J Simmons

1) Is it okay to pre pay for an anticipated layoff? YES, from a section 125 perspective (per informal comment made by Harry Beker of IRS National Office a few years back in context of question about school teachers paid over 12 months for 9 month school year). 2) If so, is it okay to not collect the prepayment pro rata over the entire plan year? YES, see #1 above. 3) If an employee terminates during the first 6 months, can employer refund the extra 50% back to employee? (If so, refund would be taxable and employment taxes would be owed, right?) THIS might implicate section 409A deferral of compensation if the 12 month year is a fiscal, rather than calendar year. This could cause the postponement of some earnings into the next tax year. From a cafeteria plan perspective, I don't see this as problematic. 4) Because of the front-loading, it seems that any deferred comp issue could be avoided. Do you see any issue? See #3 above. 5) Since this is health insurance premiums and not FSA contributions, is the use or lose rule avoided? YES.

The non-spouse may elect the life expectancy method as long as they do the rollover to the IRA and take the first life-expectancy annual payment by the end of the year following the year of death. What the Notice is trying to explain is that if the benefits remain in the employer's plan passed the end of the year following the year of death and annual life expectancy payouts have not begun by the end of the year following the year of death, then all benefits will have to be distributed out (and taxable income) by the end of the fifth year after the year of death. This is so even if in the meantime there's been a rollover to an IRA; is so, the distribution by the end of the 5th year following the year of death is from the IRA. On the other hand, if life expectancy payments have timely begun out of the employer's plan, then the balance of the benefits can be rolled to an IRA and the annual life expectancy payments continued out of the IRA. For the year that the rollover takes place, the minimum required distribution for that plan year needs to be made from the employer's plan and not from the IRA after the rollover is accomplished.

The age parameter would concern me if in design or use it resulted in those under age 40 receiving more than those over age 40. ADEA.

Let's take up the POP plan first. Suppose that you adopt a 106a plan that says the employer will pay 75% of the premium for anyone there over 10 years, 65% for those with between 5 and 10 years of service, and 60% for those with less than 5 years of service. Under 106a, you can so differentiate. Then you also adopt a 125 POP with no employer contribution. It is solely to allow employees to pay for health insurance premiums. Since those with more than 10 years of service already have 75% of the premiums paid for them (via the 106a plan), they may use the POP to pay the other 25% through pre-tax payroll deductions they elect. Those with between 5 and 10 years of service may use the POP to pay their other 35%, and those with less than 5 years may use the POP to pay their remaining 40%. If the FSA issue is part of the same employer, you might be able to further 'contort' the 106a plan and use an HRA for some of the employer dollars so that the net effect is what the employer is aiming for.

4 USC sec 114 provides, after 1995, that "No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State (as determined under the laws of such State)." State A can tax the retirement income if the person is then a domiciliary or resident of State A. Domiciliary connotes permanent residence; when alternatively used as in the federal statute, the reference to 'residence' usually implies "actual residence". For example, see page 3 of the 2006 Virginia 760, Resident Individual Income Tax Booklet, where domiciliary is explained as your 'permanent residence', the place whenever you are absent, you plan to return. And a person is a legal resident of Virginia if physically present in Virginia more than 183 days, even if a domiciliary resident of another state. In some states, domciliary (permanent) residence does not end until the person becomes a domiciliary (permanent) resident in another state or country. Residence in State B, for example, is established at the time the person is first in State B with the intent to remain there indefinitely. Until then, the person remains a domiciliary (permanent) resident of State A. This standard is what renders one yet taxable in State A for income while temporarily in State B, such as on a two-week vacation in State B. It is a facts-and-circumstances analysis of whether one's actions validate or contradict the claimed intention. One way that distributees that try to avoid state income tax by moving to State B stumble is by having the intention all along to leave State B after a time and permanently re-locate in State C (or back in State A) that has an income tax. That is, the person is only in the income tax-free State B as an extended stop-over. While there, they take the distribution and later move. State A yet has a claim for its income tax applying. That's because the person's residence in State A had not ended by the time the withdrawal was taken. Some plans will ask a distributee that now claims to reside in State B to either agree to the tax withholding required by State A and let the distributee sort that out with State A, or agree to reimburse the PA for any amount that State A might successfully exact out of the PA for failure to state tax withhold regarding the distribution.

ERISA sec 407(d)(1) provides the definition of employer security for the 10% limitation purposes: "The term 'employer security' means a security issued by an employer of employees covered by the plan, or by an affiliate of such employer." Sec 407(d)(7) provides that a "corporation is an affiliate of an employer if it is a member of any controlled group of corporations (as defined in section 1563(a) of the Internal Revenue Code of 1986, except that 'applicable percentage' shall be substituted for '80 percent' wherever the latter percentage appears in such section) of which the employer who maintains the plan is a member. For purposes of the preceding sentence, the term 'applicable percentage' means 50 percent, or such lower percentage as the Secretary may prescribe by regulation. A person other than a corporation shall be treated as an affiliate of an employer to the extent provided in regulations of the Secretary. An employer which is a person other than a corporation shall be treated as affiliated with another person to the extent provided by regulations of the Secretary. Regulations under this paragraph shall be prescribed only after consultation and coordination with the Secretary of the Treasury." No regulations treating 'a person other than a corporation as an affiliate' appear to have yet been promulgated. Consequently, there would be no provision for treating the llc as an affiliate of the employer for purposes of ERISA sec 407.

Focusing on the PT, the question is whether the llc is/is not a disqualified person under IRC sec 4975 and/or party in interest under ERISA secs 406 and 3(14). One avenue for that is whether the employer owns 50% or more of capital or profits interest in the llc. IRC sec 4975(e)(2)(G)(ii) and ERISA 3(14)(E)(ii). If so, the investments would be PTs as the interests to be invested in by the plan are not stock of the employer itself, but a subsidiary. If the employer owns less than 50% of the llc (directly and through any possible attribution), then you'd need to eliminate the possibilities that the other definitional provisions do not apply before concluding the investments would not be prohibited transactions. I think you'd have a UBTI problem (IRC sec 512-514) as well because the llc is actively conducting real estate management activities. You'd also need to have the interests in the llc owned by the plan be valued annually, unless the price of the 'units' is otherwise readily ascertainable, such as closing prices if traded on a public exchange. You'd also need to vet out the federal and state securities issues that would go along with the sale of the units in the llc.

If she's been cashed out for all of her accrued benefits through a lump sum payment, she doesn't have a 'pension' remaining. As a practical matter, the suspension doesn't apply to a returning retiree who previously took such a lump sum and is not receiving nor entitled to any further payments. There are no benefit payments to suspend. Rather, the suspension issue applies to those that receive periodic annuity payments rather than having elected the lump sum option your plan apparently permits.

A stand-alone Adoption Assistance Plan should not be an ERISA plan. Doesn't meet the definitions as to type of benefits, set forth in section 3(1) of ERISA, for a welfare benefits plan.

Group term life policies have, for some time, been an available cafeteria plan benefit. The regulations only protect from taxation the premiums to the extent they are for death benefit coverage up to $50,000 on the life of the employee. Individual life policies? I don't see that as an appropriate cafeteria plan benefit. IRC sec 125(f) only references, for life insurance purposes, section 79 (Group-term life insurance for employees).

From a federal law perspective, a DRO issued post-death may yet be a timely QDRO. DoL Reg 2530.206©(2), Example 1. The example posits the situation where a DRO was issued pre-death, but found by the PA not to be a QDRO. Rectified DRO issued by divorce court post-death of the employee is submitted to PA. If otherwise properly a QDRO, it is not untimely. Your situation is slightly different--no DRO issued before death. However, that is an example under the general regulatory statement: "a domestic relations order shall not fail to be treated as a qualified domestic relations order solely because of the time at which it is issued." Will a divorce court in PA issue a DRO after death of one of the divorcing parties? Depends on PA state law. Period of benefits suspension? See the plan's written QDRO processing policy, required by ERISA section 206(d)(3)(G)(ii). I would think that as to the length of the period of suspension would need to weigh in the balance the interests of the deceased's death beneficiary, and the reasonable processing time that the putative AP needs to obtain the DRO.

I agree with prior answer posts that 'concrete documents and facts' are needed. Also, you're trying to find that rare bird of an attorney who really understands ERISA, QDROs and divorce procedure in the state where your brother and wife # 2 divorced. I do want to give you an idea of what you are facing. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 5th Cir., No. 05-41851, 8/15/07, the employee named his wife as death beneficiary of his retirement benefits. The employee and wife later divorce. The wife waives her rights to any interest in the employee’s retirement benefits. A QDRO to that effect is signed by divorce judge, but the signed QDRO is never submitted to the plan administrator. After the employee dies, the plan pays to ex-wife pursuant to that old designated death beneficiary which the employee had never changed. His estate sues the plan. The federal district court sides with employee’s estate, citing federal common law principles. The plan appeals and the federal appeals court reverses in favor of the plan’s payout to the ex-wife. The federal appeals court explains that in light of the employee not having changed the designation of his death beneficiary per the plan procedures, only a QDRO delivered to the plan administrator would prevail over that old, unchanged designation of beneficiary in favor of the ex-wife. Austin made a good suggestion to check what the plan documents specify (if anything) in situations like yours. I think you said that the plan hasn't found the ex-wife designated as the death beneficiary yet. If so, then the plan likely has not yet paid out the benefits in question. As the personal administrator of your brother's estate, you might want to (a) send a certified letter to the plan administrator putting it formally on notice that you are claiming for the estate your brother's benefits, (b) file a motion in the divorce court where the divorce from the 2nd wife was obtained, asking the court to issue a QDRO awarding your brother (i.e., now his estate) all of the benefits, free and clear of the 2nd wife's claims including despite any designations in her favor made prior to her waiving any claim to those benefits, and © present the post-death QDRO to the plan administrator. DoL Reg 2530.206©(2), Example 1. Without obtaining and presenting to the plan administrator a QDRO, the ex-wife may very well prevail. That's what happened in the Kennedy v DuPont case referred to above. Again, this is difficult not having the plan documents, a copy of the designation of death beneficiary, and the divorce decree (and waiver) to review. But this is a suggested path.

Yeah. I've suggested it two or three times to the ERISA Advisory Council. Haven't heard anything yet. Maybe it ought to be suggested to Mort Klevan.

GBurns: I think what Jacmo might be referring to (and what I was) is if the cards are pre-paid, then a part of the sponsoring employer's general assets have been transferred to the card issuer before any medical expense has been incurred, pending the possibility of such. The moneys so paid to the issuer for crediting to the card would be funds that would no longer be under the employer's control and perhaps not part of its general assets, but eartagged (via the card) only for payment of benefits. If instead of using a card, the employer simply set up a separate bank account eartagged for paying of health benefits (and then processed employee claims in the traditional fashion without a card), that segregation of funds could be the voluntary creation of a trust (with all the compliance duties) that would not apply if claims were simply paid after expenses were claimed out of the employer's general assets. Does doing so by use of a pre-paid card alleviate that trust concern?

Earl, IRC sec 414(m)(3) provides that "For purposes of [affiliated service groups], the term 'service organization' means an organization the principal business of which is the performance of services." Treas Reg sec 1.414(m)-2(f)(1) provides "The principal business of an organization will be considered the performance of services if capital is not a material income-producing factor for the organization, even though the organization is not engaged in a field listed in subparagraph (2). Whether capital is a material income-producing factor must be determined by reference to all the facts and circumstances of each case. In general, capital is a material income-producing factor if a substantial portion of the gross income of the business is attributable to the employment of capital in the business, as reflected, for example, by a substantial investment in inventories, plant, machinery, or other equipment. Additionally, capital is a material income-producing factor for banks and similar institutions. However, capital is not a material income-producing factor if the gross income of the business consists principally of fees, commissions, or other compensation for personal services performed by an individual." Treas Reg sec 1.414(m)-2(f)(2) provides a list of certain types of services to third parties that will render the company a 'service organization' even if capital is a material income-producing factor. Headhunting does not appear to be one, unless it falls under the aegis of 'consulting'. If headhunting is not consulting, and capital is not a material income-producing factor for the headhunting business in question, then it ought not be a service organization. Treas Reg sec 1.414(m)-2(f)(3)

Nini, No cite, but I do suggest that you include a default amount in the plan document as to what amount will apply for a year if no resolution is adopted for an upcoming year before it begins. That way if the employer's board doesn't meet for whatever reason, or this issue is overlooked, you yet have some basic level of HRA accruals for the year. If the resolution can be adopted after the year begins, but expenses before the resolution is adopted (say back to the first day of the year) qualify for reimbursement you may have a problem.

It depends on what the plan documents provide.

Thanks, Peter. I appreciate the thought and creativity that went into this suggestion. From an initial read-through, it is certainly something to analyze and work at developing further. Again, thank you.

If a plan has any eligible employees away on USERRA-protected active duty, can the plan be terminated? If so, how does the employer honor the obligation to make USERRA-required contributions upon the employee returning from that active duty after the plan's been terminated?

DoL Tech Release #92-01 exempts cafeteria plans that do not voluntarily create a trust from the ERISA requirement to have a trust. If the sole source out of which benefit claims are paid is the general assets of the employer, then the cafeteria plan has not voluntarily created a trust as to which the ERISA trust rules apply. If such an employer chooses to pre-pay debit cards in the amount of the medical flex accounts elected by employees, by transferring funds of the employer at the beginning of the year to the issuer of the debit card, has the employer voluntarily created a trust (i.e., the pre-paid debt cards) that is subject to ERISA trust rules? Any citations to applicable DoL authority would be appreciated. Thank you.

Tastes great. Less filling.

Good impersonation of Ben Stein! I believe the exclusion set forth in Treas. Reg. Section 1.105-11©(2)(iii)(D) applies to the nondiscriminatory benefit requirement of ©(3) just as it does to the eligibility to participate requirement of ©(2), where specified. The reason: ©(3) references participants, and that the same benefits for participants who are highly compensated individuals must be provided to other participants. Not to other employees generally. Participants are only employees that are eligible. Since ©(2) allows you to exclude from the eligibility rule those employees that are under a union contract, they would not be part of your participant pool for applying the ©(3) rule.

I have the 4th Edition, and am wondering what's new in the 5th Edition (i.e., whether it's worth the investment to update). If I buy, will I have to pay for a supplement when the 457f regs come out and are analyzed, or will that be provided no-charge to the 5th Ed purchasers? I wonder if maybe Gary Lesser and Peter Gulia could enlighten me before I make the decision to buy or not to buy the 5th Edition.

Hi, leevena, I'm not in California (by November I'll wish I was). The insurer wants a signed application that gives medical history, or a signed waiver, from every active and COBRA-continuation former EE. It includes medical history information. My state has a 2-50 small ER rule that requires insurers let such an ER into a pool without rating the small employer separately, but the ER has traditionally been able to get better premium quotes by being rated and thus has in years past not taken the non-rated small ER pool option. We're thinking of sending the uncooperative COBRA continuee a notice specifying that if she does not provide the information within 10 days, the ER will file an action in federal court to have her uncooperation declared a forfeiture of her right to further COBRA continuation (and for damages for each month beginning with October until such a declaration is issued). We do not want to take legal action, but the insurance agent estimates that there's a $5k delta per month in the premiums to the ER.

QDROphile, that situation--an active EE not providing the information--has not occurred in the history of this ER. So don't know what would happen.