401 Chaos

Suppose you have a self-insured health plan that improperly provided certain new employees (including highly comped) with the ability to participate and receive benefits in the plan immediately while other employees (nearly all non-highly) were required to wait 60 days to participate. Based on prior guidance, this appears a clear 105(h) violation. There is some IRS guidance (JCEB Q&A, other comments) noting that one possible way around these issues would be for the highly compensated employees receiving the extra / early coverage to pay for that or have that amount imputed in their income. That was not done in real time. Would it be possible for the employer to go back and impute the value (presumably full COBRA cost) of the early coverage in the highly compensated participant's income now and head off any possible future challenge by IRS of a 105(h) violation which could lead to taxation of the benefits received by the participants (and not just imputing cost of coverage). So, basic question is can you retroactively impute income to "fix" the 105(h) issue for open tax years or has a 105(h) violation already occurred since the amount was not imputed in real time?

May I ask a related / follow-up question. I understand the general rule above regarding Schedule As but how does that run through other sections of the Form 5500. For example, we have large wrap plan that has a Plan Year End of 11/30 but all or nearly all of the insurance policies and component plans operate on a calendar year basis. As a result, the Schedule A info we are supposed to use generally reflects only one month of the actual Plan Year (i.e., the month of December) with 11 months of the Plan Year covered by the following year's Schedule A info. There are some years when we have big changes in enrollment from one year to the next that don't really get captured by the prior Schedule A info. Is that an issue? Is there a way to address?

Interested in guidance regarding how to go about correcting a share allocation error for a few years similar to the situation described in TAM 201425019. Our facts are not exactly the same as the TAM but close--basically a different variable interest rate from the one required by the plan document and loan document, etc. was inadvertently used for a few years which resulted in slightly fewer shares being allocated than should have been. The allocation error seems easy enough to address and to put participants back in the position they should have been in by recalculating the allocations and allocating the few missed shares to affected participants through VCP / EPCRS. In addition to that, however, seems we have a prohibited transaction issue as well and presumably need to pay an excise tax. In the TAM, the ESOP apparently got audited by the DOL and the DOL agreed not to take any action (i.e., no excise tax / penalty) if the ESOP corrected by fixing the share allocation which it did. The IRS, however, apparently came in on the heels of the DOL and determined that an excise tax was due. In our case, we do not have an audit by either DOL or IRS. ESOP just wants to correct and is willing to pay the excise tax. Can it file VCP under EPCRS and also pay excise tax to the IRS but not pursue a separate correction with the DOL? Alternatively, should it try to notify the DOL of its correction with the IRS or perhaps fix with the DOL directly and not pay the excise tax to the IRS? (I have been thinking this might play out similar to delinquent contribution situations where an excise tax is paid to the IRS and DOL follows up based on the affirmative Form 5500 response but does not pursue further action once notified of the correction/ excise tax payment to the IRS.) Would welcome any guidance / experience on dealing with dual IRS / DOL regulation in this context. Thanks.

Wouldn't 7503 seem to say you have until Monday, May 2nd to actually adopt the plan as well as submit the 5307? § 7503 Time for performance of acts where last day falls on Saturday, Sunday, or legal holiday. When the last day prescribed under authority of the internal revenue laws for performing any act falls on Saturday, Sunday, or a legal holiday, the performance of such act shall be considered timely if it is performed on the next succeeding day which is not a Saturday, Sunday, or a legal holiday. For purposes of this section, the last day for the performance of any act shall be determined by including any authorized extension of time; the term “legal holiday” means a legal holiday in the District of Columbia; and in the case of any return, statement, or other document required to be filed, or any other act required under authority of the internal revenue laws to be performed, at any office of the Secretary or at any other office of the United States or any agency thereof, located outside the District of Columbia but within an internal revenue district, the term “legal holiday” also means a Statewide legal holiday in the State where such office is located.

Can anyone provide more information on this. I know with the individually designed plan deadlines on a 5-year cycle the IRS had a chart or FAQ that expressly noted that the submission deadline was Feb. 1, 2016 (because January 31 was on a Sunday) but I have not seen anything as clear on the April 30 deadline. Is the extension to the next business day clearly only good to extend submission and not adoption? What if an IDP was adopted Feb. 1 rather than January 31? https://www.irs.gov/Retirement-Plans/Submission-Procedures-for-Individually-Designed-Plans-5-Year-Remedial-Amendment-Cycle

I don't have any authority for this but if the coverages under the HDHP and primary plan are the same and the only difference is cost, it would seem to me difficult to argue that the change in status (transfer to a new location) used in that example impacts eligibility for / availability of coverage under a plan in a way that really supports a switch from one option to the other. I guess if maybe there were a significant change in the cost of living generally between the locations you might have an argument but nothing is as clear cut as the example in the regulations where the transfer basically results in loss of coverage.

Speaking of those service providers deadlines, if we can get the plan documents signed, the election in place, and then have payroll processed on 12/31 but the custodian cannot have the actual account set up in which the funds are to be remitted for a couple of weeks, is there any way to pull the funds out of payroll and hold them until the account can receive them? (Custodian is unable to receive check for the deferrals and hold that until account is live--insists that all contributions must come in electronically which cannot happen until account is live.) Thanks.

Thanks. Didn't mean to suggest that the ACA issues were the only issues or concerns--just focused on those because Zane at least makes a vague nod toward trying to counter those concerns. GBurns, just out of curiosity, have you seen Zane address the state prohibitions on employer reimbursement of individual policy premiums or do they just ignore that in hopes that their clients won't ask or be concerned?

Thanks very much. That was my general sense as well; however, I understand the individual Zane points to as their legal counsel is a well-known, well-respected benefits lawyer with a large general practice firm. To the best of my knowledge, however, Zane has not been willing to share a written legal opinion or opinion letter from that law firm with their clients or helped facilitate a PLR or any sort of similar guidance on their specific arrangement from the IRS. Nonetheless, they are extremely confident that their plan works and have agreed (via email) to pay any fines that might arise in the event they are wrong. (Not sure what good that really does though if they turn out to be wrong and fold up when the house crumbles and everyone gets hit with fines.) I don't think anyone on these boards can say definitively whether Zane is right or wrong as I think that turns on some pretty nuanced interpretations of the ACA regulations but, by the same token, I don't think it appropriate for Zane to project such confidence in their position at this stage. If they wish to successfully market these arrangements, I think the burden is on them to provide some express authority for their position.

Just curious if anybody has more recent thoughts or reflections on the Zane Benefits approach. I ran across the article linked below in the NY Times as well as some additional discussion around some of the later guidance from the IRS on these issues and more discussion on the Zane website but not sure there is anything new there. As noted in the article, much of this all seems to turn on the general ambiguity around whether premiums are an essential benefit and whether premium reimbursement arrangements could ever be designed to comply with the annual benefit limit issues, etc. As the NYT article notes--all this does seem "risky at best" but Zane is apparently continuing to aggressively market their approach. Has anybody seen any sort of legal opinion in writing made available by Zane? http://www.nytimes.com/2014/06/05/business/smallbusiness/taking-a-chance-on-a-health-insurance-strategy-the-irs-may-not-approve.html

Curious if you reached some resolution on how best to handle? I guess my quick thought is that the grandfathering rule would not work here because the salary continuation would presumably be based on salary at time of trigger thus "benefits" have arguably continued to accrue each time there is a salary increase and so no fully vested right as of enactment of 409A? Not sure though about whether the retirement provision here might fit within the "separation from service" trigger--seems you might possibly make that argument but as QDROphile suggests, I think you would have to apply a somewhat strained reading and would run into issues if you provided any payout upon retirement outside the 5-year window.

AMDG, Thanks very much. Do you recall the basis for others disagreeing with you? Although the revised guidance is still not as clear as it might be, it does seem to suggest a pass for general amendments to prototypes. Seems like too with the demise of the 5-year submission cycle, etc. that this would be a logical read as well. I'll be sure to ask my local district office as well when they return my call regarding a VCR question from several years ago.

Thanks very much. I've pretty much convinced myself that this is the correct way to think about and to document from a board resolution / plan amendment perspective notwithstanding the fact that some record keepers / TPAs might suggest it should be thought of as a more simple or streamlined process along the lines of a fancy trustee to trustee transfer.

Thanks! Rev. Proc. 2015-27 does appear to address this in changes to Section 6.05 of 2013-12. https://www.irs.gov/irb/2015-16_IRB/ar06.html

I'm confused by the EPCRS discussion / instructions regarding the potential determination letter requirement (and available exemptions) when correcting an operational failure by adoption of a retroactive amendment. If you have an operational failure that doesn't come within the limited items permitting correction by retroactive amendment in SCP and the plan is maintained on a volume submitter, do you potentially have to file for a determination letter? In this case, the error is not being solved by adopting a volume submitter plan or an IRS model amendment but would include the adoption of an "optional amendment" to the existing volume submitter plan document. Is that enough to avoid any possible Determination Letter obligation? (The amendment would be to provide for full vesting of all accounts as of a prior date. TPA erroneously coded all accounts as 100% vested. Plan sponsor is fine with giving full vesting as only 2 NHCEs were impacted, amounts were small, and plan is now frozen.)

Can anyone confirm my general understanding of the differences between a spin-off and a transfer of assets and liabilities or point me to a good summary of the two actions? Whenever I read the Form 5310-A instructions and other posts here, I fear I may not be fully appreciating the distinctions. My general understanding is that a spin-off is basically the splitting of an existing plan into two or more plans. After the spin-off, the spun-off plan might live on to function as a new stand-alone plan, might be terminated, or might be merged into some other plan. So, for example, if a company "spun-off" / sold the assets of a particular division and the employees of that division went along with the assets to form a new, separate company, the seller might also spin-off the portion of the existing plan corresponding to the employees of the sold division and the spin-off plan could be used to establish a new, continuing plan for the new company. I have seen a transfer of assets and liabilities described as basically a spin-off from one plan and a merger into another plan which generally makes sense to me but I'm not sure exactly what all that means or requires. In some cases, the notion of a direct transfer of assets and liabilities seems to be thought of as more streamlined than a spinoff and separate plan merger with TPAs offering to facilitate by basically having the contributing plan amended to agree to the transfer of assets and liabilities for the group of transferring participants and the new plan formally agreeing to accept the assets and liabilities. Does that make any sense? For example, if we have a company entering into a joint venture with other companies so that the resulting JV will not be a part of the controlled group of any of the "contributing" companies and will maintain its own 401(k) plan going forward, does a transfer of assets and liabilities from an existing plan into the new JV plan make sense and can that be done without thinking of this as a formal spinoff and then separate merger with the JV plan?

Belgarath (or others): We have a similar issue where a shorter vesting schedule was erroneously applied across the board and participants were told that they were fully vested. Just curious how others have handled these situations where the error involves "over-vesting" rather than "under-vesting?" Seems one approach may be to adopt a retroactive amendment with the erroneous vesting schedule being applied. Our case involves a relatively small plan with only a couple of participants (both NHCEs) actually impacted by the mistake.

Yes. And so while the employer has complied with the SCA and has, in essence, paid a significant amount toward benefits, the employer gets no credit for that under 4980H(b) because payment in the form of cash causes the entire amount to be viewed as an employee rather than employer payment (i.e., the employee pays in full). I understand that several large employers and insurers / benefits providers had some earlier discussions around this with the IRS and DOL, etc. and while the regulators were initially receptive to providing some possible relief or recognition that the cash in lieu of amounts under the SCA be treated as employer contributions there has been no progress on the regulatory front. As a result, I think we are left without any direct guidance on this issue for ACA purposes which I suppose might provide some room for creative arguments along the lines of MarieNo's original post. Still, from a general tax / cafeteria plan standpoint, I think it is clear that the cash amounts used to purchase benefits would generally be viewed as employee amounts.

GBurns. Thank you for your response. In the case of the SCA employees, yes they paid the entire premium. The employer did not contribute further to the benefits for the SCA employees other than the benefits portion of the wage rate. In my experience, that is not unusual as the SCA benefits rate is often sufficient to cover or mostly cover employee only cost. I feel pretty comfortable in my facts.

Just curious if anyone can offer additional guidance or an update on this issue. I have seen a number of later (than the June 2013 date of this post) articles indicating that employers covered by the Service Contract Act ("SCA") who offer cash in lieu of benefits but sponsor and offer group health plans are likely to run into issues with the affordability requirement since the employee's ability to take cash (even if the employee turns around and uses the cash to purchase group health plan coverage through the employer) puts the employee in receipt of cash and thus means the employer has not contributed to the cost of the group health plan coverage, etc. Would appreciate any thoughts or advice anyone might have for an employer subject to the SCA who has inadvertently (without realizing the potential ACA concerns) carried on with their cash in lieu of benefits and permitted SCA employees to purchase group coverage through the company's cafeteria plan such that the employer has arguably contributed nothing toward group health plan costs.

GB, Many thanks. I am not sure I understand your comments. We agree that the IRS Determination Letter does not address the state insurance, MEWA, HIPAA issues, etc. I only mentioned those because you had raised those issues in your earlier post and I was trying to be responsive to those comments while attempting to re-focus the post on the IRS's current application of the "geographic locale" standard. I do think the IRS cares about there being an employment-related common bond among the VEBA participants for Determination Letter purposes. In the case of the existing VEBA, that common bond was shown by the VEBA limiting participation to members of a particular industry located within a single state (i.e., within the same "geographic locale" found acceptable to the IRS per 1.501©(9)-2(a)(1)). Hence the original question regarding whether the VEBA's previously-approved geographic locale might be extended to all working in that particular line of business stretching across two contiguous states. My understanding is the scope of an acceptable "geographic locale" has been the source of much debate and evolution including case law (Water Quality Association Employees Benefit Corp. v U.S., 795 F.2d 1303) and then Treasury's Proposed Regs. from 1992, etc. I'm simply trying to determine if others have recent experience with the IRS approving VEBAs that stretch across more than one state but would satisfy the safe-harbor standard included in the proposed regulations even though those regulations are old and remain in proposed form. Thanks.

Thanks GB. We definitely agree that we have a MEWA and would contemplate working with both states' Departments of Insurance, etc. Critical question is what to think of the existing VEBA status in light of the fact that they (or at least some at the IRS) have indicated some willingness to broaden the geographic locale standard but those regs never have been finalized. It appears that the IRS itself in some checklists and PLRs, etc. has noted the proposed regs and broader geographic scope in some releases but I have a blind spot as to how the IRS currently reacts to such requests.

I do not work often with VEBAs but have recently been contacted by an existing VEBA set up by a professional association that provides benefits to professionals who are employers operating within one state. Based on their limitation of eligibility to employer members in a single state, they previously obtained a favorable determination letter of their tax-exempt VEBA status and have been operating in this manner for a few years. They have been requested by professional employers in a contiguous state to consider expanding benefits to same group of professionals in the border state. Based on the current VEBA regulations, the expansion beyond the single state would appear to be a potential threat to the "geographic locale" restrictions for the VEBA. What they are considering, however, would appear to be within the scope of the proposed three-state safe harbor standard set forth in Treasury's Proposed Regs. 1.501©(9)-2(d) from August 1992. Does anyone have experience with how the IRS generally handles VEBA requests for providing benefits where the geographic locale stretches across a single state along the lines of the proposed three-state safe harbor? Are there other VEBAs that have been granted a favorable determination along these lines even though the regulations have been in proposed form for 23 years? Am assuming an existing VEBA wishing to expand along the lines of the three-state safe harbor would need to seek a new / updated determination letter from the IRS in order to do so safely? Thanks

Individual at issue here is not a 5% owner. Would just be HCE based on salary but for the fact they came on board late in their first year (the look back year). In this case, error involves exclusion of the individual from participation during the look back year and a portion of the next year where they were considered an HCE. Basically, question is do you just look to the individual's classification for ADP test purposes or is there anything in EPCRS that would cause you to look at the individual's annualized salary or current classification when trying to determine their status in a prior year. There seems to be a difference of opinion among the advisors but I have seen nothing in EPCRS that suggests you do anything other than use ADP test classification.

Is there anything in EPCRS that requires new hires brought in mid-year who will clearly be HCEs based on their annualized salary going forward to be treated as an HCE with respect to plan corrections during their first year even though they were classified as an NHCE for that first partial year for ADP testing purposes?