E as in ERISA

$40,000 -- the amount of cash that will go in. The individual has already received a deduction for the $4,000+/-.

We have transitioned to a service economy in which employees are one of a company's most valuable assets (thus the use of the term "Human Capital" by many consulting firms). There is growing concern about labor shortages in various sectors of the economy and various geographic areas. There are increasing efforts to hire women, minorities, older employees, etc. But there is a recognition that these employees may desire completely different benefits than a 40-year old white male employee. So the trend is to design more flexible benefits packages. Europe is far ahead of us. Several years ago I saw a presentation by individuals from the U.K., Belgium, etc. regarding new software that was being designed to accomodate the flexible compensation arrangements (in which employees were given the choice among cash compensation, health benefits, retirement benefits, use of an office, computers, access to phone lounges, etc.) The benefits laws in Europe are generally much simpler than in the U.S. -- the arrangements they have would not be possible here. Nevertheless, the movement here is definitely toward much more flexible arrangements and I would expect to see increasing discussion about them.

I've seen approved money purchase plans that matched contributions to TSAs. It sounds like this would be similar?

I have seen European arrangements that include a wide variety of benefits (including choices about telecommuting, having an office, use of a computer or phone, etc). Because of qualified retirement plan rules, 125 plan rules, etc., plans in the US generally cannot offer a choice between retirement, welfare and other benefits. However, I have seen plans offered to tax exempt entities that offer choices between deferred compensation programs and a variety of welfare benefits. Since the dollar amounts that go into deferred compensation programs often exceed the 457 eligible plan limits, one of the main issues in those plans depends is the definition of "substantial risk of forfeiture."

I should have limited myself to saying that some employers believe that it is a good idea to have separate VEBAs for actives and retirees based on the differences in the 419A account limit rules and the UBI rules. I was too hasty and I'm getting my groups and rules mixed up. I went to far in suggesting there is no limit on retirees -- 419A just allows certain reserves -- which there are differences in opinion about how to calculate. And since those reserves are ignored for UBI purposes, the real answer is that there are different strategies for how to fund and invest the assets.

I already have it!

If I recall correctly, I believe that it's often a good idea from a tax perspective to have separate funding vehicles for current and retired employees. Under 419 there are account limits for current employees, but no account limits for retired employees. If you put them together, you can sometimes have UBI issues that could otherwise be avoided.

Yes. I believe that we are saying the same thing!

In general, if you are not using a full year as the computation period for eligibility, then you are considered to be using the "elapsed time" method (instead of the "hours" method). Under the "elapsed time" method, you cannot impose an hours requirement (i.e., you cannot prorate the hours). A person is eligible if they remain in employment during a specified period of time without regard to number of hours work. However, what many companies are doing is allowing earlier entry to some participants (e.g., based on 500 hours in six months). Then they are backstopping it with a rule that allows employees to enter the plan if they have 1,000 hours in a one year period. (But some are forgetting that you apply the lowest common denominator in performing coverage testing....)

You can't keep an estate open indefiinitely. It's not meant to operate like a trust. There are rules on distributing assets and closing the estate in a timely manner.

When an individual account plan wants to go above the 10% limit, it seems like they usually put in a 100% limit so that there aren't issues when the market fluctuates. But I've also seen plenty of plans where no increase in the limits has been authorized under the plan document and there is much more than 10% invested in employer stock.

The IRS does audit 125 plans. But the audits are being conducted by payroll tax reviewers. See their training at http://www.irs.gov/pub/irs-utl/lesson4.pdf. My understanding is that they don't look at discrimination issues -- the main focus is whether there is a plan document authorizing the pretax deductions.

See the discussion regarding "Substantiation Guidelines" in the instructions for Sch T. They cite Revenue Procedure 93-42, which contains guidelines for "(1) the quality of data used in substantiating compliance with the coverage and nondiscrimination rules, (2) the timing of coverage and nondiscrimination testing, (3) the testing cycle of a plan, and (4) the qualified separate lines of business (QSLOB) rules." If I recall correctly, the three year rule is in that Rev. Proc.

Fees paid out of general assets of the employer are not reported on Sch C.

Form 5500, Part II, Line 10(a)(2) allows you to enter the year you performed the testing.

The money would generally be payable to "The Estate of ..." Legal ownership is then transferred to an individual through a court proceeding known as "probate." If there was a will, it should specify who the beneficiaries of the estate are and who is named as the executor (the person who is responsible for overseeing the estate as it goes through the probate process). If there is not a will, then state law will specify who the beneficiaries are and how an administrator is appointed. In either situation, someone has to oversee the process of filing with the court system and overseeing the collection and distribution of assets.

Kimberly -- I think that your reference to a "501© plan" was confusing. In yhe benefit plan arena, the reference to IRC Sec. 501© generally means IRC Sec. 501©(9) -- a voluntary employees' beneficiary assocation or VEBA. A 501©(9) entity or VEBA is not a plan, but rather the funding mechanism for a plan. I.e., the document don't contain benefit provisions; it establishes a legal entity (such as a trust) to hold the money to pay benefits. There would be a separate document establishing a plan that contains the benefit provisions. If the benefits are described in Section 3(1) or (2) of ERISA, then it is generally a benefit plan. However, in some cases the payment of benefits is actually a "payroll" practice" as opposed to a formal plan (see Labor Regs. Sec. 2510.3-1 and -2). A supplemental unemployment arrangement is sometimes just a payroll practice and sometimes a benefit plan under ERISA. I think people were just trying to clarify whether you have a 501©(9) trust or whether it is truly unfunded. If yours is a small welfare plan and is in fact unfunded, then Labor Regs. Sec. 2520.104-44 contains an exemption from the 5500 reporting requirements.

Has this question ever been answered?

I agree.

IRC Section 414(v)(3)(B)?

The statute requires the plan to give credit to the employee for vesting service for 2002 (and so be 100% vested) even if employee terminates employment on or after May 31, 2002. But the loan rules are permissive and a plan can impose more stringent limitations than the statute. Is there a reason why the plan couldn't provide that loans can only be taken by those who were vested as of the beginning of the year...provided that wasn't discriminatory in effect?

A standalone POP is only a 125 arrangement; it is not a "welfare plan" under ERISA. (The arrangement only converts the employee premium dollars to pre-tax; the arrangement itself does not provide any health benefits). IRC 6039D is the only section that requires a 5500/Sch F filing requirement for these arrangements. There are no DOL filing requirements for these arrangements. The IRS can suspend the filing, because the DOL would have only acted as an agent for the IRS in receipt of the filings. A plan with a POP and a health FSA is both a 125 arrangement and a "welfare plan" under ERISA. (In this case the plan provides health benefits when claims are paid). Both IRC 6039D and ERISA require a 5500 filing for the plan. The IRS cannot suspend the DOL filing requirements. A DCAP is a benefit that seems similar to an FSA. However, it is not a "welfare benefit" under ERISA Sec. 3(1). So the filing requirements are governed solely by the IRS.

I think that it's a "Catch 22." I usually advise that they file the amended return. I think that the client's voluntary filing of an amended return demonstrates that the client is being very diligent with respect to its filing requirements and shows good faith on the part of the client. If you're later trying to negotiate penalties I think that it puts the client in a better light. However, I simultaneously warn clients that I have seen situations where it probably would have been better to wait for a notice. Returns are processed very slowly and the government's tracking system seems to be less than 100% perfect. As a result, I have seen situations where both returns continue through the system and the clients get double notices. In fact, I have seen a client pay $5,000 in DOL penalties (which was a reduction from the $50,000 that was originally assess), because the client didn't timely respond to notices, provided poor responses, kept poor records of its responses, and was confused about which errors had previously been corrected. The client was unable to prove that it had ever filed the accountant's report with the 5500. So if an amended 5500 is filed, the client needs to realize that it may be "crossing in the mail" with the notices. Each response should be as timely and accurate as possible, even if the information has previously been provided to the government.

If you amended the formal plan document changed the year... But many insured welfare plans do not have formal plan documents. The terms are supplied by the insurance contract, the SPD, etc. (which are not necessarily complete). The insurance contract probably does not specify the "plan year," so a change in the contract probably won't affect the plan year. Section 102 of ERISA requires the SPD to specify the date the plan year ends. So you could check that to see if the plan year has changed. If the arrangement is part of an omnibus plan, there may be a "wrap" document that specifies the plan year and reflects any changes.

It might depend on the specific arrangement with the administrator -- in terms of what happens with excesses and shortfalls -- see the preamble to the 419 regs. But then again, just because it is funded for 419 purposes, that doesn't mean that it is "funded" for ERISA purposes.