J Simmons

QDROphile, Give the new Congress and Administration a chance to actually be sworn in before expecting promises to be fulfilled.

It is hard to fathom what the IRS argument would be that would have plan assets include 403b contracts that are not included in or maintained pursuant to the employer's 403b plan. But then that begs the question, what plans are in fact included or maintained? That is part and parcel to this October 22 letter whereby many practitioners and industry groups sought a delay of the 1/1/09 effective date due to lingering uncertainties. It seems easier to freeze and wait (and hope) for a practical plan termination solution in future IRS guidance than to attempt to terminate now.

The 2007 regs only specify a 403b contract that receives contributions needing to be maintained pursuant to an employer's 403b plan in order to exclude contributions from the employee's taxable income. The general effective date of 1/1/2009 would apply to this provision. Treas Reg § 1.403(b)-3(d)(3). However, Notice 2007-71, section 8.01 suggests that to meet the document requirement, a plan that has received contributions since the end of 2004 needs to either be maintained pursuant to an employer's 403b plan or deemed to as a result of the employer (or perhaps the vendor) making a reasonable, good faith effort to include the 403b contract in the employer's 403b plan. There does not seem to be any suggestion that 403b contracts that received no contributions since 2004 need to be included as part of the employer's 403b plan, or the subject of a reasonable, good faith effort to be so included.

Yes, it is the court's signature that is critical (and the Plan's determination that it meets the requirements of 414p and 206d3--with notice at the appropriate times in processing the order, from the plan administrator to the employee and ex-spouse).

If you are comfortable that -1(m) includes the premiums in question, go ahead (and pre-tax the employee's $50). If you are not sure, then do it outside of a 125 plan on an after-tax basis. But I'd also watch out for those other federal laws that apply.

HIPAA generally applies to a group as little as 2. My statement was you better be concerned about HIPAA "unless there is just one employee". There is an exception to HIPAA privacy compliance if the employer has less than 50 and entirely self-administers in-house. Other aspects of HIPAA, such as the nondiscrimination rules and the special enrollment rules do not have the less than 50/self-administer only exception. If the individual policy took into account, when its premiums were set, the health of the individual, you could have a problem with HIPAA nondiscrimination.

If the employer's share is paid and the employee has no option to instead take the $50 as extra cash pay or in some other taxable way, then 106a excludes that $50 borne by the employer from being in the employee's taxable income, even though it benefited the employee. The employee's share if elected as a $50 salary reduction through a proper 125 plan is treated as though it is an employer contribution so that it too is excluded from the employee's taxable income under 106a. It is a tax law fiction created so as not to do too much damage to the constructive receipt doctrine. (By the way, over on the DoL side, ERISA does not use this fiction.) Even though 106a is integral to the payment of premiums being excluded from the employees taxable income as part of a 125 cafeteria plan choice the employee has, you do not need a separate '106a plan'. In your 125 cafeteria plan document you simply state in clear terms what the required salary reduction, i.e. cost, to the employee will be if he elects that benefit. If the health policy covering the child is not owned or held in the name of the employee, I would be concerned. The new 2007 proposed regs provide that it is the "employees' substantiated individual health insurance premiums". Prop Treas Reg § 1.125-1(m)(1). Prop Treas Reg § 1.125-1(m)(2) Example (i) speaks of "employees who are covered by an individual health insurance policy." Prop Treas Reg § 1.125-1(m)(2) Example (ii): "the employee's substantiated health insurance premium;... ." Prop Treas Reg § 1.125-1(m)(2) Example (iii): "employee's health insurance premium, ... ." No where in Prop Treas Reg § 1.125-1(m) is there mention of this procedure any mention of spouse or dependents, either as -1(m) extending to their coverage under individual policies or -1(m) only applying to the employee. What then are the EMPLOYEE'S individual health insurance premiums? Do they include individual health insurance that covers the spouse? the dependents? Does the employee have to be obligated legally to pay those premiums for covering spouse and dependennts for those premiums to be the employee's as contemplated by -1(m)? If the employee is so obligated, would that be sufficient under -1(m)? Maybe all that would be required is proof that the employee in fact paid those premiums regardless of legal obligation.

TC website? No. Convenient? At this time, yes. I simply extracted those from an opinion letter I was asked to prepare in May 2004. An employer had terminated during the remedial amendment period without updating for interim amendments and a restatement. The employer was caught on audit, and the penalties proposed were steep. When contacted by the professional that was advising the employer in the audit, I was aware of the Basch Engineering case due to a similar situation I handled in 1992, and so told them they were probably toast. They wanted me to research and give them an opinion letter--I told them I did not think it would be of much use, but they wanted it. (As you might guess, they had hoped there would be more caselaw going the other way.)

Lori is correct. 125 keeps benefits excluded by other sections, such as 105, from becoming taxable income because the employee had the choice of taxable income instead. Both 125 and the other section that makes that type of benefit tax free must be observed for the benefit to be tax free if the employee had such a choice. Usually the term 105 plan refers to some type of a MERP or other health reimbursement arrangement (HRA). Your post, Matthew, involves the employer's payment of insurance premiums. The payment of premiums by the employer is excluded from taxable income by 106. Payment of health expenses by the insurance company are excluded by 105b. Using the $100 per child premium, the employer could 'offer' in the context of a 125 plan the coverage at a cost of $50 that an employee that accepted that offer would have to agree to salary reduction to cover. That $50 would, to be tax free, depend on compliance with 106 and 125. The employer would pay the full $100 actual premium cost. The second $50 would be tax free if in conformity with just 106. Because there would be the employer bearing some of the premium cost, I think the employer would find itself smack dab in the middle of COBRA (if there are 20 or more employees on the typical business day during the prior year), HIPAA (unless there is just one employee), USERRA, Pregnancy Discrimination Act of 1978, etc. Most individual policies will not have all those bells and whistles. Thus, the employer could find itself liable to fill the gaps.

Attardo v. Commissioner, TC Memo 1991-357, 62 TCM 313 (August 1, 1991) John U. Fazi, 102 T.C. 695 (May 19, 1994) Hamlin Development, TC Memo 1993-89, 65 TCM 2071 (March 15, 1993) Pawlak, TC Memo 1995-7, 69 TCM 1603 (January 10, 1995) Stark Truss Company, Inc., TC Memo 1991-329, 62 TCM 169 (July 17, 1991) Mortenson Roofing, TC Memo 1992-112, 63 TCM 2186 (February 24, 1992) Mills, Mitchell & Turner, TC Memo 1993-99, 65 TCM 2127 (March 23, 1993) Joseph P. Clawson, M.D., Inc., P.S., TC Memo 1993-174, 65 TCM 2452 (April 19, 1993) Basch Engineering, TC Memo 1990-212, 59 TCM 482 (April 25, 1990) Weddel, TC Memo 1996-36, 71 TCM 1950 (January 30, 1996) Clendenen, TC Memo 2003-32 (February 12, 2003)\ Robert W. Smith v. National Credit Union Administration Board, 8th Cir. 1994 (#93-6737)

Darn. I was hoping there was an interstitial explanation. That would have been fun.

Hi, Larry, In looking at 401(a)(30), I don't detect the plan year aspect of the limit on deferrals. I see reference to calendar years and to taxable years, but not plan years. What about 401(a)(30) suggests plan years?

If you had purchased $1,000 of AIG stock one year ago, you would have $42 left. With Lehman, you would have $6.60 left. With Fannie or Freddie, you would have less than $5 left. But if you had purchased $1,000 worth of beer one year ago, drank all of the beer, then turned in the cans for the aluminum recycling REFUND, you would have had $214. Based on the above, the best current investment advice is to drink heavily and recycle. It's called the 401-Keg.....

Prior to 9/25/2007, an employee could exchange his/her 403b contract to a vendor of which the employer had no involvement at all. These were "90-24 exchanges", as made per Rev Rul 90-24. The new, 2007 regs took this away, effective 9/25/2007. If an employee has since 9/24/2007 made a 403b contract exchange to a vendor that does not have an information sharing agreement in place, the situation may be corrected either by the employer and vendor entering into an info sharing agreement by 6/30/2009 or the employee re-exchanging the 403b contract by 6/30/2009 to be with a vendor that in fact does have an info sharing agreement in place with the employer. Otherwise, the 403b contract will turn into a pumpkin and be taxable income as not maintained pursuant to an employer's plan. The info sharing agreement might include an assignment of duties, but not necessarily so. Some of the vendors' proposed info sharing agreements basically provide nothing more than that the vendor and employer will share what info the regs require. For example, see the Vanguard one on its website. The reference in -3(b)(3)(ii) is to administrative tasks, which cannot be placed on the employee--yet some vendors by many pre-regs 403b contracts put some such responsibilities on the employee. So beware of incorporating those by reference into an employer's 403b plan documentation. Also, if you go the multi-document approach, you'll likely spend much more time making sure the montage is consistent and covers the issues that are addressed in -3(b)(3)(i) than in simply preparing a single, "integrated" document.

mjb, We're not alone in wondering why.

There is much more certainty about the rules that apply to 401k plans than to 403b plans, and there are more professionals familiar with the 401k rules than the 403b rules. These alone ought to be considerable factors. 403b investments are either annuities or mutual fund-only accounts (or, if you are a "church" a retirement income accounts). 401k plans can be invested more broadly. Fees associated with 403b investments have typically been higher than those in recent past with 401k investments.

I think the 2% is a 401k notion related to termination, not a 403b one. The criteria is that the employer must be able to cause all of the plan assets (what 403b contracts/accounts have to be included as plan assets is not clear under the regs or guidance) to be distributed within a reasonable period of time, which Bob Architect suggests is one year (as with 401a QRPs). If the employer cannot, then the benefits of any active employee under age 59 1/2 that were rolled out of the context of a 403b product (thinking the 403b plan was terminated) did not have an "access event" (Architect's terminology) and the rollover contribution to IRA (or other plan) is improper.

Before that vendor may accept an exchange after 9/24/2007 or new contributions after 12/31/2008 Yes No No No Amen.

The IRS publishes Lists of Required Modifications that might be a good starting point for what types of plan provisions must be included in the documents. The LRMs do require different provisions for master/prototype, volume submitter, and individually designed, as spelled out in the LRMs. To give definiteness and proof that the plan was in fact intended the way it was on discretionary plan design issues, or 'discretionary amendments', the IRS requires that the plan be amended by the end of the plan year or as to some issues on a prospective basis only. This is so that an employer may not, willy-nilly, choose after the fact whatever is convenient. As to mandatory amendments in remedial amendment periods, amendments may be made later than the end of the plan year in which the effective date is required by the new pension law.

Check out Treas Reg § 1.401(a)(4)-5 about the timing issue, which alone can create a discrimination problem--and your contemplated scenario smells a bit to me even though you'd have the 3 months in place for a year.

PLRs are given to a specific taxpayer, about a specific situation and are published. General information letters are not. They are usually addressed to a practitioner in response to a question about an acceptable interpretation of a published rule. If you know of any PLRs or other published ruling by the IRS that provides the 'clear and convincing' standard allowing for corrections of cafeteria plan election errors, please post the cites.

LRDG, I agree on the annual characteristic of the election. The prior regs were vague and there was, in my opinion, a reasonable interpretation of them that elections for premium payment could be made other than on a plan year basis. The 2007 proposed regs are more clear that all elections, including those for premium payment/reimbursement, are to be on the plan year basis. Though there is yet a lingering bit of vaguenss in Prop Treas Reg § 1.125-2(a)(2)(ii): "The first day of the plan year (or other coverage period)", this seems overshadowed by the rule that "A plan is not a cafeteria plan unless the plan provides in writing that employees are permitted to make elections among the permitted taxable benefits and qualified benefits offered through the plan for the plan year (and grace period, if applicable)." Prop Treas Reg § 1.125-2(a)(1).

Reimbursements and salary withholdings are not incompatible, but both part of the tax-free payment of individual health premiums. Reimbursement goes to how the benefits are paid; salary withholding goes to who bears the expense. Unless all the expense is borne by the employee through salary withholdings equal to the true, third party cost of the benefits, then the whole slew of other federal laws are invoked: ERISA, HIPAA, COBRA, FMLA, ADEA, ADA, USERRA, and Pregnancy Discrimination Act of 1978. The exposures for the employer to provide benefits under those laws would make use of individual health policies a non-starter. Apart from whose bearing the expense, reimbursement means the employer writes a check out to the employee upon proof that the employee has already paid the premiums on the individual health policy rather than the employer writing out a check and sending it to the issuing insurer those premiums directly.

The 2007 regs for 403b plans do not require the employer to choose a single vendor for new contributions, but some employers choose that route. The single vendor promises "free" administration in exchange for being the exclusive investment vendor on all new contributions. The employer might want to check its liability potential under state law for hidden fees and other issues related to net investment underperformance before it undertakes a single vendor approach. If it's a church plan, it is exempt from ERISA concerns in this regard. 403(b)s that are subject to ERISA could avail themselves of the QDIA rules regarding fiduciary liability issues. The QDIA principles could be used as 'good form' for possibly minimizing the employer's liability (if any) under state law for limiting investment options.

There must yet be an election before the earnings that are deducted and used by the employer to make the reimbursement, become available to the employee. I agree the regulations do not require a yearly election, but there must yet be an advance election that otherwise meets the cafeteria plan rules or you have constructive receipt. Please provide a citation, particularly in light of the fact that 1.125-1(m) of the 2007 proposed regs go into detail about the substantiation required before premium reimbursement may be made tax-free under a cafeteria plan. I agree that the advance election does not need to be made on a yearly basis, unless the plan documentation requires it. The regulations permit the advance election to be changed before any upcoming month and apply. The yearly election requirement under cafeteria plan regulations is required only for flex accounts. I did not read the OP as stating that any reimbursement has been made for which there is not a corresponding premium cost. The discrepancy is an overage of deductions of pay compared to premiums to be reimbursed, not an overage of reimbursements. While the regulations do not require a plan year election, the plan documents in issue and the election form itself might so specify the annual concept. If so, and the fact of the overage of pay deductions occurred because of the employee's failure to notify the employer/plan administrator, it would seem to me that the employee will forfeit the overage to the extent it is not offset by premium costs incurred by the end of the year. If neither the plan documents or the election form impose an annual characteristic to the election, then adjustment could be made to the pay deductions going forward until the premium costs catch up with the pay deductions and you then can match them in amount going forward from there. SEE further, modifying comments in post #15.