QDROphile

When the employer covers the entire premium, the term "pre-tax" as commonly understood in the industry is not the correct description. The health benefits are provided tax free. No cost to the employee and no taxable income associated with the benefit. Pre-tax means something else. If the employee wants the benefit and is willing to pay with after tax dollars, that can be done, subject to eligibility terms of the group health coverage. The employee cannot choose pay for the coverage pre-tax unless the employer has a cafeteria plan. Under the plan, the employee can choose to have the coverage and the employe's pay would be reduced by the premium amount. Since pay would be reduced, the premium amount would not be included in the employee's taxable income (or FICA wages), and that is what is called "pre-tax." It would be edgy in several respects, but the employer could cut the employee's pay by the amount of the premium and then provide the coverage for "free" like everyone else, but the employee could not choose to start or stop the arrangement. It would have to be a permanent feature of the employee's compensation. That would amount to pre-tax payment.

It would help if you clarify the intended insurance coverage. Would the employee obtain coverage under the group policy that covers the others, or an individual policy? Also, you changed the proposition for tax consequences. An employer does not need a cafeteria plan to allow an employee to pay premiums for group health coverage with after tax dollars. If one is buying an individual policy with after tax dollars, the employer does not need to get involved unless the employer has some buying capacity that is advantageous, such as a lower premium cost.

The 401(k) timing regulations are not relevant. This is not a contribution arrangement, it is a correction of an unrelated operational error. Corrections are also typically outside of plan document terms. I would not even use the term forfeit. The participant never had an interest in the mistaken contribution. One must have an interest before one can forfeit it. Aside from fine points of terminology, I subscribe to BSG150's position.

Are you under a misimpression about what is an employee contribution? An employee contribution is after-tax.

I don't think you can make Rev. Rul 61-146 work under the circumstances implied by the question. And if you could, it would not be pre-tax payment. An arrangement under the ruling provides for the employer to fund the cost of coverage, not a tax-advantaged purchase price for the employee.

Two issues: 1. Health plan eligibility terms, as noted in the second post. 2. Cafeteria plan. You did not say how the health benefits are "offered" to other employees, but the descirption implies that no one else "buys" the insurance. An employee can only purchase coverage on a pre-tax basis if participating in a cafeteria plan of the employer, which requires a written plan document.

You asked for more details about a plan spin off. You start from the idea that both companies maintain the plan. If the companies are not effctively independent in covering costs of their respective employees, you will have some complications when you spin off, but that can be covered as part of the terms of the spin off and may involve transfer of funds from one company to another. To keep the picture simpler, assume that each company effectively covers costs for its employees. The plan itself is mostly blind to actual funding. As company 2 departs the controlled group, company 2 keeps its part of the plan and the plan has exactly the same terms as before except the coverage definition changes to focus only on company 2 employees and perhaps also company 2 former employees. The "new" plan is a continuation of the original plan and would not have a short plan year with respect to the employees -- nothing would change for the employees except they might submit claims to a new administrator. For purposes of certain other formalities, the new plan starts life as of the effective date of the spin off, so if there is a medical spending account, the first 5500 would be filed for the year of the effective date. Consequently, there is some ambiguity about the "date" of the plan if the effective date is mid-year in a calendar year plan, but the duality should not cause much trouble and you might take the position the the effective date is the first day of the plan year despite a later apparent effective split. Part of the resolution may depend on how liabilities are apportioned between company 1 and company 2. I assumed away most of the complexity by having each company effectively be liable for its employees even before the spin off. Post-spin off amendments are probably needed, such as the refitting of eligibility terms, even if the eligibility and coverage issues were addressed in separate spin off documentation. The welfare plans funded through the cafeteria plan apart from the spending accounts have to be coordinated. For example, will company 2 be able to maintain a group health insurance policy with the same terms and premiums after the corporate spin off? Adjustments to the underlying plans may be events that allow participants to change elections.

I don't think the "new" rollover requirements change the old fiduciary duty to try to contact the participant for distributions. If the participant appears to be lost rather than simply unresponsive, then the lost participant standards apply, and would require reasonable efforts, including use of a government forwarding program, to contact the participant. You might be able to distribute to an IRA in the interim (subject to institutional squeamishness about having an unknown customer), but contact efforts need to be pursued if only to notify the lost participant where the distribution went.

There is no employee money under the plan. The two companies can make whatever arrangements they desire with respect to their assets and liabilities, including transfer of funds to balance assets and liabilities. The transactions should be taken into account in the larger scope of the spin off of the second company. Supplement to response: It probably would have been best for the portion of the cafetria plan with the second company employees to have been spun off. Then you would have continuity and no initial enrollment or election questions; you might have some questions if anyone wants to justify a mid-year change in election based on the events. It may still be possible to treat the seocnd company plan as a spun off plan, but both companies will need to be engaged in the formalities.

Depends on how you designed the plan/plans. If you have a plan that is an "umbrella" or "wrapper" for the other plans, you could have a single plan for ERISA purposes. The number of pages or staples is not what determines.

As long as you have only one employee, you might be able to make a SIMPLE work if the employee wishes to defer forever at least the amount of the employer's two percent contribution. The two percent would be covered by a pay cut, but watch out for other undesired consequences of a pay cut. For example, most people view the reduced FICA wages as a good thing (and the tax savings can help mitgate the pay cut), but if you believe in Social Security, reduced contributions might be viewed as bad. One might argue that the deal would be an impermissble CODA. You decide.

I have serious doubts that such an exclusion would pass the "reasonably equivalent basis" requirement.

There are so many elements of plan administration that are affected because of circumstances signaled by absence of contributions that it is hard to imagine a TPA not asking about the signal as part of handling administration properly. Maybe scope of the TPA's duties were very limited.

Wow, a lot of activity while I was editing to provide a direct response to KRS401(k).

K2retire: Just off-hand I would offer that it is implied by (i) the rules for vesting upon complete cessation of contributions, which do not say that the plan terminates, and (ii) Treas. Reg. section 1.411(d)(11)(e). You raise a good point and implications are not a great foundation. In any event, it would be some time, almost certainly more than one year, before the rule would have effect. I have heard different rules of thumb. KRS401(k): I am shocked that a TPA would wait so long to ask for an explanation from the plan sponsor or fiduciary about what happened to contributions and the implications. I can understand coming to the message boards to get comments about the explanation of the phenomena and any compliance aspects of the circumstances and the proposals for maintenance or disposition of the plan. Curiosity is good, but it is strange to come to the message boards with both curiosity and complete speculation when some of the curiosity should have played out with prior inquiry. One answer that fits is that the plan has a determination letter request pending and a plan liquidation or merger has been put off until receipt. But if you don't ask ... .

What is D telling you about D's plan? Or to be more accurate, what is the fiduciary of D's plan telling you about D's plan? It sounds like D's plan is frozen. It will operate normally except it will have no contributions. Participants have the ability to get distributions as usual, e.g. termination of employment, but no special rights except maybe accounts became vested. I am a bit shocked by your question.

ESOP review is caught up in some controversy. Be glad you are not getting comments now because the IRS is taking some positions that are contrary to accepted understandings, including accepted understandings that are not wrong. There are a lot of accepted understadings about ESOPs that are wrong and I am hoping that the IRS steps on a few of those.

A one-time election feature fundamentally changes the plan design unless the election is narrowly circumscribed. Even then, it could lead to discrimination problems depending on the choices. Also, substituting current compensation for contributions might increase employment taxes, but I could be recalling the rules about 403(b) contributions incorrectly. I did not check and there is a specific rule.

403(b) plans can be designed to allow one-time irrevocable elections, but it sounds too late to accommodate this employee, and such a design change would probably be unaccepatble to the employer. I am inferring a lot about the employer contribution because the description is sketchy.

Is this a plan language interpretation question? If it is, and the TPA is not a fiduciary, the TPA's conclusion is not the controlling conclusion. The plan should say who interprets plan terms.

The plan is not limited to the safe harbor events under the regulations unless the plan terms limit distributions to the safe harbor events. If you get outside of the safe harbor, there is really no reliable guidance but there are circumstances that qualify, depneding on the standards set by the plan terms and how thos standards are applied by the fiduciary. For example, the plan could list some additional events, such as overdue federal income tax liability that is subject to collection actions -- but no one is going to assure you that such circumstances qualify despite personal beliefs to that effect. That uncomfortable situation is why most plans stick to the safe harbor criteria.

Anecdotal evidence suggests that the IRS might assert that an excessive rate is a disguised contribution. Most at risk are individual or small professional plans.

Belgarth is probably right, but you should at least call and see if the IRS will entertain the idea. I have had success under VCP with the clerical error theory. Everything but the plan document remained in line with the former plan term, sot eh plan term change was an obvious error. I think you are dead if the SPD reflects the change.

Depending on what the employer does about the bad acts and the nature of noncompliance, the reimbursements would be taxable compensation.

Additional question: If all your questions can't be answered with acceptable answers, is it a breach of fiduciary duty to have such investments? Even if ERISA does not apply, there are fiduciary duties, although enforcement and penalties in that cases I am familiar with are essentially nonexistent.