401 Chaos

Thanks again for everyone's assistance. Very helpful. Just to close the loop on this a bit, I got copies of the application and the Aetna underwriting guide (have not gotten a copy of the BCBS underwriting guide yet). As you might imagine, the provisions are a bit vague. Specifically, the Aetna Illinois underwriting guideline provides the following regarding Employee Eligibility: “Eligible employees are those who work for the employer on a full-time basis, with a normal work week of 25 or more hours, including partners, proprietors if included as an employee under the employer’s health care plan. Eligible employees will NOT include part time, temporary, substitute, 1099 or seasonal employees. Coverage must be extended to all employees meeting the above conditions, unless they belong to a union class excluded as the result of a collective bargaining arrangement. . . . If an employer’s Employee Eligibility Criteria definition differs from the above definition (more than 25 hours), the employer’s actual definition must be provided in writing on the Employer Application. Note, the normal work week cannot be less than 25 hours.” The group policy provided also includes a helpful provision which notes that the eligible employees basically include those satisfying the eligibility requirements established by the employer. So it seems they specifically permit the employer to set higher hours per week requirements from the default 25 hours per week requirement and possibly other criteria but there is little to no guidance on whether those other criteria might include carve outs of other groups (i.e., all hourly employees) and/or any limits on the maximum number of hours. The Application originally completed is also less than clear on the parameters of setting exclusions, etc. In one spot, they ask "What is the normal work week you require a full-time employee to work to be eligible for coverage?" Then, down below that line is another that asks "Are there excluded classes of employees other than part-time and temporary employees (for example, Union employees)? If yes, describe class(es) and/or the union local name and number." In the case of our employer, they failed to complete the box asking for the number of hours per week. Then, in the line asking for excluded classes, they noted "Part-time / seasonal" which really does not make much sense given the question. The application was signed off on by the broker and the employer. Then, a week later, the broker wrote a letter to Aetna to clarify the eligible employee criteria included in the application. (Again, seems this could / should have all been set forth in the application itself so unclear why that was not done.) In any event, the letter notes that the only "full-time" employees of the company are those who are on salary. All others are considered part-time / seasonal employees and thus not eligible for benefits. Employees must work 40 hours a week on a consistent basis through out the year to be considered full-time. All that seems perhaps okay and permissible within the grand scheme of the underwriting policy and application but I think it really paints a misleading picture for Aetna. In essence, the broker says the letter was intended to make clear that only salaried employees can be considered full-time employees even though there are several hourly employees that routinely work 40+ hours on a year-round basis. In short, they basically excluded all hourly employees but did not clearly explain this to Aetna. Given the underwriting guidelines, etc., it seems such an exclusion or carve out may be permissible but just wasn't clearly explained to Aetna. I'm really at a loss to say what the risks of such a misleading application / criteria are at this stage. Forgive the extended discussion here but just wanted to try and close the loop in case helpful to anyone else. Forgive also the soapbox but I think this combination of mumbo jumbo / hide the ball sort of insurance rules and broker confusion is a big part of what has led us into ACA mandates.

Thanks very much. I agree ACA governs stuff moving forward but we are trying to assess potential liabilities for prior coverage issues and working with lawyers to do that. The lawyers have never seen such exclusions before but the guidance / standard from Illinois Department of Insurance is very thin. We have been told repeatedly, however, that such classifications / exclusions are done routinely under Illinois group policies without issue so was just hoping others out there might have some additional insight on whether or not that is true. I'm not sure there is a clear answer as a matter of law at this time but if it is the case that others do this all the time without incident that would be helpful to know.

GBurns, thanks very much. I certainly agree the Illinois laws are fairly poorly written. Unless I am missing it, I have not found anything in the Illinois statutes or regulations that attempts to set a threshold minimum number of hours for establishing full time classification. The statutes just seem to leave it up to the individual plan to set those terms. That is very different from what I'm accustomed to so wanted to be sure I was not missing something. According to both the Aetna underwriting department as well as the insurance broker, however, this is presumably fine. In our particular case, the company apparently decided not just to set the standard at 40 hours per week but also requiring that the employees be salaried employees as well (i.e., they have large numbers of essentially full-time hourly paid employees working 40+ hours per week that are excluded from group coverage reserved just for the handful of salaried employees.

Just to add a bit more information to my own post, I spoke with a representative from Aetna's underwriting department who informed me that although Aetna generally sets a minimum requirement of 25 hours per week in order for an employee to be considered a full-time employee for purposes of being eligible for coverage under an Aetna group health plan, there is no maximum standard required by Aetna or apparently by Illinois law. As such, an employer that has a large work-force with hourly paid employees working 35-40 hours per week could set their own threshold for hours per week at say 41 hours per week thereby excluding all but a few select salaried employees that generally work 40 or more hours per week. In short, the employer is generally free to set the threshold as high as they wish but they cannot set the threshold at less than 25 hours per week, The fact that a number of the employees working 37 hours per week are generally considered "full time" for other employment or company classification purposes does not seem to be binding on the group policy coverage. I'm not sure how this works in most states but I found this interesting as I am accustomed to states that basically do just the opposite--generally require you to cover all employees that work at least a certain amount (e.g., 30 hours per week) and generally permit you to cover part-time employees at lower hours (e.g., 20 hours per week) if requested as part of the group policy. Does what we've been told about Illinois not having any cap on the hours per week required to get group coverage seem correct?

Does anyone have general experience with general coverage / underwriting requirements for group health insurance policies subject to Illinois insurance regulations? We are doing some due diligence on a target company that has 200+ full time employees--about 10 salaried employees and nearly 200 hourly paid employees. They appear to have a small employer group health policy with Aetna that covers only a handful of employees--all among the salaried employees. Their broker has indicated that the policy limits coverage just to salaried employees--i.e., that the term "full-time employee" for group health plan purposes only includes "salaried employees" so no need to offer or extend coverage to the 200 hourly-paid employees. Everything I've seen, however, suggests that Aetna policies in Illinois generally require group coverage to be offered to all employees (meaning anybody that is a common law employee) that works 25 or more hours per week. (Although the Aetna underwriting summary suggests that the 25 hour standard may be increased or raised, I've seen no indication that Illinois law or the Aetna underwriting rules would permit an employer to exclude all full-time employees paid on an hourly basis and have never other rules designed that way.) Even if that were somehow true, I cannot see how they could qualify for small employer coverage as the Illinois small employer rules seem to make clear that the 50 or less threshold is based on broad full-time employee count without regard to salaried vs. hourly. Thanks for any assistance anyone is able to provide.

Unfortunately, this is a topic that needs a good bit more regulatory clarification and discussion in general. I'm not an expert in this but a couple of things to keep in mind: (1) the nondiscrimination rules will generally allow particular plans to discriminate a good bit in terms of coverage / exclusion and (2) with regard to the benefits tests, my understanding is that many think plans can be disaggregated for testing purposes such that different plans are maintained at different geographic locales and/or for certain distinct classifications of employees, etc. such that as long as no HCEs receive more or better benefits than NHCEs within a particular plan it should be okay even if that means that an HCE in one plan / group receives better benefits than an NHCE in another plan or group on a controlled group basis. Again, not an expert and the actual testing of plans is so rare that I've not really seen that play out but that is my general understanding of how some think they can get there.

Would welcome any thoughts on the following scenario: Sponsor of small profit Sharing plan adopted resolutions 4 months ago terminating the plan and directing that all plan accounts be distributed. Key employee of plan sponsor died about 2 months ago while still working with recordkeeper to pull together notice and distribution elections to plan participants so the recordkeeper could process distributions per the plan's termination. Recordkeeper is now sending out the distribution notices / elections and working to distribute all assets and wind up the trust. The deceased participant had a valid beneficiary designation form for the plan on file at the time of his death naming his daughter as the sole beneficiary. Can the recordkeeper just work directly with the daughter as designated beneficiary on distribution of the deceased participant's account without any need to involve the deceased participant's estate. In other words, we are assuming the adoption of resolutions terminating the plan prior to the participant's death and the plan's pending distribution of assets did not vest any right to a distribution of the account in the deceased participant's estate and that distribution of the decedent's account should simply be governed by the decedent's beneficiary designation (even though distribution of the decedent's account was pending due to plan terminationat the time of death).

Carol, Thanks very much. This is very helpful. I like your thinking and the individuals in the 457 plans are certainly welcoming getting away from those restrictions as part of the eventual move. This may be more of a plan design / administration issue than a regulatory issue but the 457 plan is currently drafted very narrowly to limit participation to just the select employees of the charitable entity. It does not specifically define that to include subsidiaries or members of their controlled group although I suppose arguably coverage may extend to those. In any event, there is concern that the leasing may invalidate the individuals' ability to continue participating in the 457 plans and/or that they arguably should be viewed as having separated from service with the charity before the leasing arrangement ends. (The employment lawyers want to view the interim relationship as "co-employment" by both the LLC and the charity.) If the IRS were to recharacterize the employees as being common law employees of the for-profit LLC, do you think that they could just carry on under the 457 Plan without having the 457 Plan specifically address the issue--e.g., I guess they could just abide by the general 457 plan terms and the 457 regulations as before until they officially terminate employment with the charity and get out from under the charity and the plan altogether since the 457 rules are a further limitation. They are worried about the 403(b) issues as well and I was going to post separately on that issue. Ultimately it seems the question is how far one might go with a leasing arrangement before being viewed as a common law employee of the lessee / service recipient. I suppose that is a facts and circumstances test but it seems they would be wise to err on the very conservative side there. Do you think having them acknowledge that they are "co-employees" of both the LLC and the charity may help on the 403(b) front or perhaps that does more harm than good? Thanks!

Am hoping someone may have some prior experience with this or may be able to recommend guidance on point. Employer is a tax-exempt charitable entity that sponsors 457 plans. The entity is in the process of establishing a new, wholly-owned LLC that is neither charitable or tax-exempt and is intended to function as a for-profit entity. (Eventually, a significant percentage of the the LLC will be owned by others (including those providing services to the LLC) but the charity will continue to own / control 80%+ of the LLC foreseeable future.) Given its status / classification, it would seem that the LLC is not eligible to generally establish a 457 plan on its own nor participate in the existing 457 plans of the charitable parent, etc. The LLC could presumably establish its own deferred compensation plan subject to 409A but not 457 and may consider doing that in the future. For now, however, it is taking time to get the LLC off the ground and its own infrastructure in place, etc. During this start-up / transition period, the charity intends to "lease" its existing employees (some of whom participate in the 457 plans) to the LLC in order to have them focus solely on LLC-related activities. The Plan is for a number of these individuals to eventually be terminated by the charity and hired directly by the LLC and become LLC employees but that is likely a few months away. Question is whether the individuals can continue to participate in the 457 plans (and 403(b) too I think) during this interim period where they technically remain employees of the charity but are being formally leased to the LLC and focusing just on LLC work. As a technical matter, the charity will remain their employer for general payroll, tax, reporting purposes and be in control of their work but their services will all essentially be for the benefit of this new for-profit subsidiary. Welcome any thoughts or advice anyone may have on this issue.

Am hoping someone may have some prior experience with this or may be able to recommend guidance on point. Employer is a tax-exempt charitable entity that sponsors 457 plans. The entity is in the process of establishing a new, wholly-owned LLC that is neither charitable or tax-exempt and is intended to function as a for-profit entity. (Eventually, a significant percentage of the the LLC will be owned by others (including those providing services to the LLC) but the charity will continue to own / control 80%+ of the LLC foreseeable future.) Given its status / classification, it would seem that the LLC is not eligible to generally establish a 457 plan on its own nor participate in the existing 457 plans of the charitable parent, etc. The LLC could presumably establish its own deferred compensation plan subject to 409A but not 457 and may consider doing that in the future. For now, however, it is taking time to get the LLC off the ground and its own infrastructure in place, etc. During this start-up / transition period, the charity intends to "lease" its existing employees (some of whom participate in the 457 plans) to the LLC in order to have them focus solely on LLC-related activities. The Plan is for a number of these individuals to eventually be terminated by the charity and hired directly by the LLC and become LLC employees but that is likely a few months away. Question is whether the individuals can continue to participate in the 457 plans (and 403(b) too I think) during this interim period where they technically remain employees of the charity but are being formally leased to the LLC and focusing just on LLC work. As a technical matter, the charity will remain their employer for general payroll, tax, reporting purposes and be in control of their work but their services will all essentially be for the benefit of this new for-profit subsidiary. Welcome any thoughts or advice anyone may have on this issue.

Am I correct that IRS Notice 2013-54 basically prohibits continued sponsorship of a stand-alone medical reimbursement plan that is sponsored by a very small employer that does not offer any group medical coverage? In essence, the plan has simply provided for the reimbursement of qualified medical expenses up to a maximum of $2,000 per year. In essence, it is the equivalent of a health FSA that is funded solely by employer contributions and does not meet the preventive services mandates and obviously caps coverage for such items with the annual reimbursement amount, etc. Based on 2013-54, I'm not seeing any way that can be continued.

Thanks for everyone's thoughts. In response to Kevin C, the plan does not place limits on deferrals per pay period, etc. Not sure if I am following the full import of your post, however. I agree with Lou S that the participant here is just generally a victim of how the match is handled and the way the plan document works. Given how common catch-up contributions are and the preference of a lot of plans we see not to make a true-up, however, I was just surprised this was not a more often discussed issue or concern and so was hoping I may have overlooked something like perhaps an ordering rule or other automatic adjustment that permits employer matches to continue beyond catch-up participants hitting the regular deferral limit. Based on the replies, however, that does not seem to be the case and seems the plan needs to be amended to add a true-up feature. Welcome any additional thoughts. Thanks

I'm confused by the last part of this sentence. Once participants defer the basic $17,500, how can additional deferrals be anything but catch-up deferrals? If the plan document says that all deferrals are matched, then you need a true-up. But the plan sponsor can choose not to match catch-up deferrals. If it was something overlooked, then amend the plan. GMK-- Thanks for the reply. Bad phrasing on my part above. The additional deferrals above $17,5000 are all squarely catch-up contributions and the plan is clear on not matching catch-up contributions. The thought that the last deferrals being thought of as a mix of "regular" and "catch-up" was really from the perspective of a participant who just became eligible to start making catch-up contributions this year. Last year, she deferred the full amount and received the full matching contribution amount. This year, she was eligible to make a catch-up and so elected that and spread her total deferrals out evenly across the year as well; however, she won't get the full employer matching contribution this year because she hit $17,500 well before the last pay period. Her argument to the plan was that the plan should view her as having elected to spread her regular deferrals across all pay periods so that she would get the match each pay period. While not technically correct, it seems difficult to argue that this is not somehow unfair to her--i.e., a participant doing exactly what you want / hope they will do by taking advantage of the additional deferral opportunity under the plan should not be penalized on the matching contribution front. I guess I was just surprised that there was not more discussion around this issue in a catch-up context than what I found--seems that would happen with most all plans that permit catch-ups (which I think is a high %) and match on a payperiod basis (which seems pretty common) but do not match on employer contributions (which also seems like the majority of plans).

Is it customary for plans providing catch-up contributions to automatically provide for or employ a year-end true-up in order for participants to receive full employer matching contributions where matches are made on a payroll period basis? Plan administrator says their plan / payroll stops permitting any additional employer match once a participant defers maximum 401(k) deferral amount for a particular year (e.g., $17,500). This includes those participants electing to make catch-up contributions and thus attempting to defer maximum deferral amounts for the year (e.g., $23,000). (The Plan in question does not match catch-up contributions.) As a result, participants who have spread their contributions out evenly across the year reach $17,500 before the last few payrolls and so do not receive any employer matching contribution on the last few deferrals even though a portion of those might generally be thought of as "regular" rather than "catch-up" deferrals. Having the plan stop matching contributions at $17,500 makes sense to me but, strangely, I have not heard of this issue before or found much discussion with respect to the need for true-up adjustments in this context. (I have worked with and have found plenty of discussion of the need for true-ups where participants frontload contributions and so don't defer evenly across the year but, in this case, it's basically the participants' attempts to defer the full $23,000 evenly across the year that causes the problem (e.g., they could try and dump more / most of the catch-up amount in at the very end of the year to the extent possible rather than deferring more evenly but seems they shouldn't have to do that). Question: Do most plans that permit catch-up contributions include some sort of automatic adjustment provision or perhaps assume a year-end true-up calculation in order to address this issue that the plan administrator may have overlooked in this plan? (If not, it seems this would be a very common and oft discussed issue for participants making catch-up contributions.) Thanks

I know PTO plans are not typically covered on this board but I am hoping to obtain some guidance on some PTO policy issues via resurrection of this old thread as I am striking out on other fronts and available resources. First to try and address Christine Roberts' original question--my understanding is that the IRS only expects employees to be taxed on the additional value (if any) accrued with respect to the delayed PTO cash-out amounts at the time of actual cash out. For example, assume that an employee that is earning $10 per hour at the end of 2013 has 40 hours of PTO leave that has built up and is available for cash out at the end of 2013 but the employee elects to roll those 40 hours over to 2014 and not take the cash. Because the employee could have taken the $400 in accrued PTO in cash in 2013 but failed to do so, the IRS views the employee as being in constructive receipt of that amount in 2013 and so taxable on $400 in 2013. Now, assume the employee gets a pay raise first of 2014 and is now earning $11 per hour and then in the Spring of 2014 uses the 40 hours of rolled over leave as vacation. Because the employee has already paid taxes on $400 worth of the PTO, he or she would only be taxed on the additional $40 in value of the PTO at the time the leave is actually taken in 2014 as a result of the $1 per hour pay raise. I am not sure I can point to definitive IRS guidance on that issue but I believe that treatment is pretty well accepted. Would be glad for any additional information to the contrary. Now, on to my new question: I am searching for a model or go-by for a PTO policy that (1) permits employees to elect to receive cash-outs of accrued PTO in the following year in accordance with general constructive receipt guidance by the IRS. In addition, they also want to permit employees to donate a certain amount of PTO to other employees with medical emergencies in accordance with applicable tax rules. My question is whether there are strict ordering rules, etc. as to how these amounts relate to one another and how best to draft. In short, I am looking for a sample policy that incorporates both of these elements in a way that complies with tax rules. For example, a particular question relates to the PTO elections for cash outs which have to be irrevocable. I believe those can generally be drafted so that they only apply if the amounts elected to be cashed out exist at the time of the distribution such that if the employee actually wants or needs to take the leave before the cash out, that is ok and the PTO cash out amount would just be reduced accordingly without violating the irrevocability requirements. Given that, I assume the employee is also free to donate PTO amounts freely, including amounts that would otherwise be cashed out per their prior election, if a situation arises before cash out where the employee wishes to donate some leave. In short, I assume that the election for a cash out doesn't really mean those hours are removed from available PTO hours for use as vacation or medical leave but I am not sure that is how the program is intended to operate. Many thanks for any guidance and/or suggestions on resources for sample policies or plans.

Bill, I guess that all depends on what is meant when someone says "accepted by the DOL"--for example, did the DOL expressly acknowledge that the retroactive wrap was okay after careful review on audit or did the DOL just not ping them (yet) when they filed under DFVCP using the retroactive wrap process. I have seen more of the later than I've seen Nessie but alas the former seems as elusive as the monster.

Belgarath, Thanks for the suggestion. I will give that a try although I must say that my prior success in obtaining informal advice / responses to cold calls or emails to the IRS is fairly low (particularly in real time) but am hopeful we may have some luck here. Seems like this is the sort of issue that is likely to have come up enough that there would be a fairly clear rule. (Maybe there is and I am just afraid to accept that.) In this particular case, the plan permitted folks to come in right away and there were some part-time folks with low pay and short-term employment that appear to be entitled to truly de minimis contributions--e.g., less than $1. We are not sure they can even get corrective accounts in the plan set up for such small amounts. If anyone has particular experience with truly small amounts (i.e., less than $1) and obstacles in having corrective accounts established, etc., I'd welcome any experience or insights. Thanks.

John, I'm having CPAs question the approach noted in the last part of the reply here--i.e., that if the participant with a missed contribution gets a de minimis amount you could somehow just make the contribution to the plan but could come within the de minimis distribution exception. Do you know if the IRS has endorsed this approach / interpretation, even informally? It seems like the kind of exception that would sort of swallow the rule in many cases. Thanks.

I have a similar situation so just want to be sure I understand the proper response to IRA. My understanding was that the exception for de minimis distributions was for true mistakes in required distribution amounts from contributions properly in the plan. If the correct amounts never went into the plan, however, then the exception would not extend to corrective contributions even if they are likely to be cashed out / distributed to former employees once added into the plan. Is that a correct interpretation?

CHC93, Thanks very much for your response. Sounds like you have not had the reverse situation (transferring from Union to Non-Union) but assume then the person would be eligible to participate? Wonder in that case whether you would count just the comp for the portion of the year they were in the eligible class as sort of an extension of the guidance Tom Poje provided?

thanks

Rcline, Thanks very much. Would you happen to recall which conference the IRS may have opined on that or if there was any record of their thinking on that? I hear you on the each in their own group design but seems that approach may carry its own issues / disadvantages as well? So far they've made it several years without this or similar issues coming up and I think may prefer to set the rule rather than possibly open things up on a person by person basis if this comes up in the future.

Many thanks. The groups are defined by category with all partners in a single category. The plan document does not specify what is to happen in this situation. (Situation is one of first impression. Changes in status normally coinicide with calendar / plan year starts but this is a unique case.) Am sure the client would welcome the chance to specify as they wish it to be but just wondering if there are any issues in doing that or particular considerations to pay attention to (e.g., would there be a typical default or preferred way of handling that they should know about even if the rules would permit flexibility?) Thanks.

Any thoughts or advice on this issue welcomed. Parternship has cross-tested 401(k) / profit sharing plan which has all partners in a higher contribution rate group than other rate group. Partnership has last day of plan year requirement in order to receive discretionary contribution. Partnership has individual that has been an employee through the end of this month but will become a partner effective September 1st. Individual has already earned in excess of $255,000 as an employee. How should profit sharing contribution for this individual be calculated? Should the plan just use the lower percentage for the employee rate group taking into account "the first $255,000 earned" or instead try to maximize the higher contribution percentage possible from partner earnings for the period from September through December and then only fill in with employee earnings (at the lower percentage contribution) to the extent the partnership income does not reach $255,000 or instead do some pro rata apportionment based on the percentage of overall income earned as an employee versus earned income as a partner with the thought that no contribution is due and earned until the individual has satisfied the last day requirement and the partnership declared a profit sharing contribution for the year thus the partnership can look at the individual's overall earnings across the entire year?

Thanks for the additional information. I had not seem this much detail around the DOL initiative before. Just out of curiosity, any idea whether the DOL is focusing on particular size retirement plans / employers as part of this review (e.g., seems like there's a pretty good chance that all employers with maybe over 150 to 200 retirement plan participants could be good candidates for needing to file a 5500 for health or welfare plans)? Thanks