401 Chaos

Posted elsewhere but haven't gotten any response. Is anybody familiar with the McDonalds Licensees and Ronald McDonald House Charities Health and Welfare Benefit Plan / Trust. It appears to be a Group Insurance Arrangement (GIA) providing fully-insured group health and other welfare benefits to various McDonalds related groups including my local Ronald McDonald House. They Trust files a single Form 5500 for the overall "plan" as a DFE but say they do not prepare or provide ERISA SPDs for the participating employers / entities. Seems each Ronald McDonald House would need to prepare their own SPD and also presumably have some sort of wrap plan document to wrap around the group insurance docs provided by the overall Trust / Plan. Am I thinking about that incorrectly? Anybody have experience in working with this or similar GIA? Thanks.

I think I have some related questions / issues that I'm not seeming to have much luck with elsewhere. I'm helping my local Ronald McDonald House try and get their benefit plans in order, etc. The participate in something called the McDonald's Licensee / Ronald McDonald House Charities Health and Welfare Plan which appears to provide fully-insured health, dental, vision, group life, and disability coverage to participating entities. The "plan" files a Form 5500 on behalf of all the participating entities identifying itself as a DFE (item G) and a group insurance arrangement (GIA) but does not seem to identify itself as an ERISA multiple employer plan, etc. While there is a single Form 5500 that appears to cover all entities (18,000+ participants) and there is a SAR prepared / distributed, the GIA / trust / "plan" (whatever we want to call it) does not provide or help prepare summary plan descriptions (SPDs) for the local entities. Does anyone have thoughts on how best to think of this arrangement for SPD purposes. Should each participating employer think of itself as sponsoring their own single-employer ERISA plan and thus responsible for preparing their own SPD identifying the local entity as the plan sponsor and have their own plan name, plan number, etc. and just think of the bigger GIA / trust as basically the plan administrator and funding mechanism, etc. As I understand it, the local entities do not get involved in plan administration decisions, etc.--they basically are told what coverage is available and the rates, etc. and covered employees deal directly with the insurance company / GIA with actual coverage items, etc. so the local group wants to be clear that all actual coverage terms / decisions / administration, etc. is at the bigger group level. Seems too that they would likely need some type of wrap plan to specify specific employer-specific provisions to wrap around the group insurance contracts? Welcome any thoughts or experience anyone may have with this.

I have not faced that particular situation but agree with jpod that caution is warranted. I asked a panel at an ABA conference some years ago about potential alternatives for private companies who had in-the-money options expiring and wanted to try and extend the life of the awards without forcing exercise, etc. in light of 409A. Nobody specifically asked about the proposal jpod has suggested here but everyone on the panel seemed to be void of ideas on how you could really extend the life / value of the options without running afoul of 409A. If this would work, it would be one possible alternative I suppose but I'd be concerned about possible risks with this if the optionees are required to exchange their current in-the-money options for these awards. (Seems they could always add on these new / additional awards with 2 year vesting if the current options went unexercised but directly requiring them to exchange those existing options for the new stock awards seems very close to an extension to me.) Not sure what is on the horizon for the company. If it is sold or there is other liquidity event within 2 years, I suppose that short delay would be helpful to keep people around but seems otherwise they are very soon going to have former optionees getting large amounts of illiquid taxable stock without a ready way to cover taxes due on those amounts. If the company is going to have to help with that via bonuses, etc. they might want to just do that with exercise of the options now but, of course, that doesn't help them with additional incentive / retention for the next two years but I'm not sure there is a perfect solution to address all oft those issues.

Hadn't really thought about this but would a typical dissolution qualify as a 409A distribution event? Seems it wouldn't necessarily come within the change of control definition. Would that basically equal termination of the Plan?

Thanks very much. I spoke with the DOL and they confirmed this was doable. Advised that the proper approach is to just file through DFVCP without filing another Form 5500 (or an amended Form 5500) and respond to the IRS along the same lines we generally would if just filing the Form 5500 under DFVCP.

Hopefully this is a dumb question with an easy answer (regardless of whether it's the desired answer or not): If a plan has filed their Form 5500 late but without going through the DFVCP program, can you still resubmit under DFVCP, pay the applicable penalty amount and get in under DFVCP if you file before the DOL notifies you in writing of a late filed return? In this case, the plan has just received a letter from the IRS but nothing from the DOL. The DFVCP guidance says you are eligible if you haven't received a notice from the DOL and doesn't appear to say anything about excluding those that have already filed their Form 5500 and want to file an amended return or otherwise try and put under DFVCP. Thanks for any thoughts or suggestions.

Thanks very much. We've done a bit of looking at prior DOL guidance and haven't found anything directly considering an IRA owner's personal use of funds during the 60-day rollover period and potential PTs. I think requesting an Advisory Opinion and/or PLR may be helpful here but obviously a long and expensive process for the debtor to get a formal ruling. Maybe something to offer the court though? Will see if we might be able to get some informal guidance from DOL too as a possibility. On this particular point, the PT rules are all generally grounded in transactions involving plan assets or transfers from the plan, etc. Wonder if there is any general guidance or authority out there we might point to that basically says distributions are no longer plan assets after a distribution even if that didn't directly get into the whole rollover / personal use / PT issues.

Thanks to all and particularly Masteff and Belgarath for the additional summary of the Willis case. This is very helpful--it appears the BR Trustee misquoted the Willis case suggesting the first withdrawal was redeposited within 60 days. As noted in the summaries, that was not the case and the later check swapping transactions that actually were redeposited within 60 days clearly violated the "onle one rollover every 12 months rule" (and likely other rules as well) so there was no valid rollover there. That is all extremely helpful as I think it clearly allows us to distinguish Willis, the primary authority cited by the BR Trustee here. AS BKIRA notes, there is a lot of mud slinging. Unfortunately, I think the Trustee may be able to draw on more caselaw where the 60-day rule was met and where other BR courts appear to base their decision largely on the intent of the debtor when withdrawing the funds, etc. We are still helping the BR lawyers try and sort through these cases but the thrust of the BR Trustee's argument here (while not really stated this directly) seems to be that because the withdraw was not characterized as an early withdrawal when first taken out of the IRA and because those amounts come back into the IRA the court should basically treat them as plan / IRA assets (subject to the prohibited transaction rules) while they were outside the IRA. If the withdrawn amounts come back into the IRA and the IRA Owner hasn't benefited then that is presumably okay; however, if the IRA Owner benefits or clearly does indirectlywhat he could not do directly with the amounts if actually in the IRA (e.g., use the amounts to pay personal expenses), then the IRA Owner has engaged in a prohibited transaction blowing up the IRA and thus the IRA exemption. To me, that analysis seems to clearly be the wrong way to think about withdrawls during the 60-day period and seems inconsistent with IRS rulings, guidance, etc. As Gary notes, this was a distribution, not a loan, and so was potentially subject to taxes / penalties if the withdrawn amounts were not redeposited within 60 days. As long as the amounts are redeposited within 60 days (and no more than 1 rollover occurs per year, etc.), however, it is immaterial what is done with the withdrawn amounts outside the IRA during the interim period.

Thanks to all for your thoughts (and for generally agreeing with my general take on this). The facts in the OP are not glossed--the individual here took out a single distribution and used it to cover a single expense then redeposited the same amount in the same IRA within 60 days (after receiving the tax refund). No pretense on his part that he was trying to take or make a true rollover to another account--he simply wanted to cover the expense and knew he would be able to repay within the 60 days. Basically he was just following the advice of the bank / trust department rep in making the redeposit--had he known this might have jeopardized the larger account balance then he would have simply taken an early withdrawal and paid taxes and penalty or tried to delay payment. I am not a bankruptcy lawyer either but the Trustee here is squarely claiming the individual's actions resulted in a loan from the IRA to him and thus yielded a prohibited transaction thus blowing up the entire IRA. Essentially he appears to be citing / tracking the same claims / charges made in the Willis case cited above without any real discussion or analysis as to the 60-day rule, IRS (or DOL) guidance, etc. There appear to be a few other bankruptcy cases taking a similar approach (without getting into the details on the PT front) with a couple cases basically acknowledging the existence of the 60-day rule but finding that doesn't apply even though the money was clearly redeposited within the 60-day period because the indivdiual never intended to actually roll the deposit over to another qualified account or plan. There is no authority cited for that result really--the court just seems to rule out it being a qualified rollover based on the individual's intent. See In Re Bostic; In Re Cobb. In contrast to that, the IRS in PLR 9010007 examining the 60-day rule concludes as follows: "An individual may withdraw funds from his IRA for personal use and this may be considered a rollover as long as he replaces it back into the same IRA or into another qualified IRA within 60 days." Gary, Thanks for your thoughts. I don't disagree that the overall facts around the debtor's actions in the Willis case are particularly bad given the check kiting scheme, etc. The Court there, however, seems to say the IRA engaged in a prohibited transaction and so was disqualified due to the debtor's initial withdrawal and use of funds to pay toward the mortgage on a piece of investment real estate held outside the IRA. Even though he repaid / redeposited the withdrawn funds to the IRA within 60 days, the bankruptcy court seems view that as disqualifying the IRA without having to get into his later, more troubling actions, etc. Although our guy's actions are perhaps more sympathetic in that he used the amounts to pay expenses rather than make a real estate investment, the general fact pattern is very similar so I think the Trustee in our case sees that case (rightly or wrongly) as being clearly on point. (Perhaps the court may have come down differently if that were the only IRA transaction and there hadn't been other clearly troubling activities but the court seems OK finding a problem with that initial distribution / redposit.) Welcome any additional thoughts anyone has on this--the lack of analysis in the Bankruptcy case law around these issues is worrisome.

Anyone have any experience or able to offer any insight with respect to the treatment of IRAs in bankruptcy and the potential loss of a bankruptcy exemption due to the IRA owner's prior distribution / rollover of an amount within the IRA during the 60-day rollover period? Facts are as follows: IRA owner has an IRA with a fairly large balance. IRA owner had expenses to pay and was nearing possible bankruptcy filing. IRA Owner went to bank with intention of taking an early distribution from the IRA (and paying applicable taxes and penalties) in order to get sufficient funds to cover immediate expenses until his tax refund arrived Bank told him instead that he could take money out as a "rollover," use the funds to cover expenses, then use his tax refund to redeposit the amounts without adverse consequences provided the amount was replaced prior to the 60-day rollover period expiring. IRA Owner did that just that, took a distribution, used the funds, received tax refund and made the redeposit within 60 days. The bank and IRA owner have considered IRA to remain qualified / tax exempt IRA for all purposes. IRA owner then filed for bankruptcy. Bankruptcy Trustee is now challenging exemption for the IRA account saying the entire IRA account was disqualified due to prohibited transaction created by virtue of IRA Owner's use of the rollover amounts before redepositing. Basically the Bankruptcy Trustee claims such use constitutes an impermissible loan of the IRA funds to himself and/or use of the IRA funds for his own benefit and/or general self-dealing. The Bankruptcy Trustee points to a couple of Florida Bankruptcy Cases--In Re Hughes, In Re Willis--where the bankruptcy court appears to have held in favor of the Trustee on somewhat similar facts finding that the withdrawal and repayment of the withdrawn amount within 60 days resulted in a prohibited transaction under the tax rules thereby disqualifying the entire IRA for tax purposes and thus causing the IRA to lose bankruptcy exemption. Has anyone dealt with anything similar? Interestingly, the Bankruptcy Courts in these cases appear to arrive at this conclusion by applying the tax laws but it is unclear whether the IRS has ever considered much less arrived at a similar holding with respect to these particular IRAs. Indeed, the IRS has numerous PLRs which would seem to suggest this same thing is generally possible in a non-bankruptcy context without disqualifying the IRA. Specifically, there are rulings where the IRA amounts are withdrawn but repaid within the 60-day period and even cases where the funds were apparently used for the IRA Owner's benefit during the 60-day period. Am I missing something? How can the Bankruptcy Trustee claim the bankruptcy exemption is lost because there has been a prohibited transaction under the tax rules resulting in the IRA's loss of tax exempt status when the IRS has not made that determination and appears to have permitted similar transactions without disqualifying the IRA on similar facts. Given that having access to / holding the distributed amounts during the 60-day rollover period could arguably be viewed as providing a general benefit to the IRA Owner even if he or she does not actually use the IRA amounts to cover expenses during the rollover period, it seems that the prohibited transaction issues would likely always be such a concern in any IRA rollover scenario that the IRS would not / could not permit the 60-day rollover policy in the first place.

I'm not sure this is addressed in the prior discussion but am hoping this might be a relatively simple question: if a 401(k) plan corrects excess deferrals by refunding the excess before April 15th of the following year and the excess deferrals arose because of a payroll glitch (i.e., this was not an issue involving two unrelateed plans / employers), does the correction have to be done in accordance with the SCP requirements of EPCRS or can that more simply be corrected. From the IRS summaries I've seen, it is unclear whether the excess deferrals automatically create a qualification issue that must be corrected per EPCRS or whether you technically only hit the EPCRS corrective procedure requirements (e.g., having to document the correction; documenting plan practices and procedures in place, etc.) if you fail to correct by April 15th. Thanks.

I'm not sure what the IRS's decision means for those plans that have (intentionally or not) played the IRS notice game but seems to me this could suggest a greater urgency than in the past for those plans that are late in filing 2011 to get those in under DFVCP. We had a similar client who had filed 2010 pretty late under DFVCP after getting an IRS Notice and was also running late for 2011. They filed an extension for 2011 so were not due to file until mid-October but had a DOL Notice of Intent to Assess a Penalty mailed to them mid-December apparently without any other notices or warnings from either the IRS or DOL. Not sure if part of that was due to 2010 being filed late, the new lack of notices from the IRS or just random DOL action.

Wanted to bump this up again. Maybe it's just me but doesn't the IRS's decision to stop sending these notices pose a significant threat / change to the DFVC Program? It seems that unless the DOL somehow starts to send out notices or warnings that don't somehow prohibit the use of DFVCP following a DOL notice then a lot of plans that were driven to DFVCP by the IRS will now face significant DOL penalties.

Not sure I've ever seen particular guidance under 409A on that particular question but it seems to me that approach would work. As you note, options are routinely cut short of the maximum option period due to forced exercise / forfeiture following separation from service. I'm guessing here the vesting must be tied to some performance milestone that may occur before the 7th anniversary of the date of grant and so cut short the regular 10-year period? Seems to me as long as the option provides that the period will not go beyond a set number of years then the possiblity of earlier termination should not be a 409A compliance issue.

JPOD, I do not recall specific guidance from the IRS on this but 422(d) speaks in terms of when the ISOs first become exercisable rather than when they vest. Although it is rare to see vesting and exercisability separated, I would think doing so would permit you to treat all as ISOs under your facts--seems to me the limit is more there to cap the total potential value going to an individual in the form of ISOs in a particular year rather than to regulate vesting per se.

Dave, Thanks very much for the quick response . . . and cofirming I was not imagining things. Given the 1/1/13 effective date, this wouldn't seem to explain the direct DOL Notice in our current matter as that was sent out in mid-December but the news does leave me wondering what the typical protocol will be now with respect to DOL assessments. Seems for a long time the IRS notices were a helpful warning shot to many plans that were late or failed to file 5500s that would permit them to file under the DFVC Program without penalties. If there is no IRS Notice and the plan doesn't realize the failure in time, seems DFVCP is eliminated once the DOL catches on and sends out the notices. Along those lines, has anybody had recent experience in making "reasonable cause" arguments to the DOL re a late-filed Form 5500 when the main basis for delay was administrative error / sale of the company and confusion with respect to fiing obligations, etc.?

I feel certain I saw a news blurb or clip somewhere recently (last 3 weeks maybe?) indicating that the IRS intended to stop sending out Form 5500 Delinquency Notices but I cannot seem to locate the article or any information along those lines. Indeed, it looks like the IRS recently revised and updated the delinquency notice provisions on their website so seems strange they would do that if they were going to stop sending these out. Maybe I imagined seeing the headline or just misread it. Has anybody else seen or heard anything about the IRS stopping such notices. Also, a somewhat related question: we have a client that recently received a DOL letter notifying the plan of the DOL's intent to assess a civil penalty for failure to file a 2011 Form 5500. According to the client, this is the first notice they received with respect to the 2011 Plan Year--never received anything from the IRS re 2011--so no real chance to go through DFVC first. (They apparently filed 2010 late as well and did receive an IRS notice for that and filed that under DFVC so maybe that explains the 2011 notice directly from the DOL.) Anybody have similar experience?

Afraid I don't have an answer to the specific questions but agree with the most recent advice. I think you probably do need to file some sort of return for prior years going at least as far back as the plan(s) first had 100 participants and so required to file a 5500 (assuming it is not some other sort of funded arrangement, etc. required to file no matter what size). If you file the last three years and the plan had more than 100 participants at the beginning of the earliest year, etc., I think the DOL could flag or ask questions. Factor into the analysis that (1) the DOL has apparently said, at least informally, to "do the best you can" and so may not be inclined to investigate or look closely at some of these earlier returns, (2) the DFVC penalties generally cap out after a couple of years returns due, and (3) the preparation of estimated returns for a H&W should not be all that hard and my advice would be to file as many as you can or need to. I have not had to do that back as far as 30 years--were the H&W 5500 requirements the same that far back?--but have had to go back 11 years. We had reasonably good participant and premium info for the last 6 or so years but gaps before that. Fortunately the plan had not changed insurers much so we did general estimates based on what we knew about size of company / payroll and general premium amounts and noted as much in the cover letter. We just filed that fairly recently so wish us luck . . . .

This seems like it should be an easy or simple question but I cannot seem to find any express discussion or guidance on this and so want to make sure I am not missing something. Company has a group health plan. Company is going to implement a wellness program. It is generally separate from the group health plan and will be available to all employees. It will reward individuals for achieving certain health status / factors (i.e., it is not a participation only program--you have to achieve a particular result or alternative standard). The plan generally complies with the five factor HIPAA nondiscrimination requirements--the reward involved is relatively small and there are alternative arrangements. Plan is to provide premium discounts or rebates for those in the group health plan and cash / card for those individuals achieving health status that are not in the group health plan (e.g., if covered by a spouse's plan, etc.). Is there a problem with providing cash / rewards to those not in the group health plan since the cost of coverage for them is $0 and any amount would exceed 20% or is the 20% to be determined based on general cost of coverage for an employee / family under the plan if they were covered? Thanks

Due to glitch in shifting over to new payroll system / software, a relatively small division had their 401(k) deferral missed for a single pay period. The employer realized the mistake right away and informed all participants of the problem and that they intended to simply double up on the 401(k) deductions the next pay period so people should anticipate having double taken out from pay the next time and so hold on to the extra pay now. Anybody been through a similar issue. Is this sort of self-correction possible or would the IRS say they clearly needed to correct by treating the pay period as a missed contribution with the company kicking in 50% of the missed amount? How would you expect the plan's auditors to react to this corrective action if the overall amount was small relative to the overall plan amounts?

I have a similar but not exact situation and am hoping someone with general experience with this could be of assistance. Employer has GTLI plan / policy that they've had for many years. Long-time employee covered under the plan has serious (likely terminal) medical issues and has been out of work on short-term disability for the last few weeks. The employer is considering switching insurers effective for 2013 but is concerned about coverage for the individual out on disability. She is unlikely to return to work at all but particularly unlikely to return by the January 1 effective date of the new policy. The old GTLI policy has a waiver of premium provision but it does not appear to kick in until an individual has been totally disabled (under the terms of the plan for at least 6 months). Based on the current prognosis, the employee is likely headed for just that sort of situation but has not been disabled for 6 months (and will not have met the 6-month threshold by January 1st. The new insurer has asked for a census of all employees out on disability, etc. and indicated the employee would not be considered actively at work and so not covered under the new policy. What is the status of this employee. Could she possibly come within the waiver of premium classification even though she has not yet hit the 6-month threshold?

Does anyone have experience or recommendations for resources discussing a regular US 401(k) plan that has covered Puerto Rico employees without regard to the dual qualification requirements and/or specific rules / limits, etc. applicable to Puerto Rico employees. (Basically employer treated adding Puerto Rico employees just like adding employees of a regular state for 401(k) purposes and did not realize the issues with that until a former PR employee tried to roll over his distribution.) I feel like I have seen this issue discussed on boards here or possibly in some journal articles before but cannot seem to find much information. I'm thinking this must not be an completely unknown issue but not sure how / if they could go about correcting with the Hacienda and/or IRS. Thanks

Has anyone seen any recent DOL enforcement actions related to missing Form 5500s. In this case, plan sponsor failed to file 5500s for several welfare plans. No 5500s have ever been filed for these plans so they are not on anybody's radar--i.e., this is not a situation where the IRS might send a notice asking why the 2010 5500 was missed and client could then move through DFVC to address both DOL and IRS concerns. I know there could always be a random audit by the DOL that might discover the missing Form 5500s which would then preclude the use of the DFVC program. My specific questions are (1) has anybody seen such audits by the DOL, particularly in recent years and/or seen the DOL hit these issues in audits primarily investigating other areas? and (2) if somebody has seen such audits, what sort of fines does the DOL typically impose. We have not seen any DOL action in this area in a very long time so would appreciate hearing from anybody with recent experience. The company plans to go through DFVC but question is how quickly they need to do that. They only have records for the most recent years and are trying to determine how far back the filings need to go. They believe they have the records that will permit them to determine number of participants (and likely an estimate of premiums) but it will require some digging through files in storage. At some point the cost of continued digging for exact numbers doesn't seem all that worthwhile but the risk of enforcement concerns also doesn't seem to merit simply winging it and throwing together 5500s with estimates for years that may or may not have had more than 100 participants. Thanks.

El, Was curious if you found an answer to your question. We have a similar situation as well. My general thinking has always been along the same lines as yours--that if a plan sponsor has exhausted their ability to obtain exact information that it is generally best to file returns for the years they think are missing with general estimates and note that in the cover letter. For returns that are 10 years old, etc. it's hard to think that anybody would care about the exact number of participants or other data at this stage--i.e., does it really matter whether there were 119 or 129 participants in the plan in 2001, etc.? Unfortunately, I don't have any recent experience with this however or heard the DOL (or IRS) opine on this in recent years. Would appreciate hearing from others with recent experience under the DFVC.

Without having given it much thought, I wonder if you could simply remove the director from this plan and say there was an error in including the director in it since the Plan was not intended to cover directors. Then, you could do a separate, one-off arrangement for the director to provide for benefits upon leaving the board, etc. that was drafted to specifically cover the director and address 409A issues. Not sure that would fly if the director has technically been included already but I would think that would be better than trying to monkey with the terms of the existing plan which really seems to have been intended for involuntary terminations of employees. (I'm not really sure how you would revise the existing plan now to safely permit benefits in the case of any separation from service. Is the existing plan structured to come within a 409A exemption so that you could argue 409A does not really apply and the plan could be amended, etc. (provided the amendments continue an exemption or insure compliance with 409A)?