J Simmons

The plan-mandated continuation to the end of the year of employment termination puts the terminating employee in the same position as those whose employment continues to the end of the year for which health FSAs are elected. Just like the continuing employee, the terminated employee whose health FSA is plan-mandated to continue to the end of that year has to fund the remaining annual cost elected for the health FSA and is yet able to claim reimbursement against the unused balance for medical expenses incurred by the end of that year. If the plan-mandated continuation is problematic, then health FSAs for all those that continue their employment to the end of the year for which the elected the health FSA would also be problematic. The entire elected amount for the plan year is available from day one of the plan year. That's not affected by the plan-mandated continuation. So the uniform coverage is not impacted. As for the risk, it is from the employee's perspective that 125 is concerned, as 125 is an exception to taxation simply because the employee has the choice of cash or nontaxable benefits. With or without the mandatory continuation, the requirement for health FSAs that they be for 12 months, that the election be before the year begins, and only be changeable during the year if a 'change in status' occurs apply equally to plan-mandated continuation as to plans that don't mandate such continuation. The employee decides an amount before the 'period of coverage', commits to paying it like a premium, but bears the risk of losing so much of it as he or she does not have in qualifying expenses for the 'period of coverage' to be reimbursed. The risk is yet there for the employee that he/she will forfeit part of the elected health FSA that he/she pays for, should he/she have less in qualifying medical expenses. That is just as true for the health FSA of a terminated employee that the plan mandates be continued to the end of the plan year as it is for the employee who remains employed to the end of that plan year.

I don't know of any CMS penalty, but the employer could be opening itself up to liability to an affected employee who might enroll in Part D at first opportunity to avoid later cost increase, and want reimbursed for paying for duplicative cost when later learning that enrolling at first opportunity was not necessary.

That chain gets rattled every once in a while by an IRS official speaking off the cuff. However, I'm aware of nothing official so far. Rather, LRM #94 includes the following sentence: "The allowable number of allocation rates for eligible HCEs is equal to the number of eligible HCEs, limited to 25." Of course, a plan could have HCEs and no owner-employees, so not entirely dispositive though somewhat persuasive. The real rub of the concern is that each LLC member would be able to make his own decision for more than the 402g limited amount for 401k deferrals. If the LLC membership as a whole (or better yet, its 'managers') makes the decisions, then the concern should be allayed. However, proving who actually made the decision might be difficult. At a minimum, a resolution signed by all the LLC members (or managers) that sets forth the contributions to be made for each individual's group would be helpful.

Allowing the former employee to tap his prior contributions w/o requiring him to make additional contributions is a spend down per the 2007 regs, and that is only allowed for the DCAP, not the health FSA.

The 2007 regs specifically allow for DCAP spend down, which is that the former employee can tap the unused balance for reimbursement of qualifying day care expenses incurred during the remainder of the plan year (and if the plan permits, another 2 1/2 months) after termination of employment with no further contribution obligation from the employee. The 2007 regs do not specify such spend downs for health FSAs. However, not addressed in the 2007 regs is whether the cafeteria plan can require continued participation in the health FSA for the remainder of the year of employment termination, where the former employee is obligated to cover the remaining annual cost of the health FSA and be able to claim reimbursement against the unused balance of the health FSA. This plan-mandated continuation to the end of the year is not the same as the DCAP spend down described in the 2007 regs. The cafeteria plan rules do specify that the plan must be primarily for current employees, but incidentally may be for former employees. The plan-mandated continuation would seem to within the ambit and is not prohibited by the 2007 regs. It is also something that the National Office interpretive attorneys had suggested was do-able. A plan that does not mandate the continuation of the health FSA to the end of the year must give the employee the COBRA continuation option, if COBRA then applies.

I think you could put in the election form (for use before 1/1/2008) the option of either the unlimited health FSA that would run from 1/1-12/31/2008 or the limited health FSA that would run from 3/1-12/31/2008, either should be elected now, before 1/1/2008. I think an employee could elect both health FSAs, but the eligibility for HSA contributions would not happen until the first day of the month in 2008 after the unlimited health FSA is exhausted through reimbursement of claims. So an employee might elect a much smaller unlimited health FSA, one he or she thinks would be exhausted in January and February 2008, in addition to the limited health FSA. As for the health insurance coverage required for HSA contribution eligibility, the employee could elect HSA-compatible health insurance for the whole year. You could have a single election now apply to the whole year that calls for a switch from regular to HSA-compliant health insurance after the unlimited health FSA is exhausted, but administratively that would I think be a nightmare.

The new regs require a valid business purpose for a change in plan year, in order to prevent manipulation of the 12 month election rules. This would look manipulative, and then there's always the step-transaction doctrine to collapse it into being just an attempt mid-year to give employees a chance to change their elections. Better to keep all things as is, but add the HSA/limited health FSA option mid-year. For those that have already elected the unlimited health FSA for the year, I don't think that adding HSA mid-year permits them to end the unlimited health FSA early.

If average benefit percentage test fails, then each HCE's rate group must pass the 70% ratio percentage test. If the average benefit percentage test had passed, then each HCE's rate group would have to pass the ratio percentage test, but only at the lower, mid-point that depends on the concentration of NHCEs among all tested employees.

It would seem to me that once the EE has paid income tax on the value, 2006 in your example, that the EE then has a capital asset and would not realize capital gain until 'sold', 2008 in your example, as the price could vary in the meantime. That's what would happen under section 83, and you're asking about 409A. It seems that the same treatment, post-income taxation, ought to apply under 409A as it does under 83.

Don't know about Notice 2007-46, but the transition relief does not permit acceleration into the year you make the acceleration. That is, in 2007 you cannot accelerate a payment into 2007 itself. For action taken in 2007, the earliest that you can accelerate payment is into 2008. And this is only under the transition relief that ends 12/31/2008.

Hi, leevena, I think it is the "for a private Medigap policy?" part of the question that raises a concern.

If the plan document specifies the beginning and closing dates for open enrollment, and the cafeteria plan is subject to ERISA, the plan administrator would have a duty to operate the plan as written including the provision about open enrollment period.

So if there doesn't need to be a failure in order to do an -11g corrective amendment, does -11g completely eviscerate the rule that the plan be operated in accordance with its documentary provisions? Does the DoL concur with the Service on this?

In the past, I've received D-letters for situations and plan design as you describe, even with employee data and x-test methodology submitted for IRS consideration. I see no coverage or discrimination problems.

As QDROphile mentioned, 'shared interest' and 'separate interest' are not regulation-defined terms or categories. Those terms have been used by various practitioners to connote different groupings of rights typically specified in a QDRO for an alternate payee to an employee's benefit under a defined benefit plan. Shared interest typically connotes a right awarded in the QDRO to an alternate payee to a specified portion of each future, periodic payment that the employee will possibly receive. If drafted appropriately, the QDRO will likely name the alternate payee as the 'surviving spouse' with respect to the defined benefit (or at least that portion earned during the marriage) for purposes of the survivor annuity rights. Separate interest, on the other hand, describes an awarded right to a portion of the defined benefit of the employee that has some distinction for payout purposes from the portion of the defined. The alternate payee may commence payout of that 'separate interest' as soon as the employee could have had his or her employment ended on the date of the QDRO award. This is so even though the employee may yet be employed and unable to access the retained portion of his other defined benefit because employment continues. However, even this so-called separate interest keys off of the age of the employee. For example, a defined benefit plan may permit no early payout to a terminated employee before reaching age 55. The alternate payee will have to wait to withdraw the awarded portion until the employee reaches age 55. Also, required minimum distributions as to the separate interest key off of the employee's reaching age 70 1/2. The use of these two terms is a shorthand reference, but should not create assumptions about the rights actually given the alternate payee just because someone may label or call a QDRO a 'separate interest' or a 'shared interest' one. It is better to compare the actual provisions of the QDRO in question against the statute (IRC 414(p)) as it existed at the time the QDRO was entered.

Don't get too cheeky in having the corporation pay health insurance premiums for owners but not non-owners. For example, suppose three shareholder/employees, A owns 40%, B owns 40% and C owns 20%. Corporation pays up to $8,000 a year in premiums for each of A and B, but only up to $4,000 a year in premiums for C. Corporation pays no premiums for non-owner/employees. The alignment with stock holdings will make the payment of premiums vulnerable to attack as a disguised dividend. That will result in no deduction for the corporation, but taxable dividend income to A, B and C.

Situation is this: Govt ER has a 457b plan with no service requirement. Govt ER also has a 401a plan with a 3 month service requirement. An EE wants to make a one time, irrevocable election under 1.401(k)-1(a)(3)(v). That requires the election be made before becoming eligible for any plan described in 219(g)(5)(A). 219(g)(5)(A) included "(iii) a plan established for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing". According to the 457 Answer Book, 4th Ed, at pp 1-15 and 2-13, it is suggested that a 457b plan does not fall under 219(g)(5)(A)(iii). If not, then the EE in the situation may make the irrevocable election during the first 3 months employed. Otherwise, the EE cannot make such an election have employment begins. Does anyone know the citation of authority for the notion that a governmental 457b plan is not a 219(g)(5)(A)(iii) plan?

ERISA 103(b)(3)(A) requires the annual report to include "a statement of assets and liabilities of the plan aggregated by categories and valued at their current value ... ." ERISA 3(26) defines current value as "fair market value where available and otherwise the fair value as determined in good faith by a trustee or a named fiduciary ... pursuant to the terms of the plan and in accordance with regulations of the Secretary, ... ." Don't know of any final reg that requires use of an appraiser. Appraiser may be required for such a valuation, maybe not. Depends on your plan document. In a recent letter from a DoL auditor on this point, it was stated: "In our opinion, a prudent fiduciary, acting in good faith, would apply sound business principles of evaluation, conduct an investigation of the circumstances prevailing at the time of the valuation, and document the process and results." Estimates of the value based on initial cost, and from that someone's 'best guess' of the potential selling price will be challenged by DoL.

Merlin, Does the doctor's profit sharing plan have a 401k feature? While I agree that he would start with a new, fresh 415c limit under his profit sharing plan than what applies to the 403b (that is, the dollars accrued under either do not eat away at the 415c limit that can be accrued under the other) unless he controls the local university. However, I understand that the 402g limit applicable to employee deferrals would be 'cross-wired'. That is, the $15,500 (or $20,500 with over age 50 catch up) is one-per-person between a 403b and the 401k feature of a profit sharing plan. No doubling up on that aspect. (457b is another matter.)

Does anyone know if in addition to the DoL's voluntary fiduciary correction program whether this situation needs to be fixed through EPCRS as well?

For the yearly individual benefit statements (individual account plans that do not allow participant direction of investment), the DoL recently issued Field Advisory Bulletin 2007-3 that such will not be due until the time the Form 5500 is timely filed. That will give TPAs seven months or more after 12/31 to determine the vesting as of that date in the plan year being reported, and put that updated vesting information in the individual account statements for that plan year.

Per Treas Reg sec. 1.409A-1(b)(5)(i)(B), it would appear that the arrangement I'm dealing with is a stock appreciation right that does not meet the three prong test to avoid being 'deferred compensation'. Any input on the OP questions?

Thanks, Everett. Yes, I think there is a compensation element. The ER's motive in making it was to entice the EE to remain employed and providing services. The stock grant basically gave the EE the right to appreciation of stock while he would yet remain employed. True, the ER could have delayed the post-termination notice and thus delayed the repurchase obligation, extending the time that the former EE would be entitled to appreciation on the stock. The EE could, and did, extent the time of the repurchase (and thus period of appreciation) by 6 months for every 12 full months worked. However, both repurchase triggering events have their roots in employment ending, by death or otherwise. Also, contemporaneous with the stock grant, the ER and EE signed an 'employment agreement' that basically amounted to an agreement by the EE to keep the ER's trade secrets confidential.

A Flex Spending Program could conceivably consist solely of HCEs, so long as some of them are not Key Employees. A Flex Spending Program may not consist solely of Key Employees.

Situation: Before 2004, ER issued 30 shares of discounted, restricted stock to EE subject to a repurchase per formulaic price. No additional shares were granted after that. Repurchase is triggered by the EE's death or the ER giving notice to the EE after the termination of employment, which the ER could delay doing. Payout is withing 90 days of either repurchase event. Once the ER gives notice to repurchase, the EE can per original grant provisions postpone the repurchase of the 30 shares by 6 months for every 12 months worked after grant of restricted stock. Employment ended in mid-2006; ER chose to and gave notice in 2006; but before payout during the 90 days occurred--and yet in 2006--EE exercised right to defer the repurchase on the 30 shares per the 6-months-for-every-12-months provision. This extends payment to 2009. No material (or other) modifications have been made to the arrangement, either before or after October 3, 2004. This looks to me to be discounted stock appreciation rights. Q1: Does appreciation in the value of the 30 shares of stock after 2004 count as compensation earned and vested after 2004, which would then be subject to 409A? Q2: Does 409A apply regardless of the dates because it is discounted stock rights? Q3: Does the ER choosing to give notice of repurchase in 2006 rather than in a later year constitute an exercise that makes payment an impermissible one subject to 409A taxes? Q4: Does the EE exercising the right to defer after a post-employment notice from the ER, and the repurchase price otherwise became payable in 2006, trigger application of 409A to the arrangement either at that time or back to 1/1/2005?