QDROphile

See section 72(t)(3)(A). The exemption under section 72(t)(2)© from the 10% penalty applicable to QDROs does not apply to IRAs. You can shift the obligation to pay the expense to the former spouse along with the additional money in the new IRA for the former spouse that will be sufficient to make the payment, but the former spouse will have to pay the 10% penalty. Nothing is gained with respect to the penalty tax on the amount equal to the expense unless the former spouse has attained age 59 1/2. There may be other tax consequences of the agreement to have the former spouse pay an expense of the IRA owner.

The employer does not have to do anything. The employer can leave the plan at risk of disqualification. The fiduciary should consider its obligations. Usually the fiduciary does not have an obligation to make sure contributions are made, but it may have an obligation to report to the recipient if the amount of distribution is not what the plan says it should be. You know, utmost duty of loyalty, highest standard recognized by law and all that. Whoever signs the Form 5500 should carefully consider if all the information on the Form 5500 is correct in light of the known shortfall of contributions and distributions.

You are correct. Rev. Proc. does not specifically identify your particular circumstances and walk you through the correction step by step. It does that with a few common errors. However, it provides general guidance about corrections and examples about matters such as earnings adjustments when the participant got too little contribution or too much contribution. In your case, you have two participants who received too little contibution. The overall guiding principle is that the participants and the plan should be restored to their positions as if the mistake had not ocurred. It looks like the employer may have to kick in some dollars unless the participants agree to elect contributions for the remainder of the year to get where they are supposed to be. Then there are those pesky earnings to account for. The question about the effect of the participant's fault in the matter is an interesting one and there are some other threads on this board that discuss the issue. Don't expect the situations to match yours exactly, or to provide an answer. I doubt that the failure of the participants to observe the problem for some reasonable time would not make a difference to the IRS. The employer will be responsible for the correction. An update of Rev. Proce 2003-44 is expected. It may provide some guidance that is more on point for you.

The problem with the arrangement is that it violates the fundamental requirement under section 125 that an employee must elect before the beginning of the plan year to reduce pay for the coming year by a specified amount in order to get the benefit for the year. That is the whole point of section 125. If the administration firm is "offering" this arrangement, it is either totally incompetent or a scoundrel. This is not a subtle or technical issue where the matter is debatable or a mistake is understandable. It is at the heart of section 125. What your employees really have is after-tax payroll deduction to cover their out-of-pocket medical expenses. Since it is an after tax deduction, the payments don't even have to be for qualified medical expenses, so the adminstration firm's review for eligibility of expenses is pointless. You will need to include all the reimbusements this year in compensation and report them on From W-2. Start working on the correction soon so you can ease the sting of withholding on the amounts that the employees thought were pre-tax reimbursement amounts. If the employer has been participating in this snow job in past years, the emplyer has failed to report compensation properly and to withhold properly. Corrective action is advisable. You should hire competent help to assist with fixing this mess.

What happens after the administrator books the claim in the FSA account? How does the claim get paid (where does the money come from)? What effect does payment of the claim have on the employee's pay? The elements that you have described look like an arrangement that does not comply with section 125 requirements, but I do not wish to explain why it does not work based on speculation about some of the missing elements. Please supplement your description with the information requested.

It is a qualification problem. The plan says that contributions will be made in accordance with participant elections. You have contributions for two participants that are not what they elected. The plan did not operate in accordance with its terms. Rev. Proc 2003-44 provides guidance on how to fix mistaken excesses and shortfalls of contributions.

As long as we are being vague, don't forget prudence.

Kevin Wiggins is asking the right question. If the order tells the AP not to elect a rollover, that has nothing to do with the plan and will not affect qualfication of the order. The plan administrator disregards it as irrelevant and offers the rollover as required by the plan. The AP elects a rollover at risk of contempt of court, but the plan will honor the election. If the order says the plan cannot allow a rollover at the election of the AP, the order does not qualify. Orders require interpretation and similar statements can have completely different legal effect. It may be difficult to decide exactly what the order is saying by way of restriction. So my solution is to interpret the order as not intended to disqualify itself -- the learned counsel and learned judge would not be so foolish. The plan administrator will say that the plan administrator will disregard the provision. That does not mean that the AP may disregard the provision.

If the ESOP has registered securities (plan interests, employer securities or both), it probably is required to file an 11-K. How is it that the Bank has an 11-K requirement for itself? The nature of your questions suggests that you are not the one who should be providing answers to them. I don't mean to be mean, but the questions require a combination of expertise and knowledge of the facts rather than having someone provide a citation to you.

You can roll over funds only if you are entitled to a distribution. Are you eligible for a distribution now? You cannot roll over funds that are paid in periodic payments for life or over a period of more than 10 years. Does the plan allow you to choose distribution of a lump sum or other form that qualifies for rollover? It sounds like you want to move all your benefit now. That is possible only if you are entitled to a distribution in a full lump sum now. Many union pension plans pay only at retirement age and only in the form of periodic distributions. The rollover rules do not give you the ability to simply move your benefits someplace else whenever you wish. Take a look at IRS Pubilcation 590, available on the IRS website.

Maybe someone can do better for you, but you may have to be satisfied with pointing out that no compensation is pre-tax unless the Internal Revenue Code has a provision that allows the amount to be excluded from income, such as section 125 and 401(k). You will find nothing in the Code that covers amounts used to pay plan loans. The idea of using payroll deduction for plan loans is only a convenience. Payroll deduction is not a required source of money to pay the loan. You could have a payroll deduction to pay your mortgage. Who would argue that the deduction for the mortgage payment is pre-tax? Don't feel bad about making the proponent of an idea provide the authority for it. That is the general rule in dealing with the IRS. If you can't show why you should get a deduction or exclusion, you don't get it. If you take the approach that you have to disprove incorrect notions, you will spend all day with silliness.

Maybe, but the trivia is where we get to strut our stuff. You can also see that my "stuff" is not typing skills. Displays of gratitude are always welcome, and I appreciate your contributions to the board as well.

Then take a look at SEC Release No. 33-6188 (1980). It might make you appreciate products that include explanation and anlysis.

Keep in mind that a plan is not required to allow a change just because it would be eligible under the regulations. Always consult plan terms.

BNA has a porfolio on the subject. You will see a familiar name in it, too!

Mr. Maldonado: Disregard of inapplicable or improprer provisions is based on a philosopy of review of orders. The primary objective is to determine that the order is qualified (which is ususally the goal of both parties as well as the plan). A close second is to do so efficiently. The efficiency criterion requires avoidance of unimportant correspondence. The evlaluation of what constitutes unimportant correspondence is based on a premise, or recognition, that the personsa who draft orders are usually not experts in the subject matter. Put that all together, and mix in some arrogance on my part, and you get a process that is aggressive about interpreting orders in a way that disposes of them in the first round. In other words, we fix mistakes without asking. The process involves a clear articulation of the interpretation of the points that may be controversial or subject to mistaken interpretation. The articulation allow the parties to understand exactly what is going to happen so they can dispute the interpretation if it is mistaken or not what was intended. The determination and interpretation are not final until after a period that allows for dispute, and dispute suspends implementation. I find that disputes are rare, I hope because the outcomes are correct. If there is a dispute, it usually leads to a determination that the order is not qualified and they have to rewrite. Applied to your question, what good would it do to ask? What answer could be given? If they did not intend that the plan enforce the provision, then disregarding was correct and efficient. The plan will not require the AP to elect a rollover, either. If they intended that the plan block the AP's election for a direct rollover in accordance with plan terms, then they could dispute the blatant misinterpretation and the plan administrator would rule that the order fails to qualify under that interpretation. Just about the same amount of work for the plan administrator in the second case and less work in the first. I would take that bet. Belgarth: Would you like a sinister explanation? This could be a variation on another improper provision that it sometimes in the order, a direction to distribute to the alternate payee's lawyer or jointly to the AP and someone else (such as the lawyer). It is a sure source of funds for the lawyer or some other creditor to get paid. Not legally binding, but it can is effective as a pressure tactic against well-intentioned but impecunious litigants. A less sinister explanation is that it is misguided attempt to make the distribution election in the order rather than in accordance with distribution procedures. I get the idea that some drafters of orders think that they need to address the issue, even if only to say that the AP has the option, which is what the plan provides anyway. Now let me slam plan adminstrators just to be even handed with criticism and justify the paranoia of the drafters. Would you believe that some plan administrators do not allow the AP to choose? Ignorant and stupid plan behavior is responsible for both overkill on the part of drafters and misguided informal DOL positions on QDRO issues.

Is your point that a certain volume of noncompliance changes the rule? Or perhaps an insufficient level of enforcement changes the rule?

Perhaps the term "constructive receipt" will sound familiar to you. If your FSA is funded solely with reference to compensation deferral, there is no benefit until there is compensation deferral. There is no compensation deferral until the employee elects it with respect to amount not yet earned. A middle ground is that the coverage can be effective beginning with the pay period in which the salary deferral is submitted, assuming that the salary deferral is effective to reduce pay for that pay period. Some do not agree that the middle ground is legitimate. They believe that the coverage starts with the first pay period after the salary reduction election is delivered -- everything is prospective. Your payroll system should be able to comply with the conservative view. One solution is for the employer to cover the share of the cost for the time before the election. You need to watch the timing so everyone gets the same deal. You don't want to penalize employees who submit promptly. Same thing goes for tax treatment of premiums for the health care if premiums are paid through salary deferral.

Of course you can take actions without full appreciation of the applicable law and without the assistance of someone who does. You can also represent yourself in court and prepare your own will. I guess you can't pilot your own airplane without a license. You have to make choices of risk and reward, all relative to complexity.

On what basis do the shareholders maintain "individual" plans? Does the corporation in which they are shareholders sponsor 5 plans, with each assigned to a different plan, or do they each have other unrelated employment besides the corporation and sponsor the plans for the other employment?

I have seen this before. I disregard the "no rollover" provision, but I expressly say so in the notice of qualification. If they don't like the interpretation, they can appeal, at which time the administrator will rule that order fails to qualify. Rollover rights are stautory (or at least the plan's qualification hinges on them); an order can't take them away. A court can order the AP not to roll, but that is not a matter for the plan administrator to enforce. the AP gets the option as provided in the plan and the law.

See Code section 125(f). "Qualified benefit" for a cafeteria plan does "not include any product which is advertised, marketed, or offered as long-term care insurance." See Code section 106©. Long-term care services are included in gross income if provided through a flexible spending arrangement.

A fiduciary should be very concerned about insisting that the SSN be in the order. As noted above, the SSN is not required for qualification, and the fiduciary could have liability for adverse consequences of insisting. By the way, domestic relations orders generally are public documents and several states and courts have adopted rules to avoid revealing SSNs in those documents.

Employer coverage of the deductible is an employer provided health benefit, not taxable to the employee as long as the arrangement is not discriminatory, see section 105(h) of the Internal Revenue Code. The arrangement is or is part of a group health plan, subject to ERISA, COBRA, HIPAA and all other requirementa applicable to group health plans. Among other things, the terms need to be set forth in a written plan document and disclosure (SPD) must be provided to participants. One should also consider that the premium paid under the cafeteria plan for the core health coverage also buys the deductible coverage.

An employer that asks the question that way should re-examine whether or not it is proper to pay only "via 1099" because if the employer proceeds to exclude all the payees from the retirement plan, the stakes get much higher. The combined use of "employer" and "1099" should give pause. Or, to be simplistic, paying a W-2 employee as though the employee were an independent contractor (via 1099), will cause nothing but trouble when it comes to compliance with retirement plan rules.