Scott

Luke, What did you end up concluding on this one? And what do you, or anyone else, think about the following situation? Employer has a 401(k) plan with a 5-year graded vesting schedule for matching contributions. Unbeknownst to the employer's plan folks (or benefit attorneys), a department head hiring an incoming HCE gave her an offer letter stating that her matching contributions would be immediately fully vested. A year later, she notices on her plan statement that none of her matching contributions have vested and brings it to the attention of HR. Having now learned about the arrangement, the plan folks tell the HCE this can't be done unless the plan is amended to provide for full and immediate vesting for everyone, which would be very costly and isn't going to happen. She isn't budging. Could the employer agree to pay her an amount outside the plan equal to any amount she forfeits if her employment terminates before her 5th anniversary? It seems like it would violate the conditional benefit rule, but any thoughts are appreciated.

Company has a PTO purchase program under its cafeteria plan in accordance with Proposed Regs Section 1.125-1(o)(4). The program provides that unused elective PTO will be cashed out before the last day of the year. If the cash-out payment satisfies the definition of "Compensation" under the Company's 401(k) plan, is there anything that would prohibit employees from deferring the cash-out into the 401(k) plan? Would this somehow be considered a violation of the prohibition against deferred compensation under a cafeteria plan under 1.125-1(o)(4)? I can't seem to find any guidance on this. Thanks!

401(k) plan provides that unvested amounts are forfeited upon the earlier of 5 consecutive breaks in service or the date of distribution or deemed distribution. Company is about to terminate the plan and just discovered that, while forfeitures have been occurring when employees terminated employment and either took a distribution or were deemed to take a distribution (e.g., terminated with no vested interest), no forfeitures have been occurring for individuals who didn't have a distribution or deemed distribution but have incurred 5 consecutive breaks in service. So, these former employees still have unvested amounts credited to their accounts more than 5 years after their termination. The plan provides that forfeitures are to be used to offset employer contributions, or reallocated if forfeitures are greater than the contribution obligation. Any ideas as to what to do? Can the company simply cause the forfeitures to occur now and transfer those amounts to the forfeiture account? Or is a correction required for past years, and if so, what would that look like?

I've managed to avoid dealing with ACA until now, so this is my first real venture into the weeds. I'm trying to determine whether an employer can require an employee to prove that a stepchild lives with him or her in order to cover the stepchild as a dependent on the employer's health plan. As I understand, under Section 2714 of the PHSA, if an employer allows employees to cover their stepchildren under the employer's health plan, the employer cannot impose any restrictions on coverage of the stepchild (i.e., residency with the employee) as long as the stepchild is under age 26. Under the proposed Code Section 4980H regs, stepchildren were considered dependents, but under the final 4980H regs, stepchildren are excluded from the definition of dependent. So, there doesn't appear to be a violation of Code Section 4980H if an employer doesn't offer coverage to an employee's stepchildren in a manner that satisfies 4980H. So, if an employer were to allow employees to cover their stepchildren, but only if the stepchildren live with the employees, what would be the consequence? It appears that it would be a violation of PHSA Section 2714, but not Code Section 4980H. Is that correct? Could violating PHSA Section 2714 on this point somehow cause a violation of Code Section 4980H, even though stepchildren are not considered dependents for purposes of 4980H? Is there a penalty for violating PHSA Section 2714?

A public company is considering adding its stock as an investment fund under its 401(k) plan and making the stock fund an ESOP so that it can take advantage of the dividend deduction under Code Section 404(k). Under this setup, does the requirement that a participant must be allowed to demand that his benefits be distributed in the form of employer stock apply to his entire account, or just the ESOP portion of the plan (i.e., company stock)? For example, if at retirement a participant has an account balance of $500,000, $200,000 of which is invested in company stock and $300,000 of which is invested in other available investment funds, is he entitled to demand that the entire $500,000 be invested in the form of company stock, or only $200,000?

Can a DB plan sell qualifying employer securities to the employer/plan sponsor? I know that the answer lies in the prohibited transaction exemption under ERISA Section 408(e), but I've read it and the regulations several times and can't nail down the proper interpretation. If you assume that the first two requirements (adequate consideration and no commission) are satisfied, it comes down to requirement #3, which says: (3) if-- (A) the plan is an eligible individual account plan, or (B) in the case of . . . an acquisition of qualifying employer securities by [a plan which is not an eligible individual account plan], the . . . acquisition is not prohibited by Section 407(a). Does (B) mean that the exemption applies to a DB plan only if the plan is acquiring securities and it doesn't exceed the 10% limit of Section 407(a) (in other words, the exemption is unavailable for a sale by the plan), or that any acquisition or sale by a DB plan is OK, as long as an acquisition doesn't violate Section 407(a)? Help!! Thanks!

I guess that's my question--what does it mean for a protected benefit to "accrue"? If I understand you correctly, you're saying that "accrual" relates solely to the distribution options available under the plan when the dollars go into the account and that eligibility for the benefit is not considered. In other words, even though none of the Plan B participants have satisfied the eligibility requirements to take an in-service withdrawal, the future ability to take an in-service withdrawal cannot be removed with respect to their current account balance?

Plan B is merging into Plan A. Plan B allows in-service distributions from all vested accounts upon attaining age 59½. Plan A does not allow any in-service distributions. None of the current Plan B participants have attained age 59½. Generally, in-service distributions are a protected benefit. The regulations allow the elimination of protected benefits with respect to benefits not yet accrued. Since none of the Plan B participants have attained age 59½, can the in-service distributions be eliminated in the merger of plans on the basis that this benefit has not accrued for any of the Plan B participants?

I know, I know--I should post this on the QDRO board. I have, but the traffic on that board is very light, so I thought I would post it here too since it relates to a DB plan. H retired and elected a 100% J&S annuity under his pension plan. H currently receives about $5,000 per month. H is divorcing W, but wants to provide for her as much as possible, and is willing to provide that, upon his death, W will remain as the beneficiary (based on age, current health and genes, it is more likely that H will die first). Basically, the intent is for each party to receive $2,500 for the rest of H's life, and then upon his death, W will receive $5,000 for the rest of her life. H's attorney has drafted a proposed QDRO as a separate interest QDRO, giving each party 50% of the present value of the accrued benefit as of the date of divorce, with W to receive a life annuity (or any other optional form under the plan other than a J&S with a future spouse). The QDRO says that "W will be treated as the surviving spouse of H solely to the extent necessary to provide W with a death benefit under the provisions of this Order, and to the same extent any future spouse of H shall not be treated as a spouse of H for such purposes. This provision shall have no effect after W has been paid the amount of plan benefits due to her pursuant to this Order. The death benefit payable to W under the terms of the Plan shall be calculated based on the accrued benefit of H awarded to W in this Order." The quoted language seems a bit unclear and I'm not sure it clearly states the parties' intent. In any event, wouldn't it be better to do this as a shared interest QDRO, giving each party 50% of the current distribution and provide that W will be treated as H's surviving spouse for all purposes? Not only would it accomplish the intent described above, but it would also allow H to recoup 50% of the benefit in the event that W were to die first, rather than having W's interest go away at her death. Any thoughts?

H retired and elected a 100% J&S annuity under his pension plan. H currently receives about $5,000 per month. H is divorcing W, but wants to provide for her as much as possible, and is willing to provide that, upon his death, W will remain as the beneficiary (based on age, current health and genes, it is more likely that H will die first). Basically, the intent is for each party to receive $2,500 for the rest of H's life, and then upon his death, W will receive $5,000 for the rest of her life. H's attorney has drafted a proposed QDRO as a separate interest QDRO, giving each party 50% of the present value of the accrued benefit as of the date of divorce, with W to receive a life annuity (or any other optional form under the plan other than a J&S with a future spouse). The QDRO says that "W will be treated as the surviving spouse of H solely to the extent necessary to provide W with a death benefit under the provisions of this Order, and to the same extent any future spouse of H shall not be treated as a spouse of H for such purposes. This provision shall have no effect after W has been paid the amount of plan benefits due to her pursuant to this Order. The death benefit payable to W under the terms of the Plan shall be calculated based on the accrued benefit of H awarded to W in this Order." The quoted language seems a bit unclear and I'm not sure it clearly states the parties' intent. In any event, wouldn't it be better to do this as a shared interest QDRO, giving each party 50% of the current distribution and provide that W will be treated as H's surviving spouse for all purposes? Not only would it accomplish the intent described above, but it would also allow H to recoup 50% of the benefit in the event that W were to die first, rather than having W's interest go away at her death. Any thoughts?

I had not been able to listen to the DOL webcast, but I just did. The example you refer to had slightly different facts. In the example, the individual was involuntarily terminated after 9/1/08 and elected COBRA under his employer's plan, and then got a new job and became covered under the new employer's plan, which ended the COBRA coverage under the first employer's plan. The speaker said "your extended election right only goes as long as your maximum period of COBRA coverage, and your maximum period of COBRA coverage ends when you have coverage under another plan." He concluded by saying the initial period of COBRA was completely extinguished when he had coverage under the second plan, so the only plan under which he would have a right to COBRA is the second plan. I have no problem with that conclusion. However, in our fact pattern, the individual never elected COBRA under the first employer's plan. Under the normal COBRA rules, COBRA coverage terminates on the date, AFTER THE DATE OF THE COBRA ELECTION, upon which the individual first becomes covered under another plan. The regs say that if an individual first becomes covered under another plan on or before the date on which COBRA is elected, then the other coverage cannot be a basis for terminating COBRA coverage. So, I think the rationale under the DOL's example for denying the second chance election doesn't apply here.

I think the 5 requirements referred to by oriecat are the requirements you have to satisfy to get the subsidy, not the second chance election. I agree that only an AEI is eligible for the subsidy, but I disagree with your statement that you are only eligible for the second chance election if you are an AEI. The provision governing the second chance election reads as follows: "For purposes of applying section 605(a) of [ERISA], section 4980B(f)(5)(A) of [the Code], section 2205(a) of the Public Health Service Act, and section 8905a©(2) of title 5, United States Code, in the case of an individual who does not have an election of COBRA continuation coverage in effect on the date of the enactment of this Act but who would be an assistance eligible individual if such election were so in effect, such individual may elect the COBRA continuation coverage under the COBRA continuation coverage provisions containing such sections during the period beginning on the date of the enactment of this Act and ending 60 days after the date on which the notification required under paragraph (7)© is provided to such individual." You are eligible for the second chance election if you are NOT an AEI but would be if you had an election of COBRA continuation coverage in effect. This provision doesn't say anything about coverage under another plan. All it seems to require is that you didn't have a COBRA election in effect on February 17 and the only thing keeping you from being an AEI is a COBRA election. By making the second chance election, you BECOME an AEI and eligible for the subsidy unless some other provision disqualifies you. In this example, I think it's the prior eligibility for the other plan that disqualifies him for the subsidy, but I don't see how he doesn't qualify for the second-chance election.

Here are the facts: Employee is terminated involuntarily by Company A on October 15, 2008. Employee is hired by Company B and becomes covered under Company B's health plan on November 1, 2008. Employee declines COBRA under Company A's health plan. Employee is laid off by Company B on March 15, 2009. Company B is a small employer exempt from COBRA so Employee is not given a COBRA election. Is Employee entitled to a "second-chance" COBRA election under Company A's health plan? As I read the statute, I'm coming to the conclusion that Employee is entitled to a second-chance election under Company A's plan, but is not eligible for premium assistance. I had never thought of that being a possibility, so I'd like to throw it out for others' thoughts. An "assistance eligible individual" (AEI) is a qualified beneficiary if (a) at any time between 9/1/2008 and 12/31/2009 he is eligible for COBRA continuation coverage, (b) he elects COBRA, and © the qualifying event was involuntary termination during the period in (a). Employee satisfies (a) and © but not (b), so he is not an AEI. The "second-chance" election period is available to an individual who does not have a COBRA election in effect on February 17, 2008 but who would be an AEI if an election were in effect. Under these facts, Employee didn't have a COBRA election in effect on February 17, 2008, but he would have been an AEI if he had elected COBRA. It appears that he is eligible for the second-chance COBRA election and if he makes the election, he will become an AEI. An AEI is entitled to premium assistance, but the premium assistance will not apply with respect to any AEI for months of coverage beginning on or after the earlier of several events, one of which is the first date that the individual is eligible for coverage under any other group health plan. Since Employee was covered under Company B's plan, it appears that he will never be eligible for premium assistance. So, it appears that Employee can elect COBRA under Company A's plan, but he will have to pay the full premium. Agree? Disagree?

Here are the facts: Company A, which sponsors a 401(k) plan, has a wholly-owned subsidiary, Company X. Employees of Company X participate in Company A's plan. In May 2008, Company B, which has no plan, purchases all of the stock of Company X. Immediately after closing, Company X starts a new 401(k) plan for its employees and shortly thereafter accepts a plan-to-plan transfer of the employees' accounts from Company A's plan. Assuming no employees are 5% owners of Company X, could there be any HCEs for 2008 in Company X's plan? I understand that this is sometimes a tricky question because there is no IRS guidance on the determination of HCEs in a stock acquisition. However, it seems to me that, even though Company X changed controlled groups and the employees changed plans, because Company X was the employer of the employees both before and after the transaction, you would be required to look at the employees' compensation from Company X in 2007 (when it was in Company A's controlled group) to determine if anyone was an HCE in 2008 (when it was in Company B's controlled group) for purposes of X's plan. Does anyone disagree?

A very helpful thread as I now find myself facing this situation as well. I understand that the SIMPLE IRA of the acquired company must continue for the remainder of the calendar year of the acquisition, but would that prohibit participants in the SIMPLE IRA from also participating in the acquiring company's 401(k) plan? If I understand the acquisition exception to the "only plan" rule, an employer can make contributions to a SIMPLE IRA even though it maintains another plan if (i) an acquisition occurs, (ii) the "only plan" rule would have been satisfied if the acquisition had not occurred, and (iii) only individuals who would have been employees of the target are eligible to participate in the SIMPLE IRA. The "only plan" rule appears to affect only the SIMPLE IRA and have no affect on the 401(k). Assuming the acquiror wants to kill the SIMPLE IRA at the end of the year, could the acquiror allow the target company's employees to participate in both its 401(k) plan and the SIMPLE IRA for the remainder of the year? Or, could it allow any target employees who cease their deferrals into the SIMPLE IRA to participate in the 401(k)? As long as none of the acquiror's employees are allowed into the SIMPLE IRA, I don't see anything that would prevent the acquiror from doing this. Am I off base?

A company terminated a DB plan a few years ago and filed with both the IRS and PBGC. The plan received a favorable determination letter and did not receive a notice of noncompliance from the PBGC. The plan had an asset that could not be liquidated at the time the final distributions were made, so the company loaned the plan an amount equal to the estimated market value of the asset, allowing the plan to distribute the benefits to participants. Whenever the asset can be liquidated, the plan will repay the company. The plan's trust continues to hold the asset but has a liability equal to the value of the asset, so the net value of the trust is zero. I understand that if a terminated plan does not distribute all of its assets in a reasonable period of time (generally within a year), it is considered a frozen plan and must continue to be amended to comply with 401(a). Would that be the case here? Distributions have been made, but technically the plan continues to hold assets, although the net asset value is zero.

Company A is spinning off its subsidiary, Company B. Effective as of the date of the spinoff, Company B will establish plans for its employees identical to those of Company A, including a 401(k) plan and a DB plan. As soon as possible after the spinoff, both Company A plans will transfer assets and liabilities for the Company B employees to the Company B plans. I have always understood the general rule to be that an employer has until the earlier of the date that contributions are made to the plan or the end of the year in which the plan becomes effective to adopt a plan document. Thus, under Reg. Section 1.401(k)-1(a)(3)(iii)(A), Company B's 401(k) plan must be adopted no later than the spinoff date in order for employees to start make elective deferrals at that time. I can't find any clear guidance with respect to the DB plan, however. No employer contributions will be made to the plan until some later date, so the general rule would say that Company B has until the end of the year of the spinoff to adopt a plan document. Would the fact that a transfer of assets and liabilities will occur shortly after the spinoff change that so that a plan document should be in place as of the spinoff date?

Does an employer who filed for a determination letter for a converted cash balance plan that got stuck in the moratorium have to do anything now that the moratorium has been lifted, or does the employer just wait for the IRS to contact it to resume the process?

I understand that all plans must be amended by 12/31/07 to comply with 409A. I guess it's not clear to me under existing guidance that, in doing so, you more or less have free reign to add 409A compliant provisions that weren't already in the plan, which seems to be what you are saying. You still have to avoid prohibited accelerations, and that's what I'm worried about, since under these facts the amendment will cause the amounts to be paid sooner than they would have been (assuming a change of control occurs). In my view, there are two possibilities: either (1) this amendment is not an acceleration that 409A would prohibit, in which case there should never be a problem with making the amendment, during the transition period or after, or (2) this amendment is an acceleration, in which case the transition relief for new payment elections must be used, and that relief does not appear to be available if the change of control occurs in 2007.

I like your answer, but why only during the transition period?

A company established a directors fee deferral program in 2005 that provides that a director can elect to defer his fees to be received over a 5 year period, and he (or his beneficiary) will receive monthly payments over 10 years upon the earlier of his attainment of age 70 or death. There are no provisions for payment upon a change of control, termination of the plan, or any other event. The plan is clearly subject to 409A, and it appears to comply. Another company is about to acquire this company and wants to get this obligation "off the books". It would like to cash-out the benefits upon the change of control. Can the plan be amended to add a change of control (using the 409A definition) payout? Assuming the acquisition goes through, the result would be that the payments will be made sooner than under the current terms of the plan, so is this a prohibited acceleration under 409A? To me it seems logical that you should be able to amend a 409A plan to add other payment events, as long as such events comply with 409A, but it's not crystal clear to me. The transition relief provides that a plan may provide, or be amended to provide, for new payment elections on or before 12/31/07, as long as it does not apply to amounts that would be payable in 2007, or accelerate into 2007 payments that would otherwise not be payable in 2007. I guess the question is this: What is meant by the term "new payment election"? If the term applies only to the ability of a service provider to change the timing of his payments, then I think the amendment should be OK. However, if the term covers any change to when the benefit may be paid, then the amendment appears to be a prohibited acceleration unless the transition relief applies. This would raise another question. If the plan were so amended, and the change of control occurred in 2007, would this violate the transition relief by accelerating into 2007 payments that would not otherwise be payable in 2007? Any thoughts are appreciated.

A company that would fall into Cycle A adopted a Fidelity prototype 401(k) plan several years ago. In 2003, it amended the plan to provide for multiple matching contribution formulas, which took it out of prototype status ("amended prototype"). Fidelity has issued a notice to its employers advising them that "the vast majority" of amended prototype plans (i.e., those that have not been amended "extensively" off prototype) can file under the 6-year prototype cycle and that it would actually do more harm than good to file an amended prototype plan during the individually-designed 5-year cycle. However, this article by Deloitte (recently appearing on BenefitsLink) says that only amended prototype plans that were amended after February 16, 2005 can take advantage of the 6-year cycle and all others must file during the applicable 5-year cycle. Both articles state that they are based on conversations with IRS officials. Fidelity appears to rely on Section 19 of Rev. Proc. 2005-66. Deloitte appears to rely on Section 17.02 of Rev. Proc. 2005-66. The company felt reasonably comfortable with Fidelity's position until it came across the Deloitte article. Obviously with the January 31 deadline fast approaching, it needs to decide who is right quickly. Any thoughts?

A company that would fall into Cycle A adopted a Fidelity prototype 401(k) plan several years ago. In 2003, it amended the plan to provide for multiple matching contribution formulas, which took it out of prototype status ("amended prototype"). Fidelity has issued a notice to its employers advising them that "the vast majority" of amended prototype plans (i.e., those that have not been amended "extensively" off prototype) can file under the 6-year prototype cycle and that it would actually do more harm than good to file an amended prototype plan during the individually-designed 5-year cycle. However, this article by Deloitte (recently appearing on BenefitsLink) says that only amended prototype plans that were amended after February 16, 2005 can take advantage of the 6-year cycle and all others must file during the applicable 5-year cycle. Both articles state that they are based on conversations with IRS officials. Fidelity appears to rely on Section 19 of Rev. Proc. 2005-66. Deloitte appears to rely on Section 17.02 of Rev. Proc. 2005-66. The company felt reasonably comfortable with Fidelity's position until it came across the Deloitte article. Obviously with the January 31 deadline fast approaching, it needs to decide who is right quickly. Any thoughts?

Thanks for the responses. Effen, the plan covers bargaining and non-bargaining employees. All non-bargaining employees get the 4%, while some bargaining employees get the 4% and others get something else, depending on what the CBA says. From what I am reading here, it appears that it is OK for a profit sharing plan to have a fixed contribution. As I mentioned, I've always thought a fixed contribution automatically means a money purchase plan. I guess my concern is that the IRS could look at this plan and say it is a money purchase plan because of the fixed contribution, and it's disqualified because there is no QJSA, there is a 401(k) feature, etc. Is it fair to say that if the plan clearly states that it is intended to be a profit sharing plan, there should be no problems?

I recently came across a 401(k) plan that, in addition to allowing employee deferrals, provides that "each year, the Employer shall make Nonelective Employer Contributions to the Trust for each eligible Active Participant in an amount equal to 4% of such Active Participant’s Compensation." The plan contains no language designating itself as either a profit sharing plan or a money purchase plan. It contains none of the required provisions of a money purchase plan (QJSA, etc.), so the sponsor is apparently taking the position that it is a profit sharing plan. It has received a favorable determination letter. I have always understood the basic difference between a profit sharing plan and a money purchase plan to be that a profit sharing plan provides for discretionary employer contributions and a money purchase plan provides for mandatory contributions computed as a fixed percentage of compensation. If my understanding is correct, why wouldn't the plan described above be a money purchase plan?