QDROphile

Don't stretch to justify a true-up. First, plan interpretation is a fiduciary function. Second, failure to have clear provisions for a true up (if intended) is a symptom of rectal cranial inversion and failure to moderate contributions (if no true up is intended) is a symptom of rectal cranial inversion and greed. Health care comes at a price. In a consumer driven health care economy, price is what causes the consumer to make health care rational and efficient. Don't deprive the system of its mechanism for rationality and subsidize disease and bad health care decisions.

Consider if this can fit into PTE 80-26. You still have to recon with actual payment by the employer rather than the trust, which is not in accordance wtth plan terms and not what one expects for cash flow if the employer loaned the funds to the plan for payment of the benefits.

You might look into parachute payments, section 280G of the tax code.

Yes, and separate rules apply to spending accounts.

How do you propose to "roll" the assets? You need distributions to have rollovers, and you can't have distributions without termination of employment or plan termination. You cannot transfer from 403(b) to 401(a).

Your partner may be eligible as a dependent. That depends on support and domicile. Your partner may be eligible, but with different tax consequences than you expected. Your partner may be ineligible. If the employer was at all responsible for the mistake, including by having confusing enrollment communications, then the employer should allow correction of the mistake, which would include a new election amount (although that amount might be zero -- but better than leaving a lot of claims money to be forfeited). If the employer is not at all involved in the mistake, the mistake should be corrected to remove the ineligible person, but you probably would not be able to change the mistaken amount elected. Your administrator should the best source of assistance. Get going.

Make your point under VCP.

If the original post meant that the employer actually has a separate fund, then one ought to raise the alarm that the arrangement is not exempt from the ERISA trust rules, so the sales team had better be setting up a trust and finding a trustee to hold the plan assets. Then it will be obvious that plan assets must remain in the trust to be used for appropriate plan purposes.

GBurns: How do you reconcile that view with the requirement that the entire amount of the FSA be available to pay benefits beginning on day 1? The employer is not contributing anything payroll period by payroll period unless the employer is using a separate fund. The employer has to pay benefits up to the FSA amount, but you would not call payment of benefits a contribution (unless addtional amounts were first delivered to a speparate fund to cover the excess). I am not commenting on the ultimate issue, just your portrayal in physical terms of something that does not happen. If you use the wrong picture, you might get the wrong answer. I am not saying anything about the answer.

Not so fast. Actions must also comply with plan document terms. While it is possible under the law to make up premiums with separate after tax payments, the plan may be more restrictive. Many plans do not allow after-tax payment at all. Now that you know more about your administrative needs, you should amend the plan to accommodate them.

I disagree with the tax-return due date and none of the material in the posts cite any authority to the contrary. Elections must be made before an amount is currently available. The special rule for self employed individuals is in Treas. Reg. section 1.401(k)-1(a)(6). The deadline is the last day of the partnership taxable year for partners and the last day of the calendar year for sole proprietors.

Where do you get the later deferral deadline for self employed persons?

"Interesting, that advisors typically know what they want to hear and will continue to push the issue. Remember, that doesn't make them "bad people", but they do get a lot of mis-information." It does make them bad advisors, and that should be taken into account in retaining them. it also shuld be taken into account for who should be the one to justify and support a position taken when the validity is questioned.

Ask the genius who created the situation in the first place. The genius was probably counting another IRA or qualified plan of the owner that had lots of liquid assets that could be rolled over from time to time to meet the predictable periodic liquidity lneeds of the IRA. Or the genius knew of an unrelated person who was willing to lease the raw land for use as a wildlife refuge or for future oil exploration or as a firing range.

The plan document should address this issue. As you say, it happens all the time, so a competent document would deal with it. One would then look to the determinination letter for some comfort that the plan's disposition is in accordance with section 409(o).

Although overshadowed by section 409A, constructive receipt and economic benefit concepts still apply. Is the ability to use the deferred compensation to obtain a loan an economic benefit that would cause some amount to be taxable? I agree with jpod tha that the practicalities of the situation make it unlikely.

The health FSA is insurance. It is odd insurance because the premium is equal to the benefit limit. You don't complain under your regular insurance benefit if you are lucky enough not to have claims for the year that exceed your premium for the year. Also, if you maxed out on claims early in the year and then terminated employement, the insurance company (the employer) would have a loss that would not be covered by the remaining premiums for the year because those premiums would not be collected. Insurance is all about risk. The FSA is not a bank account.

Compliance with 401(a)(9) is all that is required. An extreme example would be a plan that allows lump sum distributions only. Come required distribution time, the entire balance is distributed. The other extreme is automatic distribution of only the amount required by law at the time. The plan could allow election of an in-service distribution form of benefit as long as the payments covered at least the required amounts at the required times.

As long as the employee is past normal retirement age.

Correct. The distribution is not a required distribution. So the first question is what plan provision allowed the amount to be distributed in 2010? That provision should also determine if an amount must or may be distributed in 2011. If the only provision for in-service distributions is for MRDs, then the 2010 distribution is improper.

The only reason for the circumstances are plan provisions that go beyond the legal requirements and provided for the distribution for 2010. Consult the plan for guidance about the current proposition. While you are at it, you might want to reconsider if the plan actually allowed or required the distribution for 2010.

The membership resembles insurance, and an FSA cannot buy insurance. Do you have some other angle?

"Only 5 employees will be on the company plan; others are covered by their spouses plans - they are compensated for what they pay to be covered that way." Add to your list of questions whether or not the employer has a section 125 plan with respect to the health benefits. The employees appear to have a choice between health coverage from the employer or cash (the amount the employer increases compensation to cover the incremental cost for benefits under the spouse's plan). Since on of the requirements of a section 125 plan is a written plan document, there may be trouble. But the answer to your articulated question could be affected by whether or not there is a section 125 that covers health beneits because section 125 plans have discrimination rules. Subject to future changes under health care reform, there are no tax discrimination rules relating to insured health benefits (unless they sneak in indirerctly because the health plan is under a section 125 plan). An employer can cover all or some of the premium cost for an employee. That is simply a matter of compensation. No comment on individual rating.

You appear to be asking a state law question about division of proprtery in a divorce. There appears to be no qualifed plan with any assets to be divided by a QDRO. There appears to be an IRA and you allude to other amounts at issue that are not IRA assets. Division of IRA benefits does not involve qualified domestic relations orders, but IRA assets may be awarded by court order. The trail leads back to what the state court is willing to order. QDRO law has nothing to do with the question. If you have any hope for a useful response, you might identify the state or at least confirm that community propery law applies, or not.

Are pay periods monthly? If they are, the plan is stretching limits and not following best practices, but it is not decidedly wrong. The election is made before the taxable benefit (cash) is available.