J Simmons

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.

I would think Vogel Fertilizer is yet pertinent for the proposition that you do not count the ownership interests of a person held (actually or constructively) in one entity but not the other entity that are part of the controlled group analysis. That is, you only count the ownership interests of those that hold such in both entities.

I've heard tell that AP's, upon receiving a QDRO, sometimes pronounce it: Yipee Kiya. Not sure how consistent that is.

So that it may be done tax-free pursuant to cafeteria plan, to avoid the constructive receipt rule that would otherwise make the arrangement taxable income to the employee.

Hi, George, I think that the snafu occurred in the fact that while the premium decrease would have been known to the employee in the month that the premiums decreased, "it was not reported for a month" and thus the amount taken out of the employee's pay was higher than necessary to cover the actual premium. So what does the employer do with the difference between what it took out of the employee's pay and what the actual premium cost to be reimbursed is? There is no premium expense against which it can be assessed properly and paid tax-free. Should/may the employer add that difference back to the employee's next paycheck, where it will be subject to payroll tax withholding and be included in the employee's taxable income? Or, because the employee did not timely report the drop in premium cost, does the employer simply keep the difference?

Hi, George, My understanding is that the term 'premium reimbursement account' in the cafeteria plan context has been coined as a marketing term after the publication of the proposed regs in August 2007 to refer to what is described in Treas Reg 1.125-1(m). Treas Reg 1.125-1(m) put into regulatory statement (albeit proposed right now) some of the scattered prior guidance, formal and informal, on using a cafeteria plan to tax-free pay or reimburse employees for premiums under individual health policies. For example, many of these principles derive from Rev Rul 61-146. It is "reimbursement" to the employee after he/she has paid the premiums, presents proof, and is thus reimbursed. Usually, there would be no need for a ledger or "account" of this benefit, as the amount reduced from the employee's pay each month equals the amount that the employee is reimbursed that month for individual health coverage premiums. One that elects under the cafeteria plan to use features of -1(m) for payment of individual health coverage premiums could be said to have made a 'premium reimbursement election'. My reading of the OP is that the employee elected an amount for payroll deduction for premium reimbursement for the year based on what his/her individual health coverage cost at the time of the election. These amounts have been being held out of his/her pay. Then mid-year, the cost of the coverage dropped, but the payroll deductions continued at the same amount. The result is that more has been deducted from the emploee's paychecks than he/she will have in premium expense for the individual health coverage this year, and the question then is, what may or must the employer do with that overage? EDIT ADDITION: Just because the proposed tax regulations, and prior guidance, have permitted the reimbursement of individual health premiums paid by an employee, on a tax free basis using a cafeteria plan, an employer ought to proceed cautiously before embarking on so reimbursing as there are significant ERISA, HIPAA, COBRA, FMLA, ADEA, ADA, USERRA, and Pregnancy Discrimination Act of 1978 issues, and state law concerns. Not that an employer cannot do so, but it takes almost surgical precision to navigate a 125 plan through the complexities and challenges posed by these other laws.

qua-drow

I have heard mention numerous times to an informal IRS opinion set out in general information letters relating to mistaken elections in a cafeteria plan, which had been obtained through a Freedom of Information Act request. It is in these letters that the 'clear and convincing' evidence of an error of the type that is a mistake of fact (e.g., DCAP elected by an EE who has no dependents) rather than a miscalculation (EE elects $1,200 for health FSA for him and his wife, at $500 each) or a mistake of law (e.g., that health FSA could be tapped to pay premiums--such as suggested in the OP). Other reports I've read of those information letters make no distinction between the type of error as long as there is clear and convincing evidence that an error was made. Yet others suggest slice and dice the type of error issue differently. I've seen write-ups but never the information letters themselves, nor any reference to the dates or authors. Does anyone have copies of those information letters that could send me copies either by attachments to e-mail or PM, or post them on this Board for download?

Probably not a typo. Look at both parts of IRC § 1563(a)(2)--part (A) requires 80% and part (B) requires 50%. It's a two part test. Both parts must be satisfied for there to be a controlled group. What differs is that for the 50% test, you take "into account the stock ownership of each such person only to the extent such stock ownership is identical with respect to each such corporation".

In a question I posted yesterday in this forum on 403b plans, I noted that I'm advising an ER that has received a 240-day correction letter from EPCU (employee plans compliance unit) of the regional IRS Center. The EPCU correction letter notes that some excluded EEs perhaps should have been included, and for this a lost-opportunity contribution is required during the 240 day period. The EPCU letter is silent on how far back in time this lost-opportunity contribution ought to be made. It simply states that "a contribution to the plan on behalf of each eligible employee for each year the employees was improperly excluded from participation" may need to be made. The EPCU letter also notes: "A violation of the universal availability requirement puts a section 403(b) plan at risk for losing its tax-favored status, resulting in the loss of the retirement savings and tax benefits provided to its participants." If the ER did not have a valid 403b program because of the universal availability violation, then those EEs that did make 403b elective deferrals, it could be argued by the Service, had taxable income in the amount of the 403b elective deferrals. For those EEs that did have the opportunity and did make 403b elective deferrals, the statute of limitations on their Forms 1040 would be 3 years from later of date filed or due date of return (as perhaps extended), unless more than 25% of taxable income was not reported--then it is 6 years. Since it is possible that some of the EEs 403b deferred amounts that equaled or exceeded 1/3 of what they did report as taxable income for a year, I think the correction should go back at least 6 years, picking up 2003-2008. The ER does not pay income taxes, so deductions are not an issue. It is a public school and does not file any return other than payroll ones. For Forms 941/945, the instructions to the correcting form, Form 941c, provides: Statute of limitations. Generally, you may make an adjustment only within three years of the return due date or the date the return was filed, whichever is later. For the statute of limitations, the due date of Forms 941, 941-M, 941-SS, 943, 944, 944(SP), 944-SS, and 945 is April 15 of the year after the close of the tax year. For example, the four quarterly Forms 941 filed for 2004 are all treated as due on April 15, 2005. If they were filed on or before April 15, 2005, adjustments could be made for any of the quarterly returns for 2004 until April 15, 2008. No Forms 5500 have been filed (nor required). So statute of limitations on a year of the plan likely has no statute of limitations period triggered to run. What are the arguments for going back to years earlier than 2003?

457f Scoflaws beware! 409A is a bigger hammer.

This question pertains to the universal availability rule. For many years, IRC § 403(b)(12)(A) has permitted the exclusion of students performing services in the employ of a school in which enrolled and regularly attending classes and "employees who normally work less than 20 hours per week." The 2007 regulations set to take effect 1/1/2009 provide, as part of the universal availability rule, that if the 403b plan allows any employee normally working fewer than 20 hours per week (or such lower number of hours per week as may be set forth in the plan) the opportunity to make 403b elective deferrals, then all employees working that number of hours per week or more must be given the opportunity to make 403b elective deferrals. Similarly, if any such students are permitted to make 403b elective deferrals, then all such students must be permitted to do so. For each of these two categories, such students and <20 hours/week, it's an all or none proposition under the new regs. Treas Reg § 1.403(b)-5(b)(4)(i). I've been contacted by a public school district that answered the EPCU letter about universal availability that the district excluded substitute teachers and district students that worked in the summer months. None of the substitute teachers or district students worked, or was expected to work, 1,000 or more hours in any year. However, all <20 hours/week employees were not excluded. The EPCU wrote back giving the district 240 days to correct with 'lost opportunity cost' contributions by the District equal to either the lesser of 1.5% of pay or 1/2 of the NHCE ADP of the district. My question is whether the 'all or none' interpretation given to the two exclusion categories that is in the 2007 regs for 2009 and later is an interpretation of IRC § 403(b)(12)(A) that the IRS has given in any formal guidance that applies before 2009? If so, then a lost opportunity contribution will be required. If not, then no lost opportunity contribution will need to be made. Your thoughts and comments are appreciated.

Thanks, David!

How new is 'fairly new' for that SPD? For plan years beginning after 2006, cliff vesting cannot require more than three vesting years. IRC § 411(a)(2)(B) as amended by PL 109-280 (Pension Protection Act of 2006), Act § 904(a); ERISA § 203(a), as amended by PL 109-280 (Pension Protection Act of 2006), Act § 904(b)

Here are a few peanuts to consider: IRC § 417(e)(1) defers the valuation issue to § 411(a)(11): "A plan may provide that the present value of a qualified joint and survivor annuity or a qualified preretirement survivor annuity will be immediately distributed if such value does not exceed the amount that can be distributed without the participant's consent under section 411(a)(11). No distribution may be made under the preceding sentence after the annuity starting date unless the participant and the spouse of the participant (or where the participant has died, the surviving spouse) consents in writing to such distribution." IRC § 411(a)(11)(A) sets the measure for mandatory distribution if "the present value of any nonforfeitable accrued benefit" is $5,000 or less. Treas Reg § 1.417(e)-1 provides: "A defined benefit plan must provide that the present value of any accrued benefit and the amount (subject to sections 411©(3) and 415) of any distribution, including a single sum, must not be less than the amount calculated using the applicable interest rate described in paragraph (d)(3) of this section (determined for the month described in paragraph (d)(4) of this section) and the applicable mortality table described in paragraph (d)(2) of this section." (Emphasis added.) Treas Reg § 1.411(a)-7(a) provides: In general, the term "accrued benefit" refers only to pension or retirement benefits. Consequently, accrued benefits do not include ancillary benefits not directly related to retirement benefits such as payment of medical expenses (or insurance premiums for such expenses), disability benefits not in excess of the qualified disability benefit (see section 411(a)(9) and paragraph ©(3) of this section), life insurance benefits payable as a lump sum, incidental death benefits, current life insurance protection, or medical benefits described in section 401(h). For purposes of this subparagraph a subsidized early retirement benefit which is provided by a plan is not taken into account, except to the extent of determining the normal retirement benefit under the plan (see section 411(a)(9) and paragraph © of this section). The accrued benefit includes any optional settlement at normal retirement age under actuarial assumptions no less favorable than those which would be applied if the employee were terminating his employment at normal retirement age. The accrued benefit does not include any subsidized value in a joint and survivor annuity to the extent that the annual benefit of the joint and survivor annuity does not exceed the annual benefit of a single life annuity. Treas Reg § 1.411(a)-11(a)(2): For purposes of this section, an accrued benefit is valued taking into consideration the particular optional form in which the benefit is to be distributed. The value of an accrued benefit is the present value of the benefit in the distribution form determined under the plan. Rev Rul 81-9, 1981-1 CB 178: Situation 3. May a plan that is required to provide an early survivor annuity within the meaning of section 1.401(a)-11(b)(3) of the regulations discontinue this coverage after the plan is terminated? Held, Yes. Section 411(d)(3) of the Code provides that upon the termination of a trust qualified under section 401(a) the rights of all affected employees to all benefits accrued to the date of such termination are nonforfeitable. In general, the term "accrued benefits" refers only to pension or retirement benefits and does not include pre-retirement death benefits. See section 1.411(a)-7(a) of the regulations. Accordingly, early survivor coverage need not be continued for participants who continue in employment with the employer after the plan has been terminated. I suspect that there might be some ASPA Q&A with IRS/DoL officials that address your question.

The state where you are might have a notion like that in Idaho domestic relations law, i.e. favoring the approach that gives each divorcing spouse immediate control of his or her share of community property. Ramsey v Ramsey, 96 Idaho 672, 535 P2d 53 (1975). There a military pension was at issue and the trial court had ordered a 'shared payment' approach. The Idaho Supreme Court reversed and remanded with instructions to the trial court to calculate the ex-spouse's interest as a lump sum and that the employee-serviceman pay the ex-spouse that lump sum amount 'within a reasonable time from the final judgment'. That is, out of other assets the employee-serviceman had received in the community property division. The underlying notion, that each divorcing spouse ought to have immediate control of his or her share of community property would seem to suggest that the divorce judge ought to issue a separate interest QDRO rather than a shared payment QDROs, when the divorcing spouses do not agree on a shared payment QDRO.

Where it's a DB, maybe the EE is in better health than and expects to outlive the ex-spouse, whereas the ex-spouse may want to start taking the 40% earlier than the EE will.

I think its optional, depending on what is written into the plan document.

40% of the accrued benefit. Does the DRO read in a way that suggests that it is 40% of each payment when and as otherwise paid to the EE? Does the QDRO allow the ex-spouse to begin taking his/her 40% before the EE begins taking the remaining 60%? The statutes require that the DRO "clearly" specify "the amount or percentage of the participant's benefits to be paid by the plan to each such alternate payee, and the number of payments or period to which such order applies". If the DRO isn't clear in this regard, the PA ought to bounce the DRO as not being a QDRO.

Are you saying that if the PA found out, after making the distribution on the QDRO that facially looked okay, that the order was fraudulently signed by a non-judge the PA could simply say c'est la vie? I don't think the PA has to go to the ends of the earth to get the money back, but I think a little effort is in order for prudent action.

I would try to give the NHCEs a realistic opportunity to make deferrals themselves. The HCEs might know now and be able to manipulate their payrolls between now and the end of the year so that they have a large 'bonus' in the last payroll out of which to electively defer the 5% you mention. On the other hand, if you only spring the news on the NHCEs and have the opportunity out of that last payroll, over which they have no practical opportunity to manipulate as your HCEs might, then you could have a discrimination problem due to the timing of your adding the 401k feature. See Treas Reg § 1.401(a)(4)-5.

I'm not sure distributing benefits based on a QDRO that is facially non-defective relieves the plan from taking reasonable steps to recoup the distributed amount if the plan later learns that the QDRO was fraudulent. Would not a prudent fiduciary attempt to correct for a beneficiary (here, the employee) what the fiduciary unwittingly did in error?

The last day you can add a non-Safe Harbor 401k feature to a plan? That would be the day you begin taking elective deferrals out of the paychecks of employees and putting them into the plan. You cannot add a 401k feature retroactively.

That's what Treas Reg § 1.125-4(f)(4) provides. It might be common, but the employer is required to provide you a copy within 30 days of your written, specific request for plan documents, if the plan is subject to ERISA. If not, a court could impose a fine for each day the plan administrator is late in providing them. Be specific in asking for each of the plan's current governing documents, written policies, and summary plan description. Make sure you address and send the written request to the plan administrator. Keep proof of when the written request was mailed or delivered to the plan administrator.