J Simmons

The way I see Carmona, when an employee's benefits commence the spousal rights vest and another spouse cannot change that by then obtaining a QDRO. That is so whether the other spouse is one the retiree later marries, as Judy in Carmona, or an earlier spouse who had not perfected a QDRO before benefits payout commenced, as in the original post in this thread. 9CA in Carmona: "This case presents an issue of first impression in this Circuit: whether a 'plan participant's retirement cuts off a putative alternate payee's right to obtain an enforceable QDRO' with regard to the surviving spouse benefits of a QJSA. Tise, 234 F.3d at 423 n.6. We are persuaded that IATSE's interpretation is correct and that the answer to this question is 'Yes.'" and " the QDRO was unavailable to Lupe in this instance because Janis's surviving spouse benefits had already vested at the time he retired." As for a spouse waiving a benefit through a QDRO, before or after commencement of benefits, the Supreme Court has ruled that QDROs may be used to award an interest in benefits, but not waive an interest in benefits. Kennedy v. Plan Administrator for DuPont Sav. And Investment Plan, No. 07-636 (U.S. 1/26/2009): "There is no QDRO for a simple waiver; there must be some succeeding designation of an alternate payee". I think most family courts would naively attempt to fashion a new "QDRO" even after the QJSA and surviving spouse rights have vested upon commencement of benefit payments. The Nevada family court did just that. That doesn't mean that the order is efficacious or should be honored by the plan administrator. In fact, the plan administrator that would find such an order to be a QDRO and implement it faces paying the same benefits twice: once as ordered under the "QDRO" and again to those whose QJSA/surviving spouse rights were thereby divested.

I think that a well-advised plan administrator would reject an amended DRO signed by the judge now. What the ex-wife, her new attorney, and the divorce judge may try to do is make an adjustment in the other property division. I.e., since the retirement benefits are now probably off limits to the divorce division, the divorce judge orders the retiree to pay the ex-wife a certain amount of cash or give her some property he was originally awarded in the divorce.

The ship has sailed on the ex; the benefits have commenced payout. Check out Carmona v Carmona, Appeal Nos. 06-15581 and 06-15938 (9th Circuit Court of Appeals, 9/17/2008).

Treas Reg §§ 1.401-1(a)(2) and (b)(1).

There are two potential economic benefits to the employee. One is the value of the wellness testing or information that is provided at no cost to the employee. The other is the value of the 'rewards' for participating in the wellness program. For the rewards, the exception is the de minimis exception, as you mentioned. Whether they qualify depends on fitting IRC section 132. Is the reward a de minimis benefit one, considering its value and the frequency with which it is provided? To be de minimis, the benefit must be occasional or unusual in frequency. If the reward is a gift certificate that may be used toward a “significant variety of items”, it will be taxalbe no matter how de minimis in value. Such are taxable as a cash equivalent. For example, a $35 coupon that may be used at several local grocery stores must be included in the employees gross income and subject to FICA and FUTA taxes. Wellness programs also provide diagnostic testing and/or information on healthy living habits. I've not considered this until I read your post. Since this has the same net effect as if the EE scheduled an annual physical, paid for it and was reimbursed by the ER under a MERP or HRA, you might want to make sure that the wellness program, both in breadth and depth, covers enough EEs to satisfy the nondiscrimination tests of IRC 105h. There is an exception to this nondiscrimination testing provided in Treas Reg § 1.105-11(g), if the wellness program does not go further than that. Also, if it could be argued that the wellness program is provided primarily to advance interests of the ER (i.e., help reduce its future costs for health care for its EEs), and the benefit to the EEs is merely incidental and therefore ought not be taxable to the EE.

Prior to the change being considered the former employee could elect payout whenever during a calendar quarter (by timing his/her submission of a completed application) and if the change is implemented, the former employee's ability to do would be restricted. That raises the concern of whether this would be a protected benefit. However, excepted from being a protected benefit are, among certain other items, Treas Reg § 1.411(d)-4, Q&A-1(d). If you yet have that nagging concern, consider also adjusting for 'a proportional share of investment losses occurring between the valuation date preceding the distribution until the date of distribution'.

I would interpret Treas Reg § 1.410(b)-6(f)(1) that John is a Certain Terminating Employee despite having no 2008 compensation, another reason he received no match. The requirement of Treas Reg § 1.410(b)-6(f)(1)(iv) makes more sense if the 'solely' aspect is interpreted to mean that the year end employment requirement alone would cause the employee not to receive the contribution, not that it must be the only such reason.

I don't know off the top, Jim, if required, but I generally recommend informing such a participant in writing of (a) the first year of Roth per plan records, for the 5-year wait period, (b) what the 'basis' of Roth contributions is so that the employee will know how much is due to investment earnings and thus taxable if less than 5 years and not rolled over, © the employee's option to specify that a partial distribution of vested benefits will be first out of Roth rather than non-Roth benefits, and (d) if the employee has both Roth and non-Roth benefits and wants to roll over all benefits to one IRA or to another QRP, the recipient custodian or trustee must agree to separately track the two different types of benefits before the rollover may be made.

For health flex accounts, you can exclude from the 105h testing to the extent the plan excludes those who do not have 3 years of service, are younger than age 25, work less than 25 hours per week, and those that work less than 7 months per year. The 25 hours per week is a safe harbor; if you are ready to prove that a higher level (up to 35 hours per week) is yet considered 'part time' in your industry and locale if challenged by the IRS, then you can use the higher hours per week level. Similarly, the 7 months per year is a safe harbor; you can go as high as 9 months per year if you could establish that in your industry/locale the higher level is yet considered 'seasonal'. For day care flex accounts, you disregard in testing those employees that do not meet the 21/1 requirements you noted apply to QRPs. You also disregard those CBA'd employees.

I anticipate that HRAs will find more COBRA continuations being elected for those involuntarily separated 8/1/08-12/31/09 under ARRA given the 65% cost subsidy than under the traditional COBRA rules, given that HRAs are not exempt from ARRA special COBRA rights as health flex accounts are.

Is this being done with or without an amendment to the plan to that effect? It sounds like a hasty move if the new payroll provider has not had the time to get the 401k deferrals, auto and elected, keyed into its system fo the first payroll it will handle.

I think you're okay. The QNEC is just for NHCEs, to correct ADP and happens to also satisfy the TH min. That leaves just a need for a TH min contribution for your non-key HCE. You may have to make a TH min for any of the 4 NHCEs that may have entered mid-year if the plan limits compensation to just that while a participant.

I've only had a chance for a quick overview of those statutory provisions, but it appears that the 60 days election period will begin to run when the notice is given. So providing sooner rather than later (such as when the DoL model notice is published) will mean that the 60 day election period would end sooner rather than later too for those already involuntarily terminated on or since 9/1/2008.

Never heard of such being required--provided recordkeeping keeps separate track of the Roth from other benefits accrued. Scwhab may be institutionally insisting on it to keep the Roth assets separate and prevent the possibility that recordkeeping will be inadequate at future distribution and cause extra taxation to the employee. This may be a liability avoidance measure that Schwab has chosen to take.

You might want to look at Guardsmark Inc v Blue Cross & Bluse Shield of Tenn, Civ No. 01-2117 (WD Tenn 2004), Chao v Day, #05-5050 (DC CA 1/24/2006), Briscoe v Fine, #05-5097/5101/5103/5104 (6CA 4/13/2006), and Coldesina v Estate of Simper, #04-4006 (10CA 5/19/2005).

Anyone have any suggestions on how to deal with this situation in the meantime? Should the employee self-report the 20% extra income tax? If so, which tax year would that be for? Notice 2007-86, §3.01(B)(1) modified §3.01 of Notice 2006-79 to provide in part that (emphasis is mine) From this, I understand the implication to be that if a plan is not amended on or before 12/31/08, then there could be a violation on or before 12/31/08. As 409A took effect generally 1/1/05 (plan has not been substantially modified since 10/3/2004) and the document requirement merely postponed, would the violation for a plan that did not have the necessary plan amendments occur in 2008 or 2005? If 2005, the return has been filed, was filed in good faith, and did not disclose a 409A violation or 20% extra income tax. There are a couple of tax court cases that would suggest the taxpayer does not have to file an amended return where the original was filed under a good faith belief in its accuracy. If 2008, the Instructions to Line 61 of 2008 Form 1040 list as numbered item #12 basically impose on the taxpayer an obligation of self-assessment (and that the employer would report on Forms W-2 or 1099-MISC) of It would appear that any argument for 2005 would be fruitless given how IRC § 409A(a)(1)(A) reads: "If at any time during a taxable year a nonqualified deferred compensation plan fails to meet the requirements [of IRC § 409A] ... all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income." Granted the plan was in violation as of 1/1/2005, but the plan did not for 2008 meet the requirements of IRC § 409A and none of the compensation deferred in 2008 or earlier years was included in gross income previously, and so it would appear that the taxpayer should self-assess the entire amount of compensation deferred in 2008 and earlier years as additional taxable income for 2008, and label it NQDC. Anyone else see it differently?

Hi, Jim, Could you help me out a little with your suggestion? How does that fix the problem?

I can't imagine that any 401k prototype documents could properly accommodate a 403b plan. That is, I don't think you can properly document a 403b plan by adopting a 401k prototype. What the client may have heard is that the IRS has promised that there will be 403b prototype program opened by the IRS sometime in 2009. In the meantime, it is important to operate the 403b plan "in accordance with a reasonable interpretation of § 403(b), taking into account the final regulations". IRS Notice 2009-3.

The correction resolution system of the SEC must be more user friendly than EPCRS. Sounds like the SEC one has a 'Mulligan' concept, like lax golfers. It would be nice if the IRS gave pension practitioners a 'do over'. On second thought, Madoff slipped under the SEC radar. Maybe it is better that we have to deal with EPCRS.

K plan requires 21/1 and has semi-annual entry dates (calendar plan year, so 1/1 and 7/1). Owner's wife (ergo, HCE) starts work on November 10, 2007; one of her chores is to handle payroll. Between November 10-December 31, 2008, she electively defers $4,200 of her $5,000 pay in that period, not understanding that she had to wait for an entry date (and open enrollment period) to make elective deferrals. It appears that the only IRS-sanctioned correction method for fixing a situation where an employee was allowed to make elective deferrals before eligible and entered per the plan's terms is to adopt an amendment retroactively relaxing the eligibility/entry rules sufficiently that makes that employee to have been properly in the plan at the time that the employee first began making elective deferrals that went into the plan. Rev Proc 2008-50, Appendix B, § 2.07(b)(3). The retro relaxing amendment would have to go further in order to predominantly pick up NHCEs when considering the HCE (wife) that needs to be picked up. We could amend to allow for immediate entry for the k feature. This would have to be retroactive to at least November 10, 2008. However, to make this predominately favording NHCEs, the date to which this corrective amendment would have to go would be back far enough to let 2 of the 3 NHCEs working there into the plan on the dates that they first satisfied the 21/1. That would mean that each of the 2 NHCEs would have a missed deferral opportunity re elective deferrals from the time he or she satisfied the 21/1 and the entry date allowed into the plan. That would require a company contribution 50% of the ADP for the NHCE's for that year, plus any matching contributions that it would have received for that year--adjusted for earnings. Rev Proc 2008-50, Appendix A.05 and Appendix B, § 2.02. Does anyone know of an easier fix to this situation? This plan might not be eligible for SCP if this is a significant operational error. Any thoughts on whether this operational error is significant or not? (This is the tip of the iceberg. The deferrals are making the average benefits percentage part of cross-testing impossible. And at 84% of compensation for the period in question (November 10-December 31, 2008), there is a fiduciary violation for not observing the plan's imposed limit of 80% on K deferrals. Considered compensation is limited to post-entry for mid-year entrants.)

k2retire, Peter pointed out in another thread a couple of days ago the following: If an employer’s plan is stated using a master, prototype, or volume-submitter document that permits practitioner amendment, a sponsor or practitioner that “reasonably concludes” that an employer’s plan “may [sic] no longer be a qualified plan” must (if the sponsor or practitioner doesn’t submit an EPCRS request) “notify the employer that plan may no longer be qualified, advise the employer that adverse tax consequences may result from loss of the plan’s qualified status, and inform the employer about the availability of EPCRS.” Rev. Proc. 2005-16 at § 8.05 and § 15.07. If your mutual fund record keeping business w/ small TPA division is the sponsor of such a lead document that is being used by the plan sponsor, your company may need to send such a notice to the plan sponsor.

Yes, if the new EE had the time to think it all through before his first payday, while trying to get used to the new job, get settled into the new house and everything.

So if a new EE has some auto deferral under the QACA and then opts to take it out during the 90-day window (needing it to cover some moving expenses, for example), even though the QACA SH is match rather than NEC, that EE might not be able to make a deductible IRA (or Roth IRA) contribution when doing his/her taxes for that year. I don't take exception to the rules as you explain them, Sieve, just observing on the implications for an EE that opts out of the QACA.

I think this post deserves to be nominated for Sagest Post of the Year--do you have an extra 400EX I can ride?

So, if I understand your answer, Sieve, having a QACA plan does not put the EE in a Catch-22: either automatic deferrals (i.e., participating for purposes of the IRA deductible contribution rules) or affirmatively electing out (i.e., no participating merely by reason of making that affirmative election). Any difference in the participating (or not) analysis if the affirmative election out is after automatic deferrals have been held out of that EE's paycheck and he elects to have all returned to his paychecks, in the retroactive election opportunity?