J Simmons

Hi, ClearSky. Generally, the only time that a change in elected benefits under a cafeteria plan may take effect is the first day of the next plan year. By 'mid-year', what is meant is any time during the year, not the end of the 6th month/beginning of the 7th month of the plan year (although that is the true middle of the plan year), which does not allow for changes in election in the absence of a qualifying change in family status. So 'mid-year' means for this purpose any time other than when the plan year begins, and you can add your child. Contact your HR as soon as possible, but you should have at least 30 days in which to retroactively add your new child to coverage. BTW, congratulations on the new baby!

If the second wife will not sign an acknowledgment that in light of the designation of the children from the prior marriage as death beneficiaries is valid and enforceable despite her marriage to the decedent EE at the time of his death, then you might want to consider interpleading the death benefits with a court rather than paying the children from the first marriage only to later face a claim/lawsuit from the second wife that you must pay her the same benefits.

Yes you can structure this 'brokerage window' in this way, and even do so in a way that is in compliance with 404c. See the court decisions in Heckler v Deere Co, a Wisconsin federal court case that has been reviewed on appeal by the 7th Circuit Court of Appeals. Yes, it is allowed, but it is cumbersome. In the plan documentation or written policies, you want to be clear how often it will be determined how much is vested and then transferred to where it can then be invested as directed by the EE per a 404c policy. Suggestions? Just let each EE direct the investment of the vested and unvested amounts accrued to his benefits--all of it being under a 404c policy. Yes, but you'd need to make sure that for each EE given his age, education and earnings levels that at least three options with different risk/return characteristics make sense for that EE. Also, you'd need to monitor the 6 or so choices, probably quarterly and develop written file materials explaining why which of the choices was continued, why others were dropped or replaced, and why the new choices were added. There is more chance for liability for investment underperformance here where the choices the EEs have are so limited.

I'm not familiar with the Ft. William document. When you say that each person is in their own allocation group, I assume that is what the plan document provides. That is, that the plan document specifies that the ER can make and declare different contributions for each person. If that is the case, then with no specification in the plan document about whether the testing will be limited to either on accruals or contributions should, I would think, allow either method to be used.

You have to deal with the allocation formula that is in your plan document. You can demonstrate that the resultant allocations are nondiscriminatory in a number of ways--cross-testing, the 'pro rata' or permitted disparity. But you have to follow the parameters of your plan document for making the allocation in the first place.

Definitely worth digging into deeper. Your questions suggest that you suspicious of the right types of things. I have never seen any regs that address the procedure. As far as the EE truly not feeling right about having been reimbursed more than was held out of her checks, if that's the only, true reason, then I recommend that the ER refuse the re-payment and simply assure her that's the way things work. I think you could mention that there are many worthy charities if she just can't bring herself to keep the windfall.

Well, not so much what the IRS auditors might think of you personally, Larry, but maybe that the IRS auditors get their hackles up when a benefits lawyer pops up in the audit? From behind the scenes, I coach more accountants and TPAs dealing with audits than audits I handle with the IRS for the ER.

Each ER's participation will be tested separately. (Well, if two or more but less than all of the participating ERs are a controlled group or affiliated service group, then each such grouping will be tested separately from the ERs outside that grouping.) This is a 401k plan (assumed per the board you posted in), so I'll further assume each ER has the discretion each year as to how much, if any, it will contribute. So, no ER should be obligated to make a contribution for the employees of any other participating ER. If an ER does make a contribution to the MEP for employees of another ER, I do not think the contributing ER gets a tax deduction for so doing. An ER only gets a tax deduction for contributing to the MEP for its own EEs. Does the MEP document require the same level of benefit accruals by all EEs, so that if one ER say contributes an amount that equals 6% of pay of its EEs that the EEs of other participating ERs must also accrue benefits for that year equal to 6% of pay--but then not specify who would have to make that contribution? If the MEP is so worded, I think it needs to be amended.

If you can appropriately stop the FSA in September, then yes for October through December of that same calendar year you can have HSA contributions if employee is only covered and is in fact covered by HDHP for those months. The eligibility for making HSA contributions is determined on a calendar month basis. Now, for stopping the FSA in September, are you terminating the entire cafeteria plan that the FSA is a part? I'm just not sure how you stop it mid-year. A question that this raises for me, though, is suppose the FSA is completely used up by the end of August. If you had HDHP coverage (and no other coverage that would disqualify it), would that employee then be eligible to make FSA contributions for the months of September through December of that calendar year? It seems arguable that once the FSA is depleted, there is no longer 'coverage' under the FSA that would disqualify from HSA contributions.

It certainly is some type of back office coding problem! (I hope they admitted that to you in writing.) The IRS very well could see it as a distribution (income taxation) and an excess contribution (6% penalty) to a personal IRA of yours. I think you should hire an attorney and let Morgan Stanley you will not agree to or participate in any fix that MS proposes until it signs an agreement with you to indemnify and hold you harmless against any and all adverse tax consequences from their coding error and their fix (should the IRS later challenge one or both), including the value of the loss of the continued tax deferral, and that MS waives any statute of limitations or laches defense.

I think the MEP would spell that out, but it seems when I last looked at the question a couple of years back, each ER must make the contribution for its EEs in order to get the tax deduction. However, make sure the MEP is clear on this issue before it is signed or otherwise adopted.

Here's an off the cuff answer. I think your gateway should, on top of the $1,350 safe harbor, should be $675, to make it 4.5% of $45,000. You are running the average benefit test (I take it all of your HCE rates groups are not passing by 70% or better as a ratio percentage). Since the elective deferrals have to be included in the average benefit test, wouldn't you use your 401k compensation for that test? If so, then that would be what I would think the gateway is based on.

I think you exclude them from PY09 testing, using the same rationale for why owner's family members that were once eligible for the plan but do not have any compensation during the PY being tested should not be included.

Today a practitioner/friend of mine who is handling a field audit explained that the plan under audit has k safe harbor language, but ER never provided the annual k safe harbor notice and did not make any k safe harbor contributions, as the plan provision called for. The ER and practitioner had thought that the plan would not be safe harbored, but would be subject to ADP/ACP testing for each plan year for which no k safe harbor notice was timely provided. The document was not one that so provided, it simply said that the plan is k safe harbored and that the k safe harbor contribution would be the match. Auditor was considering insisting that the ER make the k safe harbor contribution described in the plan provision. Here's how this situation was resolved that that specific IRS auditor: "The owner/employees did not have any 401k deferrals for the year being audited, and hardly any for other years. The agent could see basically how we were interpreting the document and then closed the audit. She did recommend we fix that part of the plan with an amendment." Whenever I am involved in a plan audit, I'd like to be able to call and request this particular agent be assigned. But this is a second such situation where I've seen the IRS auditor start off wanting (a) the plan provision described k safe harbor contribution made, but (b) the plan to demonstrate ADP testing to pass. In both, the auditor closed the audit without the k safe harbor contribution being required. In this one, there wasn't even a need for any QNECs corrections.

An accountant or tax lawyer might have the skills and experience that you need to perform an analysis of many factors that come into play and to advise you accordingly. However, not every accountant and not every tax lawyer will have those skills and experience. You might consider searching on the internet for articles on the topic of factors to consider and the advisability of converting to Roth, with estate planning considerations taken into account. Don't try to bone up on the topic yourself by studying such articles. This is not a do-it-yourself matter. Rather, after reading over a number of articles, contact the author of the best and next best articles, in your opinion. Ask them if they have suggestions on who you ought to talk to. Do not worry about dealing with someone in your locale. Telephone, faxes, and e-mail make it easy to deal with someone wherever they are. You are looking for someone with the necessary know how, not just someone with a nice office in your city.

ND Ohio #06-CV-7029

If its service being counted for eligibility, then you count all service with the newly adopting employer. That doesn't depend on predecessor or prior employer service being counted. It is the same as it would be if the employer were adopting a new, single employer plan. If its service being counted for vesting, then whether you'd count the service for the newly adopting employer before it adopted the multiple employer plan would depend on what the multiple employer plan documents provide. If it states no 'pre-plan service' with no further specification, that's vague because it could mean no service is counted before the multiple employer plan was first set up or just no service is counted with an employer before the employer adopted the multiple employer plan. Since the plan administrator must operate the plan in the interests of the participants, I think you'd be safer going with the interpretation that such a provision disregards service before the multiple employer plan was set up.

No, it should not be considered a qualifying event that permits a mid year change in elected benefits. He had the same options during the open enrollment period for the year as he has now. All that is different is that he has changed his mind. He needs to wait until the next year begins to drop the coverage under your plan.

The fiction of the Sole Prop wearing two hats, one as employer and one as employee, is elevated to its extreme. Otherwise, Sole Props would be limited to the 402g amount in benefit accruals, not the 415c limit which was intended to apply. Since there is no one else, and no grouping, to make the decision for the employer except the Sole Prop, the IRS choice is to truncate for Sole Prop's their 415c accrual limit to the lesser 402g limit or respect the two-hat fiction. With a partnership, it is is different. The IRS does not have to defer to such a fiction. There is a grouping that is to make the decision for the individual. It is the partnership, not each partner, that is to make the decision as to the amount of the partnership, 'employer' contribution. If the circumstances suggest that the individual partners were each allowed to decide for the partnership what the contribution for that partner would be, that is clearly a disguised, disqualified 401k feature.

You might want to check the IRS Coordinated Issue Papers issued March 29, 1999. If you can't locate them, let me know by e-mail and I'll send them.

I think it could begin immediately after the SMM is provided. As to distributions that begin after the SMM distribution, it ought to be allowed to apply (unless the SMM specifies a deferred effective date). For distributions in progress at the time of SMM distribution, I would not be hesitant about charging any of the processing costs. Not that I know of anything that would prohibit charging the costs for the remainder of the distribution process for those in progress, but you'd need to make sure that the charges are just for those aspects that follow the SMM distribution and your chance of getting pushback on the issue would, I think, be greater from those already in progress. Also, you need to consider the timing and whether that alone will make application of going from not charging the costs to doing so favors HCEs. Allocation of plan expenses is a plan right or feature that is subject to the nondiscrimination rules. Treas Reg § 1.401(a)(4)-4(e)(3)(i). So the timing must not favor the HCEs. Treas Reg §1.401(a)(4)-1(b)(3) and (4). See Rev Rul 2004-10, IRB 2004-7, 2-17-2004. Also see EBSA FAB 2003-3, 5-19-2003.

What I understood Larry to be saying--and what I do is--to reschedule the date for filing in the current cycle, and then do a new notice to interested parties and make sure it is posted at least 10 but not more than 24 days before the newly scheduled date to mail off the application.

Like you, I have become jaded in this same aspect.

Just bumping this up to the attention of those that might have missed it the first time.

Austin, have you considered having the Plan interplead the issue in federal court and let the two kids and the 2nd wife duke it out without the Plan possibly making the wrong decision about which of them should get paid? Cost of an interpleader would be much less expensive that paying out the sizeable account twice.