J Simmons

Small ER ends professional practice, pays out benefits to all EEs but the owner/EE. Continues QRP (holds merged MPP assets) for purposes of creditor protection until professional malpractice statute of limitations period runs. During that period, owner/EE makes 4 withdrawals during the last PY and the current PY, dating back 15 months. There was no 402f notice, no QJSA/QPSA notices or waiver by spouse of owner/EE. Owner/EE is passed the later of age 62 or QRP's normal retirement age, so not a problem in failing to give notice of right to postpone payout. Incident to steps being taken to terminate the QRP, these notice and consent problems were discovered. In looking at Rev Proc 2008-50, section 6.04 on VCP describes the method for VCP correction, referring to Appendix A.07 for similar correction principles, of spousal consent failures. The QRP qualifies for SCP correction of significant operational failures by SCP as the QRP has its own D-Letter. SCP correction may be timely accomplished. My question of whether VCP is required or SCP is available boils down to whether these spousal consent and notice problems amount to something other than an operational failure as defined in section 5.01(2)(b), i.e., solely a failure to follow plan provisions. Thanks in advance for input.

Does the plan document really provide that the normal form of benefit (the one if consent to another form is not provided) is QJSA for benefits with a present value of $5,000 or less?

QDROs may effectively be revised by the entry of another court order. See U.S. DoL Regs § 2530.206 issued in March 2007. Also, however, where the benefits in question are already in pay status, your rights as a spouse would seem to be vested and not subject to being taken by another court order. Refer your lawyer to Carmona v Carmona, No. 06-15581 and 06-15938 (9th Cir 9/17/2008). Would you have to hire lawyers? If your ex files a motion in the divorce court, or some other legal maneuver, your interests would be best protected by hiring a local attorney knowledgeable in such matters. What would it cost? That's hard to predict. Too many variables and unknown factors could come into play. Maybe. It depends on whether the form of payment is as a single life annuity or a joint and survivor annuity. If a joint and survivor annuity is the form of payment, then the plan should not allow your ex to change your survivor rights. If your ex obtains a new QDRO that is presented to the plan administrator, your ex will likely run into difficulties with the plan. But it is better to make your first stand in divorce court, arguing the equities (reasons like those you've listed) and the Carmona case.

No cafeteria plan would be necessary for a choice merely between two tax-free benefits. If the HRA qualifies under 105h and the day care reimbursement under 129--and those are the only two choices an employee has, no cash or other taxable benefit choice--you do not need to comply with IRC section 125. Yes, an HRA can be limited to paying medical insurance premiums and co-pay. An HRA needs to meet the requirements of IRC section 105h. Treas Reg § 1.105-11(b)(1)(i) requires 'a separate written plan' where there is no insurance involved and an employer reimburses employees their health expenses, like co-pays. Where a publication contradicts regulations, I'd do what the regulations provide. And as QDROphile mentions, ERISA requires a written plan document. "Every employee benefit plan shall be established and maintained pursuant to a written instrument." ERISA § 402(a)(1). For the day care benefit, "a dependent care assistance program is a separate written plan of an employer for the exclusive benefit of his employees to provide such employees with dependent care assistance". IRC § 129(d)(1).

Most of the concerns are allayed by the fact that it is a non-ERISA plan. The management of the loans and their repayment might pose a problem if performed by the one participant. There is a business corollary in the commercial sector. If a third-party company is not hired by the plan and paid to manage these loans and their repayment by the obligors, you could possibly have a UBTI concern. Also, if the one participant performs those tasks, it could be a prohibited transaction per IRC § 4975©(1)©, unless it could fit within IRC § 4975(d)(11).

All of the governmental plans that I advise have long since converted from ordinances to a plan document, and I recommend to each that they apply for a D-letter. The design of those I advise fit on my prototype, so neither Cycle C nor E.

Regs or laws? No. There are reported to be general information letters from the IRS that talk about corrections being permitted when there is 'clear and convincing' evidence of an mistake. Some reports of these informal letters suggest that the mistake by the EE must be one of impossibility. For example, an EE with no dependents elected a day care flex account. Must have been an error. Other reports broaden this to any mistake of fact that can be shown by clear and convincing evidence. Yet other reports even allow mistakes of law--misunderstanding the cafeteria plan and flex plan rules when the election was made. If the error was made by the ER, then it is generally thought that the ER can take certain steps to correct that. For example, if the EE's written election shows a health flex account elected of $600, but the ER wrongly implemented it as a $450 one for the year, arguably part way through the year when the mistake is discovered health expenses incurred before the error was corrected would qualify for reimbursement, and the payroll reductions to offset the cost of the health flex account could be upped so that by year's end they will total $600. In fact, if the cafeteria plan is subject to ERISA, such a correction is arguably required so that the plan administrator meets its fiduciary duty to operate the plan as written--which includes implementing elections as made.

Is the one participant an owner of the sponsoring employer?

Is the current non-pooled, self-directed 403(b) structured through a single, group policy or individual 403b contracts? If individual 403b contracts, is the current provider the only issuer of those 403b contracts? If not, ask the current provider how it will "close out" 403b contracts to which the employer is not a party? See Treas Reg 1.403(b)-10(a).

While there are many ERs that yet do not have documents in place, it has been about a year now since the model 403b plan language attached to Rev Proc 2007-71 was published and many ERs have adopted plan documents. We're only 39 days out, and it has now been 31 days since the letter was sent to Reeder and 25 since ASBO (Association of School Board Officials) made a similar request to the IRS. On November 13, Architect said the request for postponement was then under 'high level review' at the IRS. Nevertheless, I think the prospects of a delay are actually getting dimmer each day. I hope to be pleasantly surprised, but would appreciate even more answers to questions about which 403b contracts are "plan assets" after the section 8.01 invitation has been made by an employer and either accepted or rejected/ignored by each vendor and if an employer's asking as part of that invitation that the vendor subordinate the 403b contracts to a 403b plan that gives the employer the unilateral power to instruct payout belies the invitation being a reasonable, good-faith effort to include those 403b contracts in the employer's 403b plan. That would open a practical path towards plan termination.

Has this ER ever accommodated a younger EE's request to be excluded from the plan (other than a Treas Reg § 1.401(k)-1(a)(3)(v) opt out)? particularly an EE under 40? If so, would it not be ADEA discrimination to deny the 85 year old EE the same option the ER has perhaps given a younger one, particularly one under age 40?

My concern lies primarily in the employer being able to accomplish the distribution of all the individual 403b contracts that are part of the undocumented plan within a reasonable time of terminating (i.e., a year), and secondarily whether that payout must be before 1/1/09 to be done without a plan document. If not all assets are distributed within a year, then there is no -10(a) termination. Bob Architect has been repeating that warning at seminars since last January (and I most recently heard Bob say that as part of the NTSAA's Webinar of October 24). Many of the individual 403b contracts between employees and vendors do not defer to the employer if it instructs to payout. If you have some under age 59 1/2, active employees that attempted a rollover to an IRA or other plan as part of a plan termination distribution, it's a bad rollover as the employee did not have an 'access event' permitting distribution. Consequently, I would not try a termination under the current -10(a) if individual 403b contracts are involved unless I first had all the employees and all the vendors signed off that they would do the payout within a year if the employer terminates. Of course, without defining what 403b contracts must be considered as plan assets, -10(a) requires that all of plan assets be timely distributed incident to the termination in order for termination to be an 'access event' for those under 59 1/2 and yet employed by the employer. I would at least want to go through the employer invitation step (reasonable, good-faith effort to include and maintain under the employer's 403b plan document, Rev Proc 2007-71) and be refused or ignored by a vendor before I took the position that the 403b contracts issued by the vendor were not part of my plan's assets. Without that step, what 403b contracts would have to be paid out within one year in order to termination to be an access event permitting payout and rollover for those under 59 1/2 and yet employed by the employer? I don't know. Which 403b contracts are included in a plan is cited as the first of six vague areas in the October 22, 2008 letter initiated by the Groom Law Firm and Conner & Winters (and signed by about 30 others, including American Benefits Council, MetLife, The Principal, Great-West, and SPARK Institute) to Thomas W Reeder, IRS Office of Benefits Tax Counsel, asking for a postponement of the 1/1/2009 effective date of the new regs. The Preamble approach further complicates the attempt to do a non-document termination by requiring that each of the 403b contracts satisfy "all of the applicable requirements of these regulations" other than the plan document requirement. At least if you have a plan document designed to meet the regs and provide in it that the plan provisions override any conflicting or inconsistent provisions in the 403b contracts maintained pursuant to the plan document, then any 403b contract as to which the invitation is accepted and is then subordinated to the plan document (by signature of the vendor and/or the employee) is brought into compliance with the new regs. Many of the individual 403b contracts floating around out there predate the new regs being proposed in 2004, and each would have to be carefully scrutinized and compared to the 2007 final regs' requirements before you could know that the 403b contract meets all the applicable requirements of the regs. Sounds like a mighty tall order to me. At that, I'd yet read the Preamble to require the payout to occur before 1/1/09. I'm recommending to employers that do not want to continue operating a 403b plan that they adopt a plan document, freeze the plan, and keep the documents updated until some future guidance gives more certainty about the ability and practicality of terminating. By the way, the IRS has a free phone conference featuring Bob Architect on the 403b regs, set for Thursday, December 4, 2008, at 2:00 PM EST. Conference Name: 967425/ EP CE&O Area Analyst Access Code: 195499 Toll-Free Phone: 1-866-216-6835 Toll Phone: 1-913-227-1220

Larry, I agree that W would meet the definition of 'participant', but what about 'employee'? Take a look at Treas Reg § 2510.3-3(b), specifically Treas Reg § 2510.3-3©(1) then excludes from the definition of 'employee' So W wouldn't be an 'employee' while married to H and (NEW FACT) she's not worked for the Corp since the divorce. Do you think that might entitle the Situation to exemption under Treas Reg § 2510.3-3(b)?

Check the federal Pregnancy Discrimination Act of 1978, and possible similar state law. While the PDA has a 15 employee minimum threshold for application, my state applies the federal PDA to employer's with as few as five.

It depends on what administrative tasks the STD involves. It might be just a wage continuation program requiring no administration. If so, ERISA would not come into play. If to get the STD, as the name suggests, there must be 'disability', then there must be a definition of disability and determinations of who is and is not when a claim is made. That would then involve ERISA and the requirement for a written plan document. The trouble might be that a court would 'write' the definition for you, if a denied employee pushes it.

Thanks, Larry.

The preamble says "For periods following July 26, 2007 and before the applicable date [January 1, 2009], taxpayers can rely on these regulations, except that... (2) the special rule at § 1.403(b)–10(a) of these regulations permitting accumulated benefits to be distributed on plan termination can be relied upon only if only if all of the contracts issued under the plan at that time satisfy all of the applicable requirements of these regulations (other than the requirement ... that there be a written plan)." (Emphasis added.) I read that to be that a distribution may be made 7/26/07-12/31/08 without a plan document if the plan is terminated. I don't read that preamble language to grant that leeway if the distribution (incident to termination) is not made before 1/1/09. Are you trying the non-document-all-contracts-compliant approach to termination on any 403b programs you may be advising?

(Emphasis added.) Has anybody attempted this non-document-all-contracts-compliant approach to termination other than perhaps where a single group contract is the only funding vehicle for 403b contributions to date? What actions could the employer take to change the 403b contracts to which it is not a party to remove any non-compliant terms? Could the employer do anything to bring into compliance 403b contracts of an employee if the employer learned that an employee has ever had outstanding loans from different vendors that in the aggregate (403b5) exceeding the 72p limits? Is there a correction the employer can take if the universal availability rule has not been followed, so that the employer can then take this termination approach? How would the employer be certain that a participating employee's deferrals for a year did not exceed what was allowed to the 403b contract (rendering that contract not compliant) as he or she may have made deferrals to another employer's 403b or 401k plans for that same year? Seems that it would involve more time and less certainty of compliance than the employer (a) adopting a 403b plan document with a reserved rights to the employer to terminate, and unlike the model language attached to Rev Proc 2007-71, to instruct payout, (b) giving out the 'reasonable, good-faith' invitations to all post-2004 vendors asking them to subordinate the 403b contracts to such 403b plan document, and © on January 1, 2009 terminating the 403b plan and instructing payout of all the 403b contracts that the vendors agreed were so included. That's assuming that you're comfortable with the notion that the other 403b contracts, those that the vendor refused such invitation, are not 'included' in the 403b plan's assets.

Situation: H & W own 100% of Corp. H & W are Corp's only 2 EEs. Corp has a QRP. It's only asset is a loan on which H & W are obligated (possible 72p problems are being explored separate and apart from this post). While loan is yet outstanding, H & W divorce. H receives in the divorce split of assets all of the stock of Corp. W no longer is an owner of Corp directly or by attribution, but yet has benefits in the QRP. Question: Has the non-ERISA QRP become subject to ERISA by reason of the divorce since W is no longer an owner of Corp but has benefits under the QRP? If so, what steps need to be taken by the fiduciary (H) to diversify the assets and establish the liquidity to be able to pay benefits (specifically, W's benefits)? It would seem if ERISA applies that the small employer exception to independent audit by an accountant is also blown by virtue of the loan being the QRP's only asset.

SMM is 'summary of material modifications'. ERISA § 102(a). But if day care FSA is your only benefit, ERISA might not apply since it is not the same as maintaining a day care center for employees. Even if not, IRC § 129(d)(6) requires "Reasonable notification of the availability and terms of the program shall be provided to eligible employees." Since you'd be changing the 'availability and terms of the program', you need to provide notification. IRC § 129(d)(3) requires that the day care FSA "benefit employees who qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of" highly compensated employees, as defined in IRC § 414(q). Be careful here if excluding employees based on work schedules, e.g. those working less than 20 hours per week, as it might disproportionately exclude non-HCEs. IRC § 129(d)(9) allows exclusion of employees to the extent specified in the PD if under age 21 and who have not completed a year of service (as defined in IRC § 410(a)(3)), applied similar to what IRC § 410(b)(4) requires.

Unless you have a time machine and can travel back 6 months in time, I suggest that you treat the plan as not yet terminated. Revise the unsigned amendment with a termination date sufficiently down the road to be able to give a 204h notice timely, get it signed, and be sure to actually give the 204h notice timely. Have the employer make contributions at the MPP's stated accrual rate on all compensation through the date of termination so specified in the SIGNED amendment.

The employer gets the first whack at deciding eligibility guidelines, within the nondiscrimination parameters set in IRC § 125 and either IRC § 105(h) if it is a health FSA, IRC § 129 if it is a day care FSA, or IRC § 137© and § 127(b)(2) if an adoption expense FSA. If it is not clearly set forth by the employer in its PD, then ultimately it will be a court that may determine what the vague PD should be interpreted to mean, in the face of a challenge by an employee or the IRS. By amending the PD on a prospective basis, and giving employees a SMM explaining the change, yes the employer may do so. Assuming it is a health FSA, take a look at Treas Reg § 1.105-11©(2)(iii)(A).

Nice prose, masteff, nice prose.

I'll take a stab as no one else yet has. IRC § 410(b)(2)©(i) refers to section 414(s) compensation. IRC § 414(s)(1) refers to section 415©(3) compensation. IRC § 415©(3)(A) refers to compensation "for the year"--limitation year, that is (Treas Reg § 1.415©-2)--which is the calendar year unless the plan states otherwise. Treas Reg § 1.415(j)-1(a). IRC § 414(s)(3) allows, as an alternative to section 415©(3) compensation, a definition as per regulations. Treas Reg § 1.414(s)-1 refers to determination period, obliquely defined as in Treas Reg § 1.414(s)-1(h)(2): Since your average benefits percentage test must be satisfied on a plan year basis, this reg would suggest the plan year compensation.

125 reimbursement of individual health insurance premiums is like threading a needle when avoiding those other laws that Jacmo speaks of.