsidized health plan to the one company with all the executives and longer term / permanent employees along with a full suite of other welfare plans. The other company within the group, however, has only bare-bones group health plan with less employer contribution and no other welfare benefits. Apparently that company often employees individuals on a full-time but less long-term / permanent basis. Some individuals have been there years though. And they do get to participate in the same group 401(k) plan (which is how I came to this issue) but not at all the same welfare plans (including no ability to participate in the health FSA under the cafeteria plan that the parent company offers). Assuming the different medical plans at the two companies both pass ACA muster (which is probably questionable on affordability), surely these arrangements cannot pass the Section 125 tests? When I asked about 125 testing though they all look like I'm from another planet. (That doesn't surprise me as I know that testing often gets ignored but I'm curious how brokers are setting up such disparate benefit offerings without a concern over various testing issues.) Am I missing something? Thanks.

FWIW, not obvious to me that there's a toggle or other 409A issue but gosh that seems a bit screwy. I'm assuming that's intended to operate as some sort of CIC bonus plan / incentive and retention reward program all within a deferred comp plan. Perhaps the company doesn't offer any equity compensation? In any event, I'd think there could be lots of questions or wrinkles along the way. Maybe one thing to do that with employer contributions but not sure I'd really like that for my own deferrals unless I felt i could really impact the value of the business. Maybe you agree to pay the greater of the normal amount or appreciation if there is a CIC so that folks don't benefit from moving out and are incented to grow and stay with the company. Guess part of me wonders if that is the most efficient way at coming out incentive and retention effort if somebody has to sign up for a deferred comp plan to basically get a CIC bonus. Interesting.

Thanks again to all. Very helpful.

Thanks to all. This is where I am too. Not my idea but employer has questioned whether they might just leave the erroneously filed 5500s as-is and simply do a 2020 final 5500 with correct numbers and include an audit for just that year. My initial reaction is I'm not sure a reputable auditor would or could just do an audit for the 2020 short year under the facts here and, even if they did, seems there will be a big discrepancy in year-end 2019 numbers and beginning of year 2020 5500 numbers. I assume that might trigger some automatic question or investigation but I'm not sure how the 5500 matching may work. If it did trip something, however, seems that likely means they could be subject to significant liability for failure to file correct / complete 5500s in the past and possibly not permitted to get audits done and amended /corrected 5500 filings if an audit / inquiry were initiated. Any experience or additional thoughts / risks to note to try and steer them away from this possible approach?

Thanks. Yes, there is a service provider of sorts involved although I've not seen the service agreement and it's a bit unclear how involved they were with the 5500 but the employer very much agrees with you that they should have flagged this before. I'm not sure how much recourse we may have against them but that will be part of the analysis as well.

I think I probably know how this is likely to have to play out but welcome any suggestions from the leaned group here. Company has had a 401(k) plan for a few years now. They have over 300 eligible employees / "participants" but have never had more than 50 active participants in the plan in a particular year. They have timely filed 5500s (well--actually 5500-SFs) for all the years but misconstrued how "participants" are determined and counted and so reported only active participants. As a result, audits have never been conducted / filed for the plan. With even fewer people participating due to COVID and the employer facing financial issues, they have decided the plan is not worth the expense and want to terminate altogether. Then, some helpful soul early on in the termination process noted the need to file a final Form 5500 and audit in connection with terminating which got them asking "what audit." Without that helpful notation of the audit requirement, they likely would have terminated the plan, filed a 5500 as in the past with no audit and rolled along without obvious issues and been blissfully ignorant. Now that they know the errors of their ways, however, nobody can sign the final Form 5500 without an audit without perjuring themselves. And they'll need to get audits for the prior years in order to get an audit for the 2020 final year. Which is, of course, all going to be very expensive for a company that headed down this path because of financial concerns. Oh, and my suspicion is that, like the mistake in counting participants, there are likely to be some other "issues" that may get surfaced as the result of any audit. Any ideas for coming at this in an appropriate but most efficient and least costly manner?

Thanks, Lou. That's what we generally suspected. Just to be sure I'm following correctly though, does that mean they need to keep records supporting proof of payment forever? (I don't necessarily disagree with that sort of obligation but, as noted in the comments above, that sort of differs from the real world most of us operate within.) Also, is there any exception to that obligation based on some general statute of limitations? if, hypothetically, the plan could prove the participant had notice and had elected a lump sum distribution over 15 years ago, it doesn't make sense that they would just now be seeking to recover if the lump sum had never been paid. Based on that, wondering if there might not be some defense for a plan that may have "purged" payment records after say 10 years? Thanks.

This topic is very helpful with a current issue we have. We have an active DB plan who received a request from a former employee / former participant asking about his benefit under the plan. The individual terminated over 17 years ago and appears to have requested a lump sum payment after termination. Not clear why the individual has surfaced now but the plan sponsor / plan administrator was hoping to simply show proof of distribution and move on. Unfortunately, they have looked everywhere and have not found any records showing a clear lump sum was sent / delivered to participant. There is some thought a check may have been cut but sent to outdated address. There appears to be no definitive record that the payment ever reached the participant--no record of the check, no 1099 copy, no participant tax record, no escheat record, etc. My basic question is one touched on somewhat above but I do not believe directly answered---is there a clear records retention period under ERISA as to how long a plan administrator must keep a record of payment? Is that basically the same as the indefinite period noted above for holding records necessary to calculate a benefit? Also, does anyone have an answer / experience to the questions raised above about accepted statute of limitations in these situations. If it can be proved that the participant knew off / requested a distribution so long ago, then if they did not receive it (which would seem only basis for inquiry now), then couldn't they be barred from coming back to the plan now. This is not the case where a plan terminated and the participant went missing. Thanks in advance for your assistance.

Just curious if anyone has seen or heard anything additional on this issue? We have a client that has come across the same bpas article. (It's helpful that they include cites to all their reference material, just wish somewhere I could find an express statement supporting their suggestion.) In this case, I believe there may be "extra" PPP money because of reduced payroll costs (furloughed employees) so thought would be to use all the additional PPP loan amount above current payroll cost to help fund the underfunded DB plan.

Thanks, Bird. No last day language. So, just to play that out, are you saying nothing (i.e., the discretionary match) can be changed or saying the true-up election cannot be changed? And if the later, what would that mean? In this case, it appears only HCEs would be getting trued-up based on ytd contributions.

I would like to revive this thread. We have client with a Fidelity prototype. They have historically made a discretionary match on a payroll period basis (pay weekly) that they need to suspend the match for foreseeable future (likely remainder of calendar plan year). They have elected to have the "Contribution Period" for determining matching contributions be the Plan Year so an annual true-up. The other alternatives in the Fidelity AA are to have the Contribution Period be the payroll period, calendar month, plan year quarter, or an option that permits the employer to determine the Contribution Period at the time the discretionary match was determined. There were a number of participants that received large bonuses in Q1 and have maxed out their 401(k) deferrals so some participants are already in need of a true-up. Should the last Contribution Period option in the AA be selected so that the Contribution Period matches the period during which the employer was matching? Is that possible now given the wording of the AA provision given that option envisions this customized Contribution Period being determined at the time the discretionary match is set. (The employer has been making the same match for some number of years so not really clear when the discretionary match was set per se but there was no effort to try and specify a different Contribution Period in the past.) I've also wondered if there is any way to read the plan to provide that the Contribution Period would automatically be limited to just that portion of the Contribution Period during which the employer is actually making a discretionary match but I don't see that. Thank you.

Thanks, Bird. Always helpful to make sure we're not missing something when you see somewhat conflicting or qualified guidance on these issues.

Definitely a nice conundrum to have as a plan sponsor in this current environment. Seems most are going in the other direction.

I hope this is a relatively simple question but have seen some conflicting (or, perhaps more accurate, general) guidance on the first question so am hoping to clarify as I suspect there may be others facing the same situaiton: If a non-safe harbor 401(k) / profit sharing plan document provides for "fixed" or "required" nonelective contributions but has a last day of the plan year requirement in order for a participant to accrue the benefit, can the plan be amended mid-year to either (1) change the "fixed" nonelective contribution provision to a "discretionary" contribution provision or (2) to reduce the fixed contribution rate requirement to a lower rate? (We assume exceptions may need to be provided for any participants who retired, died, or became disabled prior to the adoption of the amendment if the plan provides for a waiver of the last day requirement in each of those situations.) Assuming the answer to 1 is yes, I assume the same result if the plan had a 1,000 hour requirement rather than a last day requirement provided the amendment was adopted prior to anyone satisfying the 1,000 hour requirement? Assuming the answer to 1 is yes, I assume the same result would apply to plans with "fixed" matching contributions with a last day or other allocation requirement provided the amendment is adopted prior to a participant satisfying the allocation requirement? (While we rarely see fixed nonelective contributions in non-safe harbor plans these days, we also rarely see fixed matching contributions with last day or similar requirements so both of these situations seem like fairly rare occurrences.) General question: why would a plan sponsor elect to include a fixed nonelective contribution if not required to do so in connection with a collective bargaining agreement or similar arrangement? Again, we don't see these often but it's always puzzled me why someone would do this. Maybe more as a general participant communication thing? Thanks in advance for your assistance.

Thanks, Chaz. We'd talked a bit about Company A ceasing it's current plan as a way of avoiding COBRA liability here. In this case, however, Company A has contracts for managing a few other facilities and employees tied specifically to those locations so while the loss of this facility will result in a large drop in number of Company A employees, they still need to maintain the group health plan going forward.

I think I know the answer to this but wanted to ask to be sure I'm not missing anything. Company A is a large property manager. They have a contract to manage a particular facility among others. The owners of the facility are selling the facility and the new owners intend to engage a different property manager, Company B. Company A must fire most of the employees that worked at the facility. Company B is new to this particular area and plans to immediately re-hire most but not all of the terminated employees who will continue doing their same jobs as in the past. Those employees will have a clear termination of employment with Company A and so should be afforded COBRA rights. (Company B has a relatively weaker and expensive health plan than Company A's plan such that COBRA coverage may be found worth the cost to some of the former employees, at least for some period of time.) I don't think there is any exception to Company A's obligation to offer COBRA coverage to all terminated employees under this scenario, including those that are immediately hired and offered coverage by Company B. That presumably would be different if there were a sale of Company A (or Company A's assets) and Company B was a legal successor (or deemed to be a successor employer for those immediately hired). However, in this case, Company A was simply hired to manage the property and is losing that contract. It's not being sold or selling or transferring any assets to Company B so I don't see any COBRA M&A exceptions here although it has some similarities. Anything I'm missing that might reduce Company A's obligations here? Thanks.

Thanks. Leevana, I've seen reference (EBIA) to the eligibility test for POPs including something of a "benefits" component based on the IRS regs and thus arguably could be read to set some restrictions on the rates paid. There seems to be some uncertainty over the reach of the benefits component however and whether that would prohibit varying rates so long as all employees are eligible for the same group health insurance benefit. In light of that, what if I added another wrinkle and just proposed amending the cafeteria plan to exclude participation by HCEs. In this case, that wouldn't have any adverse impact because, as Chaz notes, the HCEs weren't participating in the cafeteria plan at all. Under this approach, it seems difficult for there to be any sort of violation of the 125 Plan. I posted a similar thread on the health plan board. Sorry for the multiple posts but I'm frustrated by the lack of guidance / clarity on what I think is probably a very common practice among many small employers where top folks have all their premiums covered and others do not.