J Simmons

By letter dated January 26, 1999, comments by members of the Committee on Employee Benefits about and a request for clarification concerning nondiscrimination standards of what was termed "open option" participant directed plans were forwarded by the chair of the ABA's Section of Taxation to the Commissioner of the IRS. One of the 'operational results' posited for comment and clarifications was that "Participants in an open option program may receive solicited and unsolicited investment opportunities from parties that are not affiliated with the plan, some of which may require that a minimum dollar amount be invested in order to make any investment. It is possible that the minimum dollar amount threshold might make these investments available primarily or exclusively to predominantly nonhighly compensated employees." Those comments specifically acknowledged that the right to a particular investment is an "other right or feature" per Treas Reg sec 1.401(a)(4)-4(e)(3)(iii)(B) and ©, but opined that "where certain investment opportunities are, in practice, effectively unavailable to nonhighly compensated employees, not as a result of plan limitations but as a result of external market practices" should not be discriminatory "because the lack of availability is not the result of any restriction imposed by the plan or any action taken by any fiduciary. Instead, the lack of availability is the result of the actions of third parties or advisers who either were selected by plan participants or who, on their own initiative, without the involvement of the plan or its fiduciaries, approached the participants. In no event could (or should) the plan or its fiduciaries control (or preclude) these practices." I am aware of no response from the IRS, either accepting or rejecting the analysis and opinion contained in those comments. The IRS has left that posed question unanswered for more than 9 years now. The position that such minimum thresholds are or may be discriminatory could have serious implications for plans that permit both participant loans and investment directions. Most plans that have both features coordinate them through a provision that explains a participant loan shall be considered a plan investment directed by that participant. The loan program may limit the amount that may be borrowed by a participant, for example, to 1/2 VAB. For someone with $100,000 or more of VAB, he or she could borrow $50,000. But the participant with just, say, $29,000 of VAB, he or she could just borrow $14,500. Does the discrepancy in how much can be borrowed, and thus be a directed investment, pose a nondiscrimination challenge since there is likely a correlation between larger VAB balances and hce status? Would you have to limit the loans to the 'lowest common denominator', the lowest amount that anyone could borrow?

Generally, I don't think that's a problem if the same minimum balance is imposed by the brokerage and not contrived or imposed by the plan, and it is applied to all plan participants/beneficiaries. I'm sure that you could fathom an unlikely scenario, such as a plan allowing only two investment options: one that requires $100,000 minimum balance and the other simply a money market account. That would likely be problematic particularly if the only ones with $100,000 or more in their accounts are hces.

ERISA sec 205(b)(1)© provides that QJSA rules do not apply to a retirement plan in three situations. One of those is where assets received by the plan in a transfer were not, under the transferor plan, subject to the QJSA rules. The flush, last sentence however provides transferred benefits will be subject to QJSA rules if not accounted for separately from other benefits subject to the QJSA rules under the receiving plan. That is, benefits that were transferred from a plan as to which the QJSA rules did not apply will be subject to those rules if not separately account under the receiving plan from other benefits that are subject to the QJSA rules. Thus, where you have some benefits subject to the QJSA rules and others not, all of the benefits will be subject to the QJSA rules unless separately accounted for. Seems to me that being subject to the QJSA rules is stricter than not being subject to them. So if the transferred benefits are separately accounted, they are yet exempt from the QJSA rules, but if not, then all the 'commingled' benefits are subject to the QJSA rules.

As long as all employees have the same set of brokerage house options from which to select (i.e., open architecture), it is not discriminatory that the hces pick different options than the nhces.

There is a suggestion in the ERISA statute for imposing the stricter rules when there has not been separate accounting. Take a look at the last, flush sentence of ERISA sec 205(b)(1)© where it is explained that the exception to the QJSA rules apply to certain transferred assets does not apply if those amounts are not separately accounted for under the recipient plan.

Hi, Don, You would have 125 nondiscrimination issues under an employee-pay-all plan. There is an exemption in the new regs for 125 plans that are POPs if it meets the Regs 1.125-7(b)(3) safe harbor percentage test for eligibility. Regs 1.125-7(f). You'd have to also deal with the 501©(9) discrimination rules since you have a VEBA involved.

You are correct that any self-insured aspect of a health plan would be subject to the 105(h) discrimination. 106(a)--no prohibition against discriminating in favor of the highly paid--only applies to employer payment of premiums to a third party insurer for coverage for the employee (and spouse and dependents). It is important where you also have a 125 cafeteria plan that the 106(a) program be very distinct and separate so that the two cannot be treated by a government entity or employee bringing suit as though just part and parcel of one "plan". While the 125 cafeteria plan might be described or its summary contained in an employee handbook, I would not include nor even mention the 106(a) plan in such an employee handbook or any other document that also describes the 125 cafeteria plan. Rather, just provide a separate SPD for the 106(a) plan to just those employees that will benefit under it. And I would not refer to the 106(a) plan as part of any "health plan" or other overarching plan. The key here is to make it and keep it separate from your 125 cafeteria plan. For example, the 106(a) plan would recite a different effective date, it would be numbered 502 if your cafeteria plan is 501. The 106(a) would not be a cafeteria plan itself (separate cafeteria plans can exacerbate testing problems, not solve them, in many instances). The 106(a) plan would be a separate ERISA employee benefit plan, needing all those regulatory compliance 'bells and whistles' in the documents and operation.

Not answering your question directly, here's an alternate solution to consider. An employer may subsidize health coverage premiums at different levels. IRC sec 106(a) does not impose a prohibition against discriminating in favor of highly compensated employees for purposes of excluding the value of the coverage from the employee's taxable income. However, to avoid the discrimination issues of IRC sec 125, the employer must not give the employee a choice of cash or other taxable benefit instead of the payment of premiums by the employer. For example, suppose that the cost of single coverage is $390 per month. The employer wants to pay $250 for the commissioned sales force, leaving each to pay the other $140. The employer only wants to pay $200 for the other employees, leaving each to pay the other $190. So long as an employee that doesn't want the employer to pay this part of the premiums cannot choose to receive cash or other taxable benefit in lieu of the premium payment, it is okay under IRC sec 106(a) to treat the employees differently, even if the commissioned sales force are the higher earners. The balances of the premiums to be paid--$140 by each salesman and $190 by each other employee--could be elected and paid tax-free through the IRC sec 125 plan. To do this, however, the employer needs to be careful to establish the discrepant premium payments as a plan separate and apart from the cafeteria plan. Otherwise, you will have a highly compensated discrimination problem.

Take a look at Revenue Ruling 94-76, IRB 1994-50,5, November 29, 1994: the merger "does not divest the assets and liabilities of the money purchase pension plan of their attributes as pension plan assets and liabilities. Therefore, to satisfy §401(a), the assets and liabilities transferred from Plan A to Plan B must remain subject to the restrictions on distributions applicable to a qualified money purchase pension plan. In order to remain qualified, any plan provision applicable to the accrued benefits derived from Plan A must not permit distributions prior to retirement, death, disability, severance of employment, or termination of the plan. Plan B's distribution provisions permit distribution of an employee's accrued benefit after two years." and Revenue Ruling 2002-42, 2002-2 CB 76, IRB 2002-28, 76, June 17, 2002: "The holding in Rev. Rul. 94-76 is applicable when an employer converts a money purchase pension plan into a profit-sharing plan." While the merger is not tantamount to a termination of the MPPP that would trigger immediate, 100% vesting, you must give a 204h notice in advance of the merger (or earlier date when MPP accruals will cease). If you terminate the MPPP instead, then all would be 100% vested, but then any amounts that the employees choose (with spousal consents as necessary) to roll into the PSP would be cleansed of those pension attributes (except to the extent provided by the PSP).

Why does the owner want to keep his and his spouse's benefits in one of the existing accounts? Is it because there will be surrender charges or back loads that he wants to avoid for himself and his spouse, but as to which his action will subject the rank-and-file employees' benefits (or front loads with the Ohio National products)? If so, the BRF concern will be a greater hurdle than it might otherwise be.

One of the other procedures you might try would be applying with the DoL to be a "qualified termination administrator" for an abandoned plan, as there seems to be no responsible plan sponsor or plan administrator. See 29 CFR 2578.1. Maybe your situation doesn't fit squarely into place with those regs or their purpose, but giving advance notice to the plan sponsor of your intent and if necessary, copying the plan sponsor with your request to the DoL, might get the plan sponsor's attention--and action.

I've found the answer to my question: EGTRRA RAP began 1/1/2002 for DC plans, 1/1/2001 for DB plans. Notice 2003-49 (August 11, 2003):

Your state law on vacation pay should be reviewed, and you might be able to do that with just advance notice before the moved 'up a year' approach Masteff suggests. My experience is that employees plan their vacations months, some even years, in advance and you may be having some with insufficient accrual (e.g., an employee was planning a vacation that would fall after his/her anniversary date (and accrual dump) but before what would be the first day of the next fiscal year beginning after that. If you move 'up a year' the approach I outlined, you might need to be prepared to 'advance' employees some vacation accrual during the year of transitioning to the new accrual date to avoid employee pushback.

I am preparing the 5307 application for an EGTRRA determination letter for a plan I restated last week. The original effective date of the plan is 5/1/97, the first plan year ending 4/30/98. We applied for received a GUST II letter in 2002. Due to the small employer exception, we did not pay a user fee to the IRS. In re-reading EGTRRA sec 620, it would appear that we may qualify once again for the exemption from the user fee if our EGTRRA application is made before the end of the RAP that begins before the end of the end of the 5th year of the plan. The plan's 5th year ended on 4/30/2003. Thus, if the EGTRRA RAP began on or before 4/30/2003, we'd be exempt once again from the user fee. I am assuming that the EGTRRA RAP began 1/1/2002, as that is the date some of the EGTRRA provisions took effect. Does anyone know of an IRS pronouncement that specifies the beginning date of the EGTRRA RAP?

What I've seen will take a year to implement. From the first day of the next fiscal year, continue to credit each employee his/her vacation on his or her anniversary date. But then, on the first day of the next fiscal year, credit everyone with a proportion. For example, if the fiscal years begin July 1, then finish out this fiscal year as you have in the past. Beginning July 1, 2008, notify everyone that they will get their full annual accrual on their next anniversary date but then on July 1, 2009, they will get a proportion of the annual vacation accrual measured by the days from their anniversary during July 1, 2008-June 30, 2009 until July 1, 2009, divided by 365. After that, everyone's annual vacation accrual will be the first day of fiscal years.

A client has a DB plan. One of the employees who is not yet in pay status is no longer able to work. He has been receiving LTD benefits, but the insurance company stopped them. (The premiums for the coverage were paid by the employer). The individual is appealing the denial of further LTD benefits, internally at the insurance company. In the meantime, the employee has a screaming cash flow need and so has reluctantly begun taking retirement benefits. A-Can the LTD insurance carrier now deny the LTD benefits because the individual is in pay status as a 'retiree' under the DB plan? B-If the LTD benefits are reinstated in the appeal process, can the DB plan and individual agree to "undo" his retirement at this time--stop further DB payments and the individual pays those DB payments back?

As yet, the mandatory provisions of PPA do not need plan document provisions. At first the IRS said that non-spouse beneficiary rollovers was discretionary, but for 2008 and beyond seems to hold that it is mandatory. For the discretionary provisions of PPA, if the plan is a prototype, the prototype sponsor can amend the new EGTRAA-class prototype to add those provisions, with or without adding mini-adoption like agreement for each adopting employer to select which discretionary provisions will apply to its particular plan. For volume submitter, I suppose each employer could make an amendment. BTW, some of the EGTRAA-class prototypes were allowed to add the non-spouse beneficiary rollovers to their documents before IRS approval.

Another way that the prototype can be rendered to be individually designed is if the employer rejects, for its plan, an amendment that the sponsor makes to the prototype.

Was the EE eligible for the plan before terminating at the end of Year 1? Does the plan require two years of service for eligibility? Did the EE have any vested benefits at the time of terminating at the end of Year 1? Even knowing the answers to these three questions, the answer you seek will depend on a very close reading of numerous plan provisions.

If the HRA is written that way, yes. HRA must be ER only dollars. EE dollars can only be involved on a tax-free basis if the IRC 125 is met with regards to the EEs' elections, and the use it or lose it rule applies--then it would actually be a health flex account. What you describe is a $200/year HRA deductible. An EE's payment of the first $200. The dollars that the EE would be paying that $200/deductible would not be tax free (though would count towards Schedule A itemization, subject to the 7.5% of AGI threshold). Only the ER dollars that would be paid per the HRA for medical expenses in excess of the $200/year would be tax-free. To work that in mid-year, the HRA could provide either (a) that the expenses incurred from January 1-May 31 under the old plan be credited to the employee towards the $200 deductible for 2008, or (b) prorate the $200 annual deductible by 7/12's and not give any credit for the January 1-May 31 expenses. You're right. But either way you handle the new HRA's $200/deductible for 2008 (#(a) or #(b) above), that's not reimbursing expenses incurred before the HRA exists. It is a condition for reimbursement of an expense incurred after the HRA comes into existence.

My understanding is that you would beginning withholding the elected deferrals out of the April 4th paycheck even though the pay period began before the enrollment became effective. If it were cafeteria plan reductions that had been elected, then it would not apply because the pay period began before the enrollment became effective.

Page 4, second column of page 4, 2007 Instructions for Forms 1099-R and 5498 provides: Are excess deferrals paid out before the W-2 is prepared for the year of the excess then included on the W-2, but if not paid out until after the W-2 is issued then reported on a 1099-R for the year of the pay out?

Are those vendors obligated to the employer to perform the 402(f) notice task? Or is this something that the employer is to do before instructing the vendors to perform the payouts incident to termination of the 403b plan?

I thought it would be entered on Line 7 (wages) rather than Line 21 (other income). Other than that, it all sounds correct to me.

The prototype retains its status as such despite the plan being administered by someone other than the prototype sponsor, so long as the employer continues the document relationship with the prototype sponsor. That relationship is as a 'subscriber' to the prototype document via the adoption agreement (and terms as agreed between the prototype sponsor and the employer). An amendment to the adoption agreement that simply switches from one of the listed options to another on any design parameter does not render the plan to be individually designed. However, an amendment to vary any of the terms set forth in the prototype plan document, or to attempt a design option not presented on the adoption agreement, will render the plan to be individually designed.