J Simmons

Situation: A single-employer QRP is sponsored/participated in by several ERs part of one ASG. (But it is not an affiliated group under IRC sec 1504.) One of the ERs has one EE, who earns $100,000. That EE would like to accrue $46,000 in benefits, and given the overall demographics, the plan will pass x-testing doing so. However, $46,000 is greater than 25% of $100,000. If the IRC sec 404(a)(3) deduction limit applies ASG-wide, then this ER could make the $46,000 contribution for its only EE and deduct it because other ERs in the ASG are not making less than 25% of the aggregate compensation of just their EEs. On the other hand, if IRC sec 404(a)(3) is separately applied per ER, then this specific ER could contribute no more than $25,000 for its sole EE. Does IRC sec 404(a)(3) apply separately to each ER in an ASG or is it applied plan-wide, allowing disproportionate use of the deduction limitation by different ERs in the ASG?

Thanks, Becky. Your thoughts not only validated but further fleshed out some of my own thinking on this issue.

The 7-day regs did not change the timing rules for remitting elective deferrals over into the plan, just created a safe harbor compliance method. The general rules remains: "the earliest date on which such contributions can reasonably be segregated from the employer's general assets" DoL Reg §2510.3-102(a). For SIMPLE IRA plans, DoL Reg §2510.3-102(b)(2) yet specifies that "the 30th calendar day following the month in which the participant contribution amounts would otherwise have been payable to the participant in cash" is the drop dead date. So for a SIMPLE IRA plan, if elective deferrals are not remitted within the 7 day safe harbor, the employer may be taken to task to prove that the remittance was on the earliest date the contributions could reasonably be segregated from the employer's general assets. In any event, the remittance is due no later than the 30th calendar day after the month of the payday from which deducted.

More details would help. If you are asking may distributees under a 403b annuity roll over the benefits into an IRA? generally speaking, yes. But more info is needed to know what it is you are really asking.

Yes

The ability to carryover unused amounts beyond the end of a plan year (and eventually into retirement) is by virtue of Rev Rul 2002-41 and Notice 2002-45. Neither quite mentions mandatory employees in describing the contributions. Rev Rul 2002-41 "The HRA is paid for by the employer and employees do not make any salary reduction election to pay for the HRA." Notice 2002-45 "An HRA is an arrangement that: (1) is paid for solely by the employer and not provided pursuant to salary reduction election or otherwise under a section 125 cafeteria plan;..." I understand the 'politics' of collective bargaining with a union, and the perceptions, but if stated pay was slightly reduced so that all of the contributions (the ER would be obligated per the CBA to provide) were to be paid by and characterized as employer contributions, it would have better semantics even if in substance it is the same thing.

Hip shooting here, but I think that the MEP would need an audit for the year until the spin offs occurred. The four post-spinoff plans should not need audits. EDITED ADDITION: If the MEP is one of the 4 plans resulting after the spinoffs, the it would need to be audited for the entire 2008 plan year. As to the other 3, their plan years in 2008 began the day of the spinoff and end on 12/31/2008. Each of these other 3, new plans never had 100 or more employees at the beginning of the 2008 plan year. The countervailing notion is that each of the 4 post-spinoff is merely an extension of the MEP that, at 1/1/2008, had 100+ employees. However, the Forms 5500 for the 3 new plans would have plan years of just the date of spin-off to 12/31/2008. The independent annual audit is a requirement incident to the annual report. So if the annual report is for a period that these 3 new plans did not have on day one 100 or more employees, it follows that those 5500s do not need the annual audit.

The new 403b regulations and section 8 of Rev Proc 2007-71 are not clear on when termination occurs if the ER gets no cooperation on payout within a reasonable time from a 403b vendor. However, section 8 does give a continuing 403b plan (doesn't specify that it has to be an unfrozen one) comfort with regards to the noncooperative 403b vendor after the ER makes a reasonable effort to bring the 403b contracts under the newly document 403b plan and operations. Section 8 also gives concrete guidance on what a reasonable effort entails. This is particularly problematic for an ER that has allowed the EEs to pick whichever vendors they wanted. So until the IRS might give further guidance, I think it is somewhat preferrable to adopt a plan document to conform with the new regs and freeze than to attempt a termination altogether. Also, by terminating, you might trigger loans having to be repaid or deemed distributions and you might be subjecting 403b products to CDFC charges for early termination. Some 403b vendors, however, also offer IRAs and are willing to not charge the CDFC charges if the EE simply elects to roll the 403b over into an IRA with the same vendor. The advantages for terminating are not having to keep the new 403b plan document up. Already, the IRS is preparing a list of required modifications for future updates. If all 403b vendors will cooperate with making timely distributions incident to the termination of the 403b plan, then a 12 month clock will start ticking once the last such distribution is made. When that 12 months ends, the ER would have the option of beginning a new 403b plan if it so desired.

I think you have a problem. QNECs are a method for curing initial ADP testing failure. There are other methods. Your plan doesn't specify that QNECs are a method you can use. Plan fiduciaries are required to apply the plan as written, to the extent consistent with ERISA. ERISA does not require that a plan allow for QNECs; it's permissible but not required. How would you allocate the QNEC? The plan document doesn't specify. If anything, you may need to be proceeding under EPCRS (Rev Proc 2006-27) anyway, and that might allow you to make the contribution needed for the overlooked participant.

If the statement was false when presented, and it was presented in order to acquire benefits from the employer, it may meet the state's definition of fraud. It may also constitute theft or embezzlement from an employee benefit plan, 18 USC 664.

You might need to give your parents the money so they can contribute it to an education IRA or a 529. Both go beyond my experience, but others on this board can likely chime in and say for sure. Good luck-but with the way you're looking into things and making plans, luck may be the last thing you need.

Don't know about the impact of FAFSA eligibility. Do know my high school coaches did not give advice about tax-advantaged savings. Do suspect you are rather precocious for 16--can't imagine you won't get some scholarships--when I was 16 the questions you are asking never crossed my mind. An education IRA or 529 might be better than a Roth if you'll need to withdraw for college. Roth IRA would be a great idea for dollars you know you won't need to withdraw--you might not have to pay much if any taxes when it goes in, and if you leave it there until at least age 59 1/2 you'll never pay tax on the withdrawals.

Where the plan document doesn't say so, I would think that the break in employment effects a stop of the election in place before the break. You ought to modify the payroll system to drop to zero after last paycheck incident to employment termination.

For how imaginitive some multiemployer plan trustees get in trying to pierce the veil, see Board of Trustees of the Western Conference of Teamsters Pension Trust Fund v Lafrenz, 837 F2d 892 (9th Cir 1988). Note, other circuits had refused to follow the result of the Lafrenz case. You can find them by shepardizing the citation.

On your posited numbers, the windfall would be $125 in tax savings--for expenses he knows he's already incurred by the time he attempts to retro. It's a big problem that the money is in the EE's pocket by the time he'd be making the 'election'.

My problem with the retro election in this scenario is the dominion that the employee has over the dollars in question. Once the paychecks are cut and delivered, albeit for the last payday of the plan year, the employees can do with that money whatever they will. The employee in question could choose to do nothing with respect to the flex account by reason of the 6/17 born child, and instead buy a big-screen TV. On the other hand, the employee could, as here, try to squeeze dollars already in his pocket back into the tax-free flex account. Once the paycheck was cut and delivered, we'd not be dealing with the more theoretical 'constructive receipt', but the more palpable actual receipt for income tax purposes. The change in status rules are exceptions to the specific year-long election rules, not to the more basic and general tax rules that require the election be in advance of constructive receipt.

The statute defines a cafeteria plan to be "a written plan under which all participants are employees, and the participants may choose among 2 or more benefits consisting of cash and qualified benefits." IRC Section 125(d)(1). I think a written Board resolution or minutes would at least need to specify that "all participants are employees" and specify 2 or more benefits consisting of cash and qualified benefits from which the participans may choose. If the Board merely discussed the possibility, or decided that a plan should be adopted and directed the executive director to sign a written plan--but it never was--you'd not have a written cafeteria plan as required by the statute.

P-ship issued a K-1 to P1. It showed an amount in excess of the compensation limit for 2007 ($225,000). On that basis, TPA tested an allocation of employer contributions for P1, in the P-ship plan’s nondiscrimination testing, using the $225,000 amount for her compensation. P1 did not roll the income from the K-1 into Line 17 of her Form 1040 via Line 28 of Schedule E. Instead, P1 brought the K-1 income into a Schedule C (with the resulting amount from the Schedule C ending up on Line 12 of her Forms 1040). Due to expenses claimed and deducted by P1 on the Schedule C, the end result amount from the Schedules C onto Line 12 of the Forms 1040 was $85,000. P1 has notified the P-ship that her earned income was $85,000, not $225,000. My question is not about the appropriateness of what P1 did (i.e., running the K-1 ordinary income through Schedule C rather than Schedule E). My question is whether for purposes of the P-ship's plan, is P1's compensation for 2007 the $225,000 as more than that was reported as her ordinary income from the P-ship on the K-1? Or is it the $85,000 that she's notified the P-ship about, and requiring that it recompute the nondiscrimination test--and reduce her allocation from P-ship contributions? If the $85,000 must be used in a recompute of the nondiscrimination testing, and thus part of her employer contribution taken from her benefits, it would appear such would have to be re-allocated among other employees and could not be returned to the P-ship under a 'mistake of fact'. Even with the reduction in P1's compensation, the total employer contribution would yet be deductible. Agree/disagree that the extra would have to be re-allocated among other participants rather than returned to the P-ship?

LRDG, There are two possible retro scenarios. One is where the mid-year increase was elected before the last payroll, but due to payroll failure it was not implemented. Later, that final plan year payroll is corrected. That I could easily see as not violating the rule against retro elections. The other possibility is where as the OP posits the mid-year increase was not elected until after the last payroll of the plan year had already run. The employee had full access to the payroll money in question before making the election. Having full power over those dollars, he is taxable on them. A cafeteria plan is an exception to the constructive receipt doctrine. One of the reasons that cafeteria plan elections must be made in advance of the money becoming available is so that the constructive receipt doctrine is left intact (or mostly so). I guess my question is whether your experience has been of the first type I mention or more of the second type, which is what the OP is, and if the second type, in your experience has the IRS known about and either approved or simply ignored the retro election?

If the payment is made after the end of the year in which the services earning the right to that pay were performed, you need to analyze for 409A implications and likely have a document that conforms to 409A. If there is any discretion by the employee or even the employer as to the timing, such may only be exercised in ways comporting with the 409A regs, or you face the 20% extra tax. There is an exception for bona fide vacation pay plans, but no definition is provided even though such was requested by practitioners while the regulations were pending in their proposed state. Caution suggests having a 409A-compliant plan document even if neither the employer or the employee has discretion over the timing, e.g. unused vacation pay will be cashed out for everyone upon termination of employment. Discretion by the employee to take the previously earned vacation pay in a year after earned but before termination would require compliance with the 409A election rules, unless you are confident that the arrangement is a bona fide vacation pay plan (keep in mind, the IRS has not yet defined that). In speaking with HR directors, that type of flexibility is relatively new in vacation pay plans--so that feature might of itself blow the arrangement out of the ambit of 'bona fide vacation pay plan'.

Assuming as jlea indicated your employer might have chosen in designing the 125 plan to make full use of the change in status rules to permit mid-year election changes, you cannot drop the 125 coverage altogher due to a cost increase or loss of coverage, even significant ones, mid-year unless there is "no other benefit package option providing similar coverage" then available. Treas Reg 1.125-4(f)(2)(ii) and (3)(ii). If the cost increase is significant or the coverage loss significant, but the new coverage offered through the 125 plan provides "similar coverage", the employee doesn't have the option to stop the election mid-year. The plan administrator would be the one to determine if the cost increase and coverage loss were significant, and whether another, similar benefit option is yet available.

Before the son disclaims, you might want to check the terms of the annuity policies to see who then would be the beneficiary per the terms of those policies. That might then have it go to the widow, but maybe somewhere else. Although the annuity policies may be owned by the DB plan, the insurance company is contractually obligated to pay to whomever is the beneficiary under the terms of the policy--in light of any designations and waivers. The DB plan could pass its ownership of the policies to the widow, but not the death benefit that will go where directed by the annuity policy/designations/waivers.

Don, You have written, in this thread and others, that "the VEBA has the opportunity to provide unique products not available through commercial insurers". I've struggled to understand what you've meant by that, but think I may have figured it out. Your state (Texas) regulates health insurance, which I presume requires certain provisions be in each coverage policy and prevents certain other types of provisions. However, if ERISA preempts Texas law in a particular situation, then the coverage provided might include otherwise Texas-prohibited provisions and/or exclude otherwise Texas-required provisions. If that's what you are referring to as "the opportunity to provide unique products not available through commercial insurers", a VEBA would not necessarily do the trick. That is because you could have a VEBA that is a multiple employer welfare arrangement which is subject to both ERISA and state law. If you have a single employer welfare arrangement by a private employer (not governmental, not church), then ERISA applies and certain state laws are preempted. The state laws preempted are those directed at ERISA plans. Saved from preemption are those that have a broader reach. So what I'm wondering is if you mean that a single employer welfare arrangement 'has the opportunity to provide unique products not available through commercial insurers' because Texas does not try to regulate what is or might be preempted by ERISA. The single employer welfare arrangement could use a VEBA or might use a taxable trust with the products mentioned in this thread. Am I understanding your comments about "the opportunity to provide unique products not available through commercial insurers"? Or can you explain more how a VEBA allows you to do in Texas what cannot be done there without a VEBA?

If the IRS were to challenge the later, beefed up amount as excessive, and thus try to recharacterize some of that payment as dividends (income taxed both at the corporate and shareholder levels), the corporation and shareholder would be hardpressed to explain that the value of his personal services was truly zero, but then miraculously the beefed up amount. If the corporation/shareholder answered the IRS by explaining it was really deferred payment of compensation in the zero era, then you'd have a 409A 20% tax problem.

That sounds right--the $1,000 being the mandatory tax withholding.