J Simmons

I would wait and amend. I wouldn't want, in the meantime, an employee to die and his heirs claim there should have been group life, pointing out that's what the plan documents said, and that therefore the plan fiduciaries were not operating the plan as written in not making group life available. As for long term care, I was not aware it could be made a cafeteria plan benefit. See Prop Treas Reg 1.125-1(g).

SScannell, you might find the following of help in bucking industry practice of not charging separately for plan documents. You could explain that by charging separately, not only are you disclosing the costs of a component service that your competitors are not, but also helping your clients avoid violating their fiduciary duties: Questions for the Department of Labor Staff for the 2005 ABA’s Joint Committee on Employee Benefits Technical Session Held on May 18, 2005, at 10:00 AM (Unofficial, nonbinding DoL staff views) Question 5: A plan’s benefit consulting firm/service provider is paid entirely through revenue sharing, the terms of which are fully disclosed. The service provider contracts to provide plan consulting/document service at no additional charge. In year two, the service provider provides consulting services relating to a plan design issue and implements the design via a formal amendment. Does this arrangement violate ERISA? Proposed Answer 5: Yes. The consulting service will be deemed to be paid via revenue sharing which in turn will be tantamount to paying such expense with plan assets. The ERISA violation occurs due to the fact that a settlor function expense, in this case the design decision, will be deemed to have been paid with plan asset in violation of ERISA. DoL Answer 5: The DoL staff was skeptical as to whether the amount received by the service provider could represent no more than reasonable compensation for the services provided in year one, if that provider can provide the additional plan design and amendment services for no additional compensation. However, if that is the case, it is not violative for a service provider to provide services that are considered settlor in nature if it is not receiving additional compensation. On the other hand, if the service provider is either receiving additional compensation, or is reducing the other services it provides to the plan, then the plan design and amendment services that are paid for through revenue sharing based on plan investments would be deemed to be paid though the use of plan assets, and would constitute a violation. In the alternative, it is possible that the amount received by the provider in years in which it does not provide plan desgin and amendment services is more than reasonable, in which case the arrangement would not satisfy the conditions of section 408(b)(2).

JanetM, "target locked"? That's a synonym for 'focused' I haven't heard before. But I like it--as long as I'm not the target your firing at.

Hey, Don, If you're not looking for tax-free reimbursements to employees for paying premiums on individual health policies, then I wouldn't bother trying to use a cafeteria plan for the employee-pay-all situation. It would be much easier to steer clear of ERISA 'welfare benefit plan' status and status as a 'group health plan' under COBRA, HIPAA, etc. Interestingly, the 4 guideline safe harbor in the DoL Regs §2510.3-1(j) is for "group or group-type insurance programs". Using that safe harbor to back away from ERISA might back you right into a 'group health plan' for purposes of the other other laws. DoL Regs §2510.3-1(b) provides an exception for certain, specified payroll practices. I won't take the time to cull all the citations to the laws I mentioned in Post #11 in this thread. I'm not here going to provide a legal analysis or opinion. I will give you a few nuggets, however: ERISA may apply whether or not a tax break does. US Dept of Labor (DOL) Opinion Letter 2001-05A (June 1, 2001). The DOL has recognized that every arrangement merely to pay the premiums is not subject to ERISA. The DOL has noted that a ‘premium conversion arrangement’ may be offered by an employer primarily “so that its employees may gain certain tax advantages and [which arrangement] itself provides no ERISA-covered welfare benefits”. Footnote 5 to DOL Opinion Letter 94-15A (April 20, 1994). That is, the DOL agrees it is possible to structure the payment of insurance premiums to be tax-free in a way that would not be subject to ERISA. The DOL has concluded that a ‘pre-tax plan’ designed to meet IRC § 125, allowing employees the choice to pay premiums with pre-tax deductions from their pay, did not “constitute, in itself, a separate employee welfare benefit plan within the meaning of section 3(1)” of Title I of ERISA. The DOL explained that “[t]he provision of this tax-favored treatment, . . ., is not the equivalent of the provision of a benefit enumerated under section 3(1), and it does not appear that the Pre-Tax Plan itself provided any enumerated benefit.” DOL Opinion Letter 96-12A (July 17, 1996). On one occasion at least, the DOL ruled that direct payment of the premiums by the employer to the insurance company subjected the arrangement to ERISA regulation. DOL Opinion Letter 77-54A (August 8, 1977). Granted, in later opinions (DOL Opinion Letter 94-23A (July 1, 1994) and then 94-26A (July 11, 1994)), the DOL said that the employer’s directly paying the insurance company (and then collecting from the employee) would not of itself trigger ERISA application. A couple of federal courts have agreed with the DOL’s more recent rulings: Roehrs v Minnesota Life Ins Co, No. CV-03-1373-PHX-LOA (D.Ariz. 02/16/2006) and Bagden v Equitable Life Assur Society of the US, 1999 US Dist LEXIS 7066 (ED Pa 1999). It is important that the policy be owned and held by the employee, not the employer. All the employer should do is reimburse the employee on proof of payment of the premiums for the individual health policies. See DOL Opinion Letter 94-26A (July 11, 1994) and 94-22A (April 20, 1994). In a situation where all employees were initially covered by a group policy, but then the coverage for some was replaced by individual policies while the coverage for others was continued through the group policy, a court found the individual policies merely to be part of the ‘group plan’ subject to ERISA. Peterson v American Life & Health Insurance Co, 48 F3d 404 (9th Cir 1995) and Stern v Provident Life & Accident Ins Co, 295 FSupp2d 1321 (MD Fla 2003), but compare Laventure v Prudential Insurance Co of America, 237 F3d 1042 (9th Cir 2001). Apart from the 4 guideline safe harbor for group and group-type insurance programs, “there is no authoritative checklist that can be consulted to determine conclusively if an employer’s obligations rise to the level of an ERISA plan” * * * “In this cloudy corner of the law, each case must be appraised on its own facts.” Belanger v Wyman-Gordon Co, 71 F3d 451 (1st Cir 1995). See also DOL Opinion Letter 90-08A (April 11, 1990). Just having a ‘cafeteria plan’ (which the 125 Payroll Practice is) has been cited by federal courts in Alabama as a factor in determining whether ERISA ought to apply. 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) and Lott v Metropolitan Ins Co, 849 FSupp 1451 (MD Ala 1993). On one occasion, those Alabama federal courts went so far as to hold that use of a ‘cafeteria plan’ invokes application of ERISA. Hrabe v Paul Revere Life Ins Co, 951 FSupp 997 (MD Ala 1996). Compare that to the DOL advisory opinions which take a different position (DOL Opinion Letters 2001-05A, 1996-12A and 1994-15A). When asked in 2005, DOL officials declined to make even unofficial comments about which circumstances of offering individual insurance policies through a cafeteria plan might trigger the application of ERISA. The reason the DOL official chose not to comment: a court case was then pending in which that question was at issue. The question (Q&A-27) was posed at a May 18, 2005 meeting of the American Bar Association’s and DOL’s Joint Committee of Employee Benefits Technical Session. On June 24, 2005, the federal 4th Circuit Court of Appeals ruled in that pending case, Casselman v AFLAC, 143 Fed.Appx. 507 (4th Cir. Nos. 04-2370 & 04-2378, 06/24/2005), that Both determining eligibility criteria and selecting the insurance company have been found relevant to the determination of whether the safe harbor is applicable. See Butero [v Royal Maccabees Life Ins Co, 174 F3d 1207, 1213 (11th Cir 1999)] (recognizing, in holding the safe harbor inapplicable, that the employer picked the insurer and deemed certain employees ineligible to participate). Given the unequivocal language of the regulation limiting functions of the employer to the enumerated tasks, we conclude that the employer exceeded the bounds of the permissible interaction with the program under the safe harbor.

Hi, Don, I think you also explained in this thread that because a VEBA is a like a non-commercial insurer, the VEBA can offer products that commercial insurers do not and "Thus, VEBAs have the opportunity of offering innovative plan designs." I'm just wondering what specifically you might have in mind.

Hi, Don, I'm a bit confused. Is there something other than paying health premiums out of the VEBAs assets or paying plan-promised health benefits out of the VEBA assets that you are referring to as "innovative plan designs"? Is it purchasing life insurance on the lives of VEBA members, with the owner and the beneficiary of the policy being the VEBA, as a method of increasing the VEBAs assets with which to pay other, promised health benefits to other VEBA members?

Hi, Don, I don't know that you can slice and dice a plan trying to insulate a portion from ERISA otherwise applying, particularly if it is a type of benefit (health coverage) that ERISA specifically covers. For example, if you were to try a POP cafeteria arrangement on a bare bones 125 compliance basis for individual policies, concerns about compliance would be increased if the same employer has a MERP or another cafeteria plan with flex accounts. Those involve employer dollars and significant ongoing administrative schemes, respectively, that invoke ERISA, and make it particularly difficult then to resist being tagged a 'group health plan' for COBRA, HIPAA, etc. That POP ought to be, IMHO, the only type of welfare benefit arrangement, and then you ought to get written opinion from an attorney that the specific employer situation and 125 practice will be exempt from those laws before trying it. There is a risk level here that should be respected and appreciated by the employer before attempting to make tax-free reimbursements to employees for paying the premiums on their individual health policies.

For specifics, look at DoL Regs §2550.403a-1(b)

JanetM, If the kids are yet eligible under husband's plan, but husband chose not to renew their enrollment for the next year (albeit in violation of the divorce order not presented as a QMCSO), what would be the COBRA qualifying event? Losing coverage because no longer eligible as a dependent is one thing, but the parent simply non re-enrolling an otherwise eligible child--is that a COBRA qualifying event?

I agree with L337pwner5. Federal law dictates the ownership of the IRA. The IRA interest is not part of the gross estate of the decedent. However, state law might give the decedent's estate a greater, offsetting share of the other community property assets since federal law allocates the entire IRA to the owner. Check California state law in regards to the division of the community property between the decedent's estate and the survivor.

J4FKBC, In regard to your OP, you might want to take a look as Carol Gold's October 22, 2004 Memorandum for Director, EP Exams Director, EP Determinations Redesign. There, loading up short-term, low paid NHCEs vis-a-vis other NHCEs (while a beefy contribution is made for thw owner-employee) was assailed as an unreasonable interpretation of the -8 cross-testing regs aimed at preventing discrimination in favor of the HCE, as required by -1©(2). Your situation does not look as stark or blatant as the straw-man example used in the Gold memo. But you might want to compare your situation closely.

Hi, Don, All sorts of things the plan design might require or employer might do can cross the threshold into being a 'group health plan' for one or more of those federal laws. Who bears the cost of the premium is obviously one. If the arrangement amounts to an ERISA plan, it will likely be a plan 'of the employer' triggering application of HIPAA and COBRA (which most individual policies do not have provisions for). To avoid being an ERISA plan, the employer cannot bear any part of the expense. Participation by employees must be entirely voluntary. The employer must not endorse the plan or make it appear as part of the employer benefit package. The employees must not receive a discount against the otherwise commercially available premium because of being employees of the employer or choosing to participate in this payroll practice. The employer should not be the 'owner' of the policy or listed in any other capacity with regards thereto. If the employer receives compensation for implementing the payroll reductions and corresponding premium payment, that too can be problematic. At the same time, the plan must be written to satisfy IRC sec 125. Several courts have indicated that having a cafeteria plan is a factor in considering whether there is an ERISA plan, although it is possible that an employer can have a cafeteria plan without it rising to the level of an ERISA plan. It depends on all the facts and circumstances. The cafeteria plan should not offer other benefits, such as a flex account. The fewer, if any, eligibility requirements imposed on employees to participate the better. Eligibility requirements require administration and that usually leads to the finding of an ERISA plan. COBRA and HIPAA apply either if the arrangement is contributed to by the employer or is "of the employer". It is important too to avoiding these mandates that the employees not receive a price break on the premiums for being employed by the employer. Most individual policies do not give the covered persons these laws require the employer with a group health plan provide. For USERRA and Pregnancy Discrimination Act purposes, the availability of the individual policy must not be made "in connection with employment". If they are, then the mandates of these laws must be complied with and usually are not by individual policies. The FMLA applies to 'employee benefits' ("all benefits provided or made available to employees by an employer, including group life insurance, health insurance, disability insurance, sick leave, annual leave, education benefits, and pensions, regardless of whether such benefits are provided by a practice or written policy of an employer or through an 'employee benefit plan'" as defined in ERISA). The FMLA, if applicable, could require special payment terms that would complicate the cafeteria plan to the point its administration rises to the level of being an ERISA plan and possibly a 'group health plan' for HIPAA and COBRA purposes too. The ADA applies to 'fring benefits available by virtue of employment, whether or not administered' by the employer, and prohibits discrimination against the disabled with regards thereto. If the disabled employee's premiums for individual policy coverage are greater than they are for similarly situated other employees, is there discrimination of the type prohibited by the ADA? Possibly, even though the counter argument is that a scaled back, bare bones cafeteria plan for paying insurance premiums amounts to nothing more than a payroll practice and does not provide coverage. As such, it is actually of greater benefit to the disabled employee who is able to shelter the higher premium cost from taxes, while other employees only are allowed to use the cafeteria plan to shield their lower premium costs from taxation. Same argument could be made that such a cafeteria plan actually benefits more those who are over age 40 and facing higher individual policy premiums than those that are younger, for ADEA purposes. There is also state law to contend with. If the plan is not an ERISA one (probably essential to avoding HIPAA and COBRA), then there is no ERISA preemption of state law. So whatever rules the states in which the employer has employees must also be dealt with. Satisfying the requirements of IRC section 125 to make the premiums on individual policies tax-free, but without bumping into these other laws requires a careful balancing act. There's a big downside potential for the employer if it accidentally does too much with respect to those policies, triggering the application of these laws, that must be weighed against (a) keeping employees happy by making their health premiums tax free, and (b) 7.65% FICA savings for the employer on the premium dollars involved. It may be worth it to some employers, and maybe not to others. As David Letterman might say, "don't try this at home, kids, these are trained professionals."

Hi, Laura, I assume the 2%-of-pay for NHCE #2 is to be added to the 3%-of-pay SHNEC, to reach the 5%-of-pay gateway. I think if you are using a prototype and thus subject to LRM 94 for cross-testing, you need to make sure that NHCE #2 receives the same %-of-pay as does NHCE #1 so that you only have one NHCE group.

Hi, Don, As George indicated, treatment under the IRC does not mean the DoL treats it similarly. In the context you mention of a cafeteria plan, amounts the employer pays toward insurance premiums that corollate to elected payroll reductions are nevertheless 'employer contributions' for tax deduction purposes. However, the DoL sees that same amount as an 'employee contribution' for purposes of its plan asset regulations and rules on timely remitting. There is authority cutting both ways on whether a plan for just one non-owner employee is an ERISA plan, or in legal terms, merely a contract between the employer and that one employee flying below the ERISA radar. Clearly, if the employer lets the employee pay for the individual policy through payroll to avoid income and payroll taxes, the arrangement needs to meet the requirements of IRC sec 125 (cafeteria plans). If that cafeteria plan is kept to a skeletal remains of what most cafeteria plans involve, but yet satisfies IRC sec 125, then I think it may not be an ERISA plan or a 'group health plan' under other applicable federal laws (COBRA, HIPAA, USERRA, PDA '78, etc). If the employer gets to involved or the cafeteria plan is drafted in the typical way, the 'group health plan' mandates of those laws will likely not be found in the individual policy and expose the employer to liability for those mandated features missing from the individual policy.

Thanks, Gary. I appreciate how handy these charts are.

I'm aware of bottom loading being a problem for QNEC allocation to correct initial ADP failure, but I'm not aware of bottom loading being challenged for cross-testing purposes.

So if I understand your interpretation and an employer has a self-funded plan, there would be no need to report anything on Schedules A and C because the employer pays the costs directly rather than first into a fund? Or are payments from the employer's general assets for plan related expenses reportable on those Schedules because those payments come from the same funding source as the payment of claims--the employer's general assets?

ER pays insurance salesman a negotiated sum as a 'brokers fee' for arranging and facilitating the set up of a self-insured medical plan, and the hiring of a claims TPA. No policy was placed by this salesman. Q1: Should that brokers fee be reported on Schedule A, Schedule C, elsewhere or not at all on the Form 5500? The claims TPA places a stop-loss policy for the self-insured plan. The premium is paid to the stop-loss carrier which does not pay the claims TPA a commission. Instead, the claims TPA charged the ER for the stop-loss coverage an amount greater than the premium, and the claims TPA kept the excess over what the commissionless premium cost. Q2: Should that excess collected by the claims TPA who placed the policy be reported on Schedule A, Schedule C, elsewhere or not at all on the Form 5500?

Situation: ER has been self-funded for more than 10 years. About 5 years ago, it switched claims TPAs. The ER pays a health insurance agent about $5/EE/mo for a "broker fee". The ER pays an insurance company about $30/EE/mo for stop-loss coverage. The ER pays the new claims TPA about $31/EE/mo. Recently, it was discovered that the claims TPA has charged about $5/EE/mo more that the $26/EE/mo that was quoted for claims administration. When asked, the claims TPA merely dismissed it as a 'stop-loss placement fee' on top of the claims administration, and the TPA holds an insurance producer's license. Such a charge had never been disclosed, at least not beyond invoices with $31/EE/mo that the ER received before the one from which the ER discovered the 'over charge'. In the industry, is it common for a claims TPA to receive an undisclosed 'placement fee' or commission from the stop-loss carrier? While I understand that the stop-loss policy and coverage are not ERISA plan assets, generally speaking, I've also heard mention of a 9th circuit decision that the payment of the premiums for stop-loss coverage are plan assets until received by the carrier. Anyone have any illucidating thoughts regarding this?

The partner is an HCE. Outside the plan, the ER (the P-ship) is making up the forfeiture inside the plan by a payment to the HCE, a make up payment that the ER does not make for NHCEs due to what they forfeit inside the plan. Does anyone know if the IRS has any problems with what amounts to a vesting requirement on NHCEs that effectively does not apply to HCEs that are partners? or is the IRS okay with it since the make-up is outside the plan and doesn't have the tax advantages of being inside the plan?

Are you thinking something along the lines of requiring so many hours during a 6 month period as opposed to the elapsed time method? like an eligibility year of service, just shorter? I think you could (outside of a prototype) write something like that in, but you'd want to make sure that you had a fail safe that made everyone eligible no later than when they'd have earned two eligibility years of service (if you have no vesting), or one eligibility year of service (if you have vesting, or for the 401k feature of the plan if applicable).

I would think not in that you have described a non-ERISA plan and the bonding requirement is an ERISA one.

Not if the hardship withdrawal is taken at a time when, as you explained, the vested benefits total $5,000 or less.

Fact is, it is downloadable and fillable--and then printable. Tomorrow, I'm mailing off to Covington the first one I've used in thise way. If they reject it, I'll post.

I agree with J4FKBC's application to the more specified facts and question.