Übernerd

Client has had an FSA for a long time and has amended it to take advantage of the newly-available 2.5-month extension of coverage. Client is also adding an HDHP/HSA combo beginning 1/1/06. Client has been told that anyone who contributed to the FSA in 2005 will be ineligible to contribute to the FSA until 4/1/06 (first day of first month following expiriation of extended coverage period) because of "exclusivity" requirement attached to the HDHP/HSA combo. Client must answer the following questions in the next 2 hours (I know, I know): 1. I have some memory of the IRS issuing transition relief on this very issue, but can't find it and might be imagining it. 2. Assuming that those who contributed to the FSA in 2005 aren't eligible to contribute to the HSA until 4/1/06, can they "backload" their contributions for the remainder of 2006 and thereby still contribute the annual maximum? I assume they can't. 3. Same assumption as #2--what about expenses incurred between 1/1/06 and 3/31/06? Can HSA participants who were 2005 FSA contributors use $ in the HSA to to pay for expenses incurred before they started contrbuting? I'd be surprised if the answer is "yes." Thanks for any help.

Assuming the other conditions of the safe harbor are met, I'm looking for guidance on the "make or influence investment decisions" and "compensation" elements, where the employer is a bank that wants to offer its HSA custodial package to its own employees. Employer would waive its usual transaction and account-maintenance fees, but would receive some indirect income from the accounts (i.e., interchange revenue from debit card use, sweep fees from the program's money market account, and 12b-1 fees from non-proprietary mutual funds and investment management fees from proprietary mutual funds. There is simply no way to "turn off" some of these indirect revenue streams; does that mean that any HSA program the bank offers its employees is unavoidably an ERISA plan? I've seen a little informal chit-chat advising banks to offer HSAs to their own employees only on the same terms they would give a third party--I'm not sure I understand that. In this case, that would mean keeping the "consideration" the bank is willing to forego, which seems like a direct contravention of the FAB.

In connection with litigation over two ERISA plans, we are looking for a firm or an individual to provide expert testimony on (1) the prudence of certain investment decisions and (2) the calculation of damages to the plans. Does anyone have a recommendation? Thanks.

Yeah, that's the right citation, sorry. That paragraph says that you can't make an election before the later of the date the employer adopts the CODA or the date it's effective. I wasn't reading that as an ironclad requirement that the plan had to be in writing before the first deferral (though I think that's what it means).

Thanks for the responses. You're referring, I think, to IRS Reg. § 1.401(k)-1(a)(3)(iii)(B), which says that the contribution under a CODA can't precede the election. Unfortunately, that doesn't get me to an ironclad requirement that there be a plan document before that election (I'm convinced, but it's not me that needs convincing).

That's my feeling, as well, but I'm getting pushback. Is it just the presumption in the statutory language ("under a plan," and so on), or is there clear authority requiring a document before a valid deferral? BTW, Newco isn't assuming or cloning Oldco's plan (and can't, under the circumstances).

This is a new one on me. Any ideas much appreciated. Newco buys Oldco's facilities and will employ a large percentage of Oldco's employees. Newco will set up a 401(k) plan, but because of time pressure it would rather not draft an actual document until after the closing date (the time pressure is significant and unavoidable). Instead, Newco proposes to establish a trust and to simply "carry over" employee salary deferral elections--made under Oldco's 401(k) plan--to Newco's "planless" 401(k). Newco would then draft a plan document before the end of the plan year; but, for significant period, employee money would be contributed to the trust without a plan document. This makes me a little nervous. § 401(k) and the regs all presume a plan document; but is one required before a qualified cash-or-deferred election can take place? I know people rely sometimes on a "general rule" that you're OK if you get a plan document in place before the end of the first plan year--is there any support for that? If so, does it apply to cash or deferred elections?

Several years ago, an employer used the wrong 415 limit to calculate contributions for two HCEs; it therefore undercontributed to their accounts. It would like to use QNECs to self-correct under EPCRS (under § 6.02(4)(b), such corrective contributions relate back to the yeart they should have been made and therefore aren't annual additions in the year they'reactually contributed). EPCRS requires the employer to amend the plan to permit such QNECs--but all the guidance I'm finding on such amendments relates to correcting nondiscrimination errors and therefore doesn't apply to these HCE-only contributions. Is there necessary language for such an amendment, or can it just provide that the employer can, at its discretion, correct operational failures with QNECs?

That makes sense. Thanks for the response.

Participants' pension plan failed to make timely RMDs (i.e., "age 70½" distributions). Thus, participants must pay the 50% excise tax imposed by Code § 4974. They will attach the letter (outlining the mistake and the reasonable steps being taken to correct it and begging for a waiver) to their Forms 5329. Does anybody know how tough the IRS is on such requests? Thanks.

Typing this out helped me organize my thoughts. I think the best way of stating what Employer wants (and might be able to get) is to divest itself of its fiduciary obligations with respect to inactive participants, without those "force-outs" constituting distributions for purposes of §§ 401(k) or 403(b). I.e., it wants the effect of a termination would have on its ERISA obligations, without (1) triggering distributions for IRC purposes or (2) jeopardizing its ability to continue the plans for active employees. So, would purchasing irrevocable commitments (the IRAs) do that? Ins. co. assumes fiduciary obligations with respect to the inactive participants (effectively removing them from the plan), but there has been no distribution to the participant under either 401(k) or 403(b).

Employer sponsors two plans: a 401(k) and a 403(b) plan (it also sponsors a cash balance plan, which is in the process of terminating). Assets in the 403(b) plan are held in insurance company annuity contracts (investment vehicles, rather than individual contracts) and in mutual funds. Following an asset sale, over 90% of the participants in the two DC plans no longer work for Employer, but remain participants in the plans. Employer’s stated goal is to spin off and terminate those portions of the DC plans covering inactive participants (i.e., those no longer employed by Employer). Employer wants to keep both plans for its remaining employees. Is there any way to get there? I haven’t been able to track down anything that sounds like a “spin-off” termination of those portions of the plans Employer would like to get rid of. As I understand it, under current law, plan termination is a distributable event for purposes of the 401(k), but not the 403(b). Under the new proposed 403(b) Regs, the 403(b) plan could terminate and distribute its assets, but Employer could not maintain another 403(b) plan for 12 months. None of that really speaks to terminating only a portion of the plans--though it might be worth considering whether the remaining "stumps" of the plans would be considered "successor" plans. But, as I see it, even if Employer could distribute the 403(b) account balances on plan termination, it couldn’t force participants to take their money out of either plan (unless a spin-off termination is possible). If Employer’s first choice is impossible (which seems likely), it would like to flush as many inactive participant accounts out of the plans as possible. One proposed method of doing that is to give participants the option of rolling their plan accounts into Individual Retirement Annuities with the same distribution options as the plans. The insurance company that issued the annuity contracts under the 403(b) plan is willing to forgive surrender penalties on the annuity contracts if Employer makes its IRAs the default option for the transferred assets. Is this the best that they can do (assuming even this much is possible)? Sorry this sounds like a law-school exam question (or an example from the Regs). Maybe I should have started with “Once upon a time . . .” Thanks for any ideas.

Thanks for these very helpful responses. That definitely gets us started.

This individual designated his trust (which was revocable during his life but became irrevocable on his death) as the beneficiary of his IRA. Is the transfer taxable? We don't do much IRA work, so this is a new one on me. Any thoughts much appreciated.

Thank you, mbozek and Mr. Moreland--this discussion continues to be helpful. I thought I would note that we received today an informal opinion from an IRS employee, addressing both the general question (are qualification failures occuring when a plan is non-governmental erased when the plan becomes governmental?) and the specific question (regarding failure to comply with suspension-of-benefit rules). The gist of the response to both questions was, such failures are not erased when the plan becomes governmental, and must be addressed by the new, governmental sponsor. Unfortunately, the response addressed neither the effect of the plan's inability to elect ERISA coverage nor potential state-law claims, but merely the qualification question. Nor was any law cited; as I said, this was merely an opinion (though a rather firm one).

Unfortunately, the plan document provides for neither the § 203(a)(3)(B) notice nor any actuarial increase. Several years ago, the plan's actuary spotted the lack of a notice provision and, to comply with ERISA, sua sponte began including the actuarial increase in benefit statements to all employees working beyond normal retirement age (which is 55 in this plan, so the amounts at issue are considerable). The Plan did have a favorable determination letter, but it probably isn't worth much in this context. I think we're left with the underlying law, and the lingering question of whether the now-governmental plan must pay actuarial increases that, while not provided for in the earlier plan document, were nonetheless arguably required under ERISA and the IRC. The transferor sposor having since been dissolved, the buck would ultimately stop with the new, governmental sponsor.

Aren't the vesting and benefit accrual rules separable in this context, though? That is, the plan at issue does provide for continued benefit accrual beyond normal retirement age, which arguably satisfies the ADEA requirements. The question remains, though, whether the plan must also provide the actuarial increase (because of its failure, when it was an ERISA plan to provide the § 203(a)(3)(B) notices). The actuarial increase requirement is a vesting rule, which seems separate from the benefit accrual rule the ADEA extended to govt. plans. In that context, it seems like the plan's current status as governmental is still relevant.

Governmental plans are exempt from various ERISA and IRC vesting and funding rules. But what if a plan starts out private, then becomes governmental--to what extent do the ERISA and IRC vesting and funding rules "carry over"? E.g., assume that a privately-sponsored qualified pension plan neither provided § 203(a)(3)(B) service notices nor the alternative actuarial increases when participants beyond normal retirement age continued working. Then a governmental entity obtains the private sponsor and restates the plan as a qualified governmental plan. If the plan had remained a private plan, retiring participants would be entitled to the actuarially-increased benefit (because of the failure to provide notices); but, per § 411(e), a governmental plan is exempt from the 411 rules. Does the fact that the participant accrued most of his benefit under a private plan impose any requirements on the governmental plan, or is the governmental plan relieved of such responsibility once the plan becomes governmental?