J Simmons

The EE died without having affirmatively named a death beneficiary, and without spouse or children. The plan provides then that the EE's probate estate is by default the designated beneficiary. The personal representative (PR) of the estate of the EE, one of 4 brothers of the EE, thought there would be an affirmative designation by the EE of the PR personally as the death beneficiary of the 401k benefits. He explained that if it goes through the estate, the 4 brothers share equally. Additional searches were made for a death beneficiary designation, but nothing turned up. Distribution elections were prepared for the estate, as the default beneficiary and sent to the PR, with an explanation that again no death beneficiary designation by the EE has been found. The PR turns back in the the Distribution Elections, signing them "as personal representative", but electing a rollover to an IRA entitled "IRA of [EE's name], deceased, FBO [PR's name], beneficiary". It appears that the PR is attempting to have the benefits rolled over to himself, in his personal capacity, even though the default beneficiary is the EE's estate and the PR has explained to plan official that through the estate, it would go 1/4 each to the 4 brothers. Any suggestions on how the plan ought to respond to the distribution elections turned back in by the PR?

If he's the only one, you don't need a 125 plan to overcome the constructive receipt of taxable income that attends individual choice of cash/taxable benefit or tax free benefits. The corporate board of directors can resolve to provide this individual health insurance, at the corporation's expense, and it will be tax-free to the individual under IRC 106. The corporate board of directors could also promise medical expense reimbursement and it would be tax-free to the individual under IRC 105h, provided (a) the individual does not own more than 2% of the corporation or (b) the corporation is a C corporation. If an S corporation and the individual owns more than 2%, he'd be ineligible for 125 plan participation. If a C corporation and he owns or is deemed to own 5% or more (or he is otherwise a key employee, IRC 416i), he'd be eligible to participate in a 125 plan, but the absence of non-key employees would mean he'd get zero tax-free benefits--unless the POP only exception to testing under Prop Treas Reg § 1.125-7(f) applies.

Did someone say 'obtuse'? Here I am! Rev Rul 2002-32 deals with continuing health flex accounts for transferred employees in a mid-year asset sale. Treas Reg § 1.105-11 incorporates by reference two IRC § 410 rules: IRC § 410(b)(1)(B) discriminatory classification of employees (Treas Reg § 1.105-11©(2)(ii)) and IRC § 410(a)(3) eligibility year of service (Treas Reg § 1.105-11©(2)(iii)). Does that allow for any extrapolation to IRC § 411(b)(6)©? Both the minimum coverage rules of 401a QRPs and the excess reimbursements calculations of 105h MERPs depend on a plan year concept, and the IRC § 411(b)(6)© safe harbor from coverage is one involving a change during a plan year. Arguably the same reasons for the safe harbor from coverage would apply to 105h discrimination rules. That's all I have. Mr. Obtuse, aka

Does your cafeteria plan attempt to continue the participation of all mid-year terminated EEs with current year health flex accounts to the end of that year? Otherwise, look at Prop Treas Reg § 1.125-5(d)(1): " the payment schedule for the required amount for coverage under a health FSA may not be based on the rate or amount of covered claims incurred during the coverage period. Employees' salary reduction payments must not be accelerated based on employees' incurred claims and reimbursements."

Yes, between the parent and subsidiary. The question the new information raises is whether you need to add the two companies that own the parent into the control group chain. Are the two companies that each own 50% of the parent a control group themselves, giving each a 100% ownership of the parent?

If the EE, spouse and dependents all live at the same address--per the most recent address info available to the Plan Administrator and ER--then a single notice mailed to the EE and spouse at that address ought to do. If the EE and spouse live at different addresses, then you must send notices to each of their separate, last known addresses. If the Plan Administrator or ER have last known address for a dependent that differs from both the address for the EE and spouse, then another notice must be mailed to the dependent at the separate, last known address for that dependent. A fail-safe is to keep last-known address info on each person covered, and mail a notice separately addressed to each--even if that means more are being mailed that might need to be per the foregoing rules.

What happens under your cafeteria plan when other employees lose their eligibility for the cafeteria plan mid-year?

Thanks, Tom, for the link.

I think it yet counts in ADP. Treas Reg § 1.401(k)-2(a)(4)(iii).

Having no key EEs, the 25% concentration test poses no problem/challenge. For health flex accounts, you yet have to be concerned about not discriminating in favor of the 25% highest paid salesmen vis-a-vis the other 75%. This is so under 105h even though all are HCEs per 414q definition.

Step children do not appear to be within the parameter of child or alternate recipient, ERISA § 609(a)(2)© and (D), but see O'Neil v. Wal-Mart Corp., N.D.N.Y., No. 8:05-CV-1572, 8/22/07, before you make a decision on this issue.

to clarify, this arrangement would be an HRA, correct. Yes.

That kind of a choice would need to be offered in a cafeteria plan context to keep the EE choosing the $100 ER contrib to health coverage from being taxed on $50 cash that he could have alternatively chosen (that's assuming the $50 of flex credits has to be used toward one or another tax-free benefits and not taken as cash or other taxable benefit). You could split this and offer two choices: one being between $50 of cash or $50 in ER contrib toward health insurance premiums (which is what requires the cafeteria plan) and a second that is between $50 of flex credits--per my assumption--and another $50 in ER contrib toward health insurance premiums (this second choice would not need to be provided in the cafeteria plan context). So splitting it out might impact the 25% concentration and nondiscrimination testing. Since the only amount of cash (or other taxable benefit involved in the choice) is $50, then you'd need a cafeteria plan for the choice in order to keep the person choosing $200 ER contrib towards the health insurance premiums from being taxed on $50. Again, you could split this out into two choices, one in the cafeteria plan context of $50 cash or $50 ER contrib toward health insurance premiums, and leave the remaining choice--$50 flex credits or the other $150 ER contrib towards the health premiums--outside of the cafeteria plan context. This again would have an impact on the testing, and therein lies a planning opportunity or pitfall potential. You would need a cafeteria plan in order to have the person who elects the $100 in fully insured ghp to not be taxed on the $100 cash he could have chosen. Again, the $100 flex choice (assumed to be a choice only among tax-free benefits) could be taken out of the cafeteria plan context and thereby change the testing of the cafeteria plan.

I haven't heard of any further guidance coming other than that you mention.

Hi, George, I assign a three digit number, 5XX, to the cafeteria plans that I write, and I see them assigned to a great many--but not all--cafeteria plans that clients have from other sources. I do not think you could get to 2 cafeteria "plans" as simply as by the corporate resolution to treat a single document that speaks in terms of a single plan as being in reality two plans. But hey, they permit the document requirement to be satisfied using more than one document, so why not the opposite? two plans using one and the same document. One technique I see used to relieve the limits of the key EE concentration test is for the ER to decide to provide under IRC 106 health insurance coverages at the ER's expense to just key EEs (and perhaps also HCEs). The EE has no choice in the matter, it's take it or leave it, but those who leave it get nothing in lieu thereof. This is documented as a 106 plan, with the ERISA document 'bells and whistles'. Then a single cafeteria plan offers to all EEs the opportunity to elect paycheck reductions to pay for flex accounts and health insurance premiums. The key EEs already have health insurance under the take-it-or-leave-it 106 plan, and so would not elect under the 125 plan to pay premiums redundantly and bear the expense of that redundancy through payroll reduction. The real choice presented for the Key EEs would be how much to flex account per year, and of which types of flex accounts. For the non-Key EEs, they would be able to choose health insurance premiums and/or flex accounts. This technique removes the health insurance premiums from the Key EE side of the equation in the 25% concentration test, but health insurance premiums the non-Key EEs elect to pay by paycheck reductions are counted on the non-Key EE side. This makes the 25% concentration test easier to pass. If the ER has traditionally paid the premiums of the non-Key EEs (with no cash alternative for the EE to elect) and wants to continue to pay such, the ER can give the non-Key EEs a one-time boost in pay equal to what those premiums would be. For those non-Key EEs that elect the coverage and corresponding payroll reduction, they are in the same net place as before. Those non-Key EEs that elect to take cash instead may do so under this arrangement, the ER cannot force these dollars to be used to pay the premiums. So some ERs will survey the non-Key EEs first to determine how many have other coverage, how many might take cash instead, etc. to get a feel for the extent to which cash would be taken, non-Key EEs might have no health coverage, etc. This can help avoid a potential problem of not meeting the group health insurances minimum percentage threshold as well.

You only need the exemption from constructive receipt provided by IRC 125 if cash or some other taxable benefit is an option given to EEs as an alternate to one of the allowable tax-free benefits. If the EEs' only choice is between two or more tax-free benefits, you do not need to comply with IRC 125. 'Group health plan' is a term specifically used for COBRA and HIPAA purposes. Whether you have a group health plan does not depend on choices presented to EEs. However, health flex accounts under a 125 plan would comprise a 'group health plan'.

No, not if premiums and flex accounts are contained in the same cafeteria plan. Prop Treas Reg §1.125-7(h) provides that "[a]n employer who sponsors more than one cafeteria plan is permitted to aggregate two or more of the cafeteria plans for purposes of nondiscrimination testing." The regulations thus do not require all plans of an ER be aggregated, and recognize that there can be more than one. I think to get the POP exception to the testing, you'd need two separate plans--separate titles, separate three digit numbers, separate documents--one for the POP (premium-only plan) and the other for flex accounts, with neither document specifying optional aggregation with the other.

Off the cuff, I think they are a prior adopter if there was not a gap of time after going off the old VS and onto the new one.

Also of interest on this topic about the individual conversion right is the approach taken by the 9th Circuit in Miller v Rite Aid, 504 F3d 1102 (9th Cir 2007).

For states that do recognize 'legal separation' as well as divorce, in those states treat someone as legally separated if they meet that state's definition. For states that do not recognize 'legal separation', only give COBRA rights for divorce. Until then, they are married.

Hey, Larry, Is a new SPD triggered solely by reason of the switch from IDP to prototype, or are you speaking more generally, assuming that either the 5 or 10 year time frame might be up or that some design changes are in play?

No recent change about the exclusion of an employee who is a 2%+ shareholder of the S corp employer, or his spouse, from the 125 plan. Those exclusions yet apply. However, if it is just health insurance premiums that the shareholder/employee and spouse/employee are looking for, it could be provided by the S corp to the shareholder/employee, included in the shareholder/employee's W-2 taxable income, and then the shareholder/employee claims a deduction on his personal 1040. For self-employed, the income tax deduction is now 100% of the premiums so paid. As compared to other employees, such as those using the 125 plan, the only difference is that FICA taxes apply to the amount of the premiums for the shareholder/employee.

Probably False, but here's a recommended reading list: US Dept of Labor (DOL) Opinion Letter 2001-05A (June 1, 2001) DOL Opinion Letter 96-12A (July 17, 1996) DOL Opinion Letter 94-22A (April 20, 1994) Footnote 5 to DOL Opinion Letter 94-15A (April 20, 1994) DOL Opinion Letter 94-23A (July 1, 1994) DOL Opinion Letter 94-26A (July 11, 1994) DOL Opinion Letter 90-08A (April 11, 1990) DOL Opinion Letter 77-54A (August 8, 1977). Johnson v Watts Regulator, 63 F3d 1129 (1st Cir 1995) O’Brien v Mutual of Omaha Ins Co, Case # 99-CV-02151-HAM, ED La (12/7/1999) Roehrs v Minnesota Life Ins Co, No. CV-03-1373-PHX-LOA (D.Ariz. 02/16/2006) Bagden v Equitable Life Assur Society of the US, 1999 US Dist LEXIS 7066 (ED Pa 1999) Peterson v American Life & Health Insurance Co, 48 F3d 404 (9th Cir 1995) Stern v Provident Life & Accident Ins Co, 295 FSupp2d 1321 (MD Fla 2003) Laventure v Prudential Insurance Co of America, 237 F3d 1042 (9th Cir 2001) Belanger v Wyman-Gordon Co, 71 F3d 451 (1st Cir 1995) Stoudemire v Provident Life and Accident Insurance Co, 24 FSupp2d 1252 (MD Ala 1998) Levett v American Heritage Life Ins Co, 971 FSupp 1399 (MD Ala 1996) Lott v Metropolitan Ins Co, 849 FSupp 1451 (MD Ala 1993) Hrabe v Paul Revere Life Ins Co, 951 FSupp 997 (MD Ala 1996) Casselman v AFLAC, 143 Fed.Appx. 507 (4th Cir. Nos. 04-2370 & 04-2378, 06/24/2005) Butero v Royal Maccabees Life Ins Co, 174 F3d 1207, 1213 (11th Cir 1999)

Well, that's raising two audit-potential flags rather than just one. If you have reason to be confident that you'd pass an audit with flying colors, then I'd do as the agent suggested. If not, I'd explain to the individual partners and let them make the choice individually of whether to add the second flag to their Forms 1040 in addition to your adding one to the Form 1065.

Thank you, Peter and QDROphile.