Lori Friedman

The taxpayer has basis in the non-deductible contributions, which are treated as investments in the contract. Notice 87-16, Sec. III provides the formula for calculating the taxable and excludible portions of a distribution.

Did the S corporation's accountant report the individual's salary on Form W-2 and his taxable medical insurance benefits on Form 1099-MISC? I've seen this happen more times than I can even recall.

Just a random thought... If the dollars are run through a cafeteria plan, would the HSA, in effect, become subject to the Sec. 125 nondiscrimination rules?

katieinny, Please don't think that anyone wants to hurt your feelings. Some of us were simply trying to pin down your question so that we could give you some applicable, and accurate, information. We wouldn't help you by misinterpreting your question and providing off-base answers.

The benefits are included in the taxable compensation of a more-than-2% shareholder-employee, but they aren't subject to Social Security and Medicare taxation if they're made under a plan for employees and their dependents. There's a very helpful discussion in Announcement 92-16, 1992-5 IRB 53.

katieinny, Depending on the terms of the written plan document, a Sec. 125 plan can allow participants to purchase a variety of qualified taxable and/or nontaxable benefits. We're trying to pin down exactly which benefits will be available through your client's arrangement. If I'm understanding you, the employer currently has a POP (premium conversion only) and wants to add a FSA. Is this correct? Or, is the employer trying to add a HSA benefit (or both an FSA and HSA)?

I'm wondering whether you mean to say FSA instead of HSA? Is the employer adopting a flexible spending arrangement to reimburse employees for eligible, out-of-pocket medical expenses? An HSA is a Health Savings Account under I.R.C. Sec. 223 -- something very different from an FSA.

In PLR 199914044, the IRS ruled that a court reporter who had parallel but disparate job duties had been correctly classified as both an employee and independent contractor of the same organization. This W-2/1099 situation is sometimes used by national and international labor unions. Certain union employees "moonlight" as mediators in worker grievance and dispute resolution. This sort of work is completely separate and unrelated to the employees' regular job duties for the unions, and: -- The workers are notified of available cases and can accept or decline for any reason. -- The unions provide initial training for each worker but don't dictate the terms of continuing education. Although each worker is required to maintain necessary job skills, additional training is at the worker's discretion and personal expense. -- The unions don't furnish equipment or provide a regular work location for this work. -- The individuals are usually reimbursed for travel but not for any additional out-of-pocket expenses. -- The individuals work independently and without supervision. The IRS has repeatedly given the "green light" to this W-2/1099 practice. It's worth mentioning that these individual workers prefer to have their "moonlighting" work reported on Form 1099. They incur out-of-pocket expenses that can be deducted on Form 1040, Schedule C but would be subject to the 2% floor on Schedule A. I emphasize again, however, that the IRS scrutinizes this method of worker classification. The various IRS Audit Technique Guides specifically instruct examiners to search for instances when an employer has issued both a W-2 and a 1099 to the same individual. The employer must have a reasonable and defensible position. Given what's at stake, it's probably a good idea for any employer to get a PLR before proceeding.

This client has been audited, and the IRS agreed with the employer's position.

I was thinking of something narrower than the general topic of Nonqualified Deferred Compensation...a place to discuss technical issues directly related to the lovely Sec. 409A, the wonderful Notice 2005-1, and the ever enjoyable proposed regulations.

To the general administrator of the message boards, I think it would be helpful to have a separate forum for 409A. This huge topic is generating numerous discussions (and will certainly continue to do so), but the discussions are scattered among various places on the message boards.

It might be worth noting that the whole "election form" issue is very loose. I.R.C. Sec. 125 and its proposed regulations don't provide a required format for a salary reduction agreement, nor do they describe any methods that would be unacceptable. The IRS has applied the law broadly and permissively, taking the position that Sec. 125 merely requires an employee to make an informed choice -- either by action or inaction -- between cash and another benefit. Many cafeteria plans actually have no formal written salary agreement between the employer and the employee. Also, many plans, especially POPs, use "negative elections" -- benefit coverage as the default condition unless affirmatively declined. In Rev. Rul. 2002-27, 2002-20 IRB 925, a cafeteria plan may provide for an automatic enrollment and renewal process when an employee doesn't affirmatively elect to receive cash compensation instead of a health insurance benefit. The "negative election" won't cause employees to be in constructive receipt of income.

Although unusual, there are legitimate situations when an employee can receive both W-2 and 1099 compensation (for services provided concurrently, and not because the individual's status changes during the year). The 1099 work has to satisfy the general requirements for independent contractor services and be completely unrelated to the employee's other job duties. Here's a real example. One of my clients has an office worker who's also an accomplished musician. The organization sometimes hires the individual to play the piano at receptions, holiday parties, and other events. The individual always has the choice of accepting or declining an event, and he controls all aspects of his performances (musical selections, when he takes his breaks, etc.). The piano playing has absolutely nothing to do with his regular administrative office job. The IRS agreed that the organization can issue both a W-2 and a 1099 to this person, and it does so every year. But, this sort of situation will raise a huge flag with the IRS. The employer must have very valid reasons for taking this approach and be prepared to explain those reasons.

There's a new and significant difference -- 457(f) is subject to Sec. 409A, but 457(b) isn't. Sec. 409A is applied in addition to Sec. 457(f); the NQDC arrangement has to satisfy the provisions of both I.R.C. sections.

Did Busch Stadium have artificial turf? I thought that all ballparks (except for the "domes", of course) had, over the years, made the switch to grass. By the way, I recently visited the Cardinals website, which made the claim that Busch Stadium had been the last of the 1960's "cookie cutter" ballparks. I had to take issue with that claim and send an email messagae to the site manager. The very first "cookie cutter" happens to be alive and well in Washington, DC -- RFK Stadium, home to the Nationals.

Just be sure to sign the return in crayon.

Personally, I keep one set epoxied to my forehead. I can always look up, any time of day or night, and know that ERISA is nearby.

Kirk, I'm not suggesting that qualified trusts have any "blanket" exclusion from UBIT. To the contrary, the trusts are very much subject to UBIT. Sec. 514©(9) provides a general rental income and capital gains from debt-financed real estate property. If the qualified trust uses debt-financing to purchase other types of property -- for example, investment assets -- the related income is subject to UBIT.

We don't really have any information about the plan. If Dean's asking about a Sec. 401(a) qualified plan, the debt-financing rules shouldn't be an issue for real estate transactions. With certain limitations, a qualified plan trust is exempt from UBIT on income from debt-financed real estate property. Unlike other exempt organizations, a Sec. 501(a) trust can incur debt for the acquisition and improvement of real estate without being liable for UBIT on any rental income or capital gain from selling the property. I.R.C. Sec. 514©(9)(A) and ©.

It's helpful to think of the POP and the health insurance plan as two separate "animals". The POP is a specified fringe benefit plan and strictly the IRS's concern. The IRS doesn't require a Form 5500 for this arrangement. The health insurance plan, however, provides ERISA benefits and has to comply with DOL's reporting rules. If you find this whole subject confusion, you're not alone. Here's some language from the PPC 5500 Deskbook:

Not if the plan is exclusively a premium-only cafeteria plan. In Adv. Op. 96-12A, the DOL provided that a POP does not, in and of itself, constitute a separate employee welfare benefit plan within the meaning of ERISA Sec. 3(1). Because a true POP is nothing more than an I.R.C. Sec. 6039D fringe benefit plan, and not an ERISA welfare benefit plan, there's no filing requirement. The number of participants is irrelevant. I notice quite a bit of confusion at this message board about IRS fringe benefit plans, ERISA welfare benefit plans, and when the two sets of law overlap. It would be nice if someone at BenefitsLink could write and post an article about this subject.

You mention that the employer would prefer to keep newly-eligible employees from enrolling in the plan. Is this employer attempting to coerce or otherwise influence people to waive participation? As the kids say, "don't go there".

Thank you, Andy. Right back at you. jevd looks like a giant band-aid, with arms and legs, who's about to hit himself (herself) in the head with a mallet. Um...because the Blinkster has no life beyond employee benefits? Rumors have it that Lame Duck and Ritchie have run off together into the sunset.

A Sec. 125 POP shouldn't have a Form 5500 filing requirement, regardless of the number of participants. You might want to read Notice 2002-24, which suspended the Form 5500, Schedule F filing requirement for "specified fringe benefit plans" (including Sec. 125 plans). These plans had been filing Form 5500 for the sole purpose of remitting Schedule F; when Schedule F disappeared, there was no longer any reason for the plans to file Form 5500.

Denise, I knew about your three-year-old boy, but you'd never told us about the twins. What a beautiful family you have. Here's the real question for you: how do you do it all? A job, a marriage, 3 children...I feel exhausted from just thinking about it. You should be very proud of everything that you achieve, every day of your life.