J Simmons

We're adding a copy of the plan's written policy to comply with ERISA 404c to the package of documents sent to the distributee that includes elections and other notices.

1 and 2. Only if the NQDC plan specifies that each payment in the series will be a "single payment" will the subsequent election rules (the 1 yr/5 yr rules) apply on a payment-by-payment basis. This allows the "laddering" that you describe in #2. 3. Your question in #3 goes to whether the time of payment is the only thing that can be changed with a subsequent election or whether the form of payment may also be changed. Treas Reg sec 1.409A-2(b)(9), Example 19 illustrates that the form of payment too may be changed. So it could be made in a lump sum 5 years after the first payment was scheduled previous to the subsequent election. 4. Yes, if designated as 'separate payments', you could get the "rolling" payment effect described in paragraph 3, but that you could never get a lump sum payment unless you elected to get paid 5 years following the end of the original payment period for the last installment.

Several systems can be managed in a way to effect compliance by setting up a second health flex account for the employee at the time of the change, and coding it in the system with that date as you would a mid-year entrant choosing a health flex account so that pre-account expenses are not eligible for reimbursement.

Scenario 1: 45% shareholder gains 10% more of the stock, pushing her over the 50% threshold. Change in ownership. Scenario 2: New shareholder (i.e., previously 0% stockholdings) gains 32% of the stock in a 12 month period. Change in effective control.

I agree with mjb's comments on policies underlying alternate tax schemes. Additionally, the only consumption tax that I think could possibly be taken seriously would be one where the current income tax is determined, but the taxpayer would get a tax deduction for the net amount he or she saved during the year. If more is drawn out of savings during the year than added, the difference is treated as additional taxable income. With this kind of a consumption tax scheme, the progressive rates may yet apply--to higher spenders rather than higher earners. The problem is that this could cause a slow down in spending and thus a slowdown in economic growth. However, with the Social Security and Medicare future longterm as bleak as it is, this might make sense if coupled with means testing benefits under those two programs about 15 years down line from when this type of consumption tax scheme is implemented.

Bill, you're being too logical. For a BENEFIT statement, SS integration is only useful to an employee to determine his or her benefits in the context of a DB plan. Unfortunately, the statute (ERISA sec 105(a)) wasn't amended to read that way. In paragraph (1) it specifies WHEN benefit statements are due, and separately addresses this frequency issue for DB plans separately from individual account plans. In paragraph (2) there is a listing of what must be in all benefits statements (subparagraph (A)) including the description of the plan's SS integration, and then additional items that must be in those for individual account plans (subparagraph (B)). There is reported, second or third hand, that there are rumblings inside DoL of limiting the requirement for SS integration to just those for DB plans, but haven't seen anything yet.

I had a situation a few years back representing a surgeon who had two employees that handled his filing and billings. He spent all his working time at the local hospital. The three of them were all participants in a profit sharing plan that had a 2-6 year graded vesting schedule. The office neighbor to the billing office noticed over a couple of months time that both of the surgeon's employees' cars were never there at the same time. The office neighbor asked the surgeon how that was working out letting the two of them split a single full-time shift. That was to the surgeon's surprise. They were both full-time employees. He hired a PI who documented the comings and goings of the two employees over two payroll periods, and then compared the PI's report to the claimed hours worked for time card and payroll purposes. They did not jive. He terminated and pressed charges for timecard fraud. The surgeon had the plan pay out the vested portions of their benefits. The two fired employees contacted the DoL about the forfeiture, and the DoL office in San Francisco adamantly maintained their position was this constituted a partial termination for immediate vesting period, despit the timecard fraud. The explanation was that the terminations were nevertheless employer-initiated because of the employees did not quit. The DoL insisted on an 'uncle' agreement from the surgeon that he would pay all the accrued benefits to those two employees, threatening civil enforcement action if he did not. He wasn't willing to take a stand and defend it in court, but simply paid out the amounts that should have been forfeited.

We're doing it Q'ly per the same analysis you set forth.

Get the divorce court to restructure the divorce settlement and issue a QDRO to give the ex-spouse some of the benefits, with the employee being relieved of the payment obligation that is creating the 'hardship'. Then the plan doesn't have to deal with hardship issue, and the 10% early distribution penalty (if otherwise applicable) would not apply to amount paid directly from the plan to the ex-spouse per the QDRO.

Take a look at ERISA sections 4(b)(1) and 3(32). If the local school district meets the ERISA definition of a governmental entity (many do), they might not be required to have an SPD. However, without ERISA applying, there would not be preemption of state law for the self-funded health plan. That subjects the self-funded health plan to state law and regulation, perhaps including registration as an 'health insurer' if the state does not have a separate regulatory scheme for self-funded health plans, particularly where the employer is a governmental entity. In those state laws and regulations that apply, you might find disclosure requirements that might even include a summary be prepared and distributed to employees and other beneficiaries. So while there might not be an SPD requirement under ERISA, you might have a mimicking requirement under state law. Also, being a public employer, you might have a freedom of information type of right under your state law to inspect the plan's governing documents and operational records as well.

An in-service distribution when not permitted? I would think this could be a disqualifying event, but would bet that you could CAP it. I've only VCP'd such a situation we discovered informally, when not under audit.

What is the correction? Ugly. Re-do all the affected Forms W-2 for 2006, and payroll reporting. You'll have overpaid FICA/FUTA. Not sure how you'll recoup the credit for doing so, but I'm sure the Service has a procedure. The revised Forms W-2 would in turn cause all the employees to have to amend their Forms 1040 for 2006 to take advantage of the lower reported taxable income per the revised Forms W-2.

If the ER will pay all the premiums for the health insurance, and those EEs that might decline coverage receive no additional pay or any other taxable benefit in lieu of the coverage, then no section 125 plan need be established or operated. Your arrangement would likely yet be governed by ERISA and in addition to the group health policy document, you might need an ERISA 'wrap' document to comply. If the EE will have the option of 'cashing out' as additional pay any part of the ER's contribution should the EE not take the health insurance coverage and/or if the ER is paying just part and you want to make the EE's payment of the rest tax-free, then you'll need a section 125 plan. If the ER will pay part but not allow an EE waiving coverage to 'cash out' the contribution towards the premiums that the ER would otherwise be making, then the ER's contribution is better handled outside of the design/operation of the section 125 plan--as masteff pointed out. This is so even if the balance of the premiums paid by EEs choosing coverage would be handled in the context of the section 125 plan in order to make it tax-free. If you allow EEs to 'cash out' as additional pay all or any portion of the ER's contribution, it need only be added to those EEs paychecks ratably. That is, it could be done on a monthly basis, it doesn't need to be paid in lump sum for the year. That should be spelled out in the section 125 plan document you would need.

That the QDRO issued in 2002 specifies it is a permanent order does not mean that it cannot be changed or added to, merely that when entered it was not intended to be temporary or to expire at any certain time. Recently, regulations were issued on March 7, 2007 that specify, among other things, that the entry of one QDRO does not prevent the entry of another one later that changes the proportions awarded to the AP and retained by the P. In fact, a later one could even be entered after you are in pay status or you have died. The subsequent QDRO might also name your ex-spouse to be the 'surviving spouse' of your retained benefits. 29 CFR sec 2530.206. TIAA-CREF's plan administrator is not to look beyond the face of a domestic relations order issued by a state court in determining whether that order meets the requirement to be a QDRO, and thus honored by TIAA-CREF. In reviewing the order, the plan administrator does not relitigate the property division and other issues between the divorcing P and AP. The 'equities' of the situation is therefore a battle to be fought out in the family law court in Dade County, not with TIAA-CREF. That family law court might subsume some of the attorney fees issues into a subsequent QDRO that orders more of your benefits at TIAA-CREF be awarded to the AP. On the other hand, if TIAA-CREF is providing information to the AP (and attorney for the AP) about the benefits you retained per the 2002 QDRO before a subsequent domestic relations order is signed by Dade County family law court and presented to TIAA-CREF, you have a legitimate beef with the plan administrator of TIAA-CREF over your privacy. Further, TIAA-CREF should be notifying you whenever it receives an order, or proposed draft order, that purports to affect your benefits.

Austin, Is there some reason that on this fine summer Saturday your waxing whimsically? Is there some elixir that accounts for it, or just giddy over the return of your avatar? Whatever your potion, it makes for a much more enjoyable read.

So all the IT/payroll guys would know is that EE A might choose a richer health coverage and more health flex account than EE B. Is that PHI? IT/payroll guys might conclude EE A is not as healthy as EE B. If EE A and EE B themselves work in the IT/payroll departments, this attenuated bit of into might be factored in an employment decision, such as whether they are promoted, let go, or get a raise (and how much). Personally identifiable information? Yes. Health information? I don't think so. I'm no expert on the definition of PHI but I think that's reaching, or as your colleagues suggested, way overboard.

ERISA Title I would apply to the nonqual plan you describe, unless excluded because of the type of employer (e.g., local governmental entity). Just because it does not qualify for tax advantages (an IRS issue under Title II) doesn't mean that the nonqual plan isn't involving the deferral of compensation promised by employer to the HCEs (a DoL issue under Title I). If the nonqual plan meets the definition of a top hat plan, certain disclosure and reporting requirements might be avoided or allowed to be satisfied in a very short-shrift manner. I suspect others on this Board will chime in with more info that can be of help to you.

That sounds risky to me given how quickly those daily penalties can mount up, and how inexpensive the penalty can be when voluntarily filing late. Does the company really have that many different welfare benefit plans, or just one plan that sports those various benefits? The question might sound strange, but the metaphysics of what is a 'plan' could help you out somewhat. Depending on the documentation of these benefits, the verbiage used in the summaries, the sign-up forms used and whether different three-digit numbers have been assigned to each one, you might have a single plan or two, with a variety of features. Since you haven't already filed Forms 5500, you might be able reasonably to cast the situation as just one or two, and just prepare and file late Forms 5500 (and pay penalties) for such. This would also make the Form 5500 burden in the future a bit easier. I think you definitely need to hire ERISA counsel and see what you can do. There's just too much at stake in those daily late penalties to pin all your hopes on EBSA not looking that close at annual reports for welfare plans.

Hi, Don, Yes, that regulation is most pertinent to the discussion, and is the basis of the following paragraph from my earlier post That relevance is why in this thread various posters have used the term 'fully insured' to describe the situation that must exist to be free of the nondiscrimination requirement. If only partially insured, then the remainder of benefits to EEs as reimbursed by the ER 'out of its pocket' is subject to the nondiscrimination rules, and if not observed, a portion or all of such reimbursements to the 25% highest paid EEs will be taxable income to them.Only if the plan is entirely, 'fully' insured can you ignore nondiscrimination under 105h and the benefits received by those 25% highest paid EEs be tax-free to them. In my view, that means that once a fixed premium is paid for a coverage period (CP 1) by the ER to the third party insurer, there can be no additional amount due from the ER for CP 1 based on the claims during CP 1. If the ER can be further obligated for payments for claims made during CP 1, then the arrangement is partially if not fully self insured and subject to 105h nondiscrimination. In determining the premium to charge for the next period of coverage (CP 2) the third party insurer can take into account prior claims experience (including those from CP 1) without causing the arrangement to be self-insured, even partially, provided the ER is not obligated legally to the third party insurer to continue the policy into CP 2.

A school district contracts with EEs on a 12-month basis each year. Some EEs' pay is stretched out over the entire 12 months while others over just the 9 month school year. Due to a payroll error, 1/12 of the cafeteria plan-elected annual health insurance premiums were held out of an EE's pay that was paid on the 9 month basis. Payroll should have had 1/9 of the annual amount of premiums held out each month, since the EE only receives a paycheck over those 9 months. All other similarly situated Ees had 1/9 held out of each of their 9 monthly checks for the year. The EE in question is willing to pay for the 3 months coverage, but that EE and the district's payroll are wondering if there is anyway to effect this in a tax-free situation. Any suggestions will be appreciated.

The DoL's position can be found at http://www.dol.gov/ebsa/Publications/qdros.html. In section 2-1, it is provided that If you reasonably articulate in detail in your request to the administrator of the plan why you need the info about the plan's loan provisions in order to draft an adequate QDRO and that the (ex-)spouse is in fact pursuing a QDRO affecting benefits under the plan, then the DoL's position is that the administrator should provide it to the putative alternate payee. As for encouraging the administrator to then provide the info if the administrator resists, I think you'd need to involve the regional office of EBSA, or ultimately file in federal court. The DoL's position is that the plan should not be subject to being hailed into the state divorce court proceeding. See part 1-2 of the linked DoL discussion.

Don's question about seems appropriate, but the inquiry should not stop there.To be non-taxable, the product must be 'fully insured'. For those federal income tax purposes, the question of 'fully insured' is a matter for the IRS and ultimately federal courts. The IRS has indicated there must be risk-shifiting to, not just an ASO contract arrangement with, the third party company. State insurance commissions regulate the selling of insurance. There is certainly an overlap with the tax issue. In the state I practice, a product is not insurance that must be registered/regulated as such unless it "is a contract whereby one undertakes to indemnify another or pay or allow a specified or ascertainable amount or benefit upon determinable risk contingencies." I take that to mean risk shifting as well. If in the registration process, the state's insurance commission undertakes a qualitative analysis of whether the product as to which registration is applied is in fact 'insurance' as so defined (rather than merely assuming all applications are made regarding what amounts to insurance, on the premise the applicant wouldn't go to the effort and expense of application if it wasn't), then the qualitative determination by the state insurance commission could be persuasive on the tax issue. The IRS could yet challenge the product as not meeting the tax definition. The question for tax purposes is who is relieved of the financial risk? It must not only be the employee, but also the employer for the nondiscrimination rules not to apply. The state may consider the Exec-u-Care product to be insurance for state regulatory purposes simply because Exec-U-Care is undertaking to indemnify the individual covered, regardless of whether it is Exec-U-Care or the employer that actually bears the brunt financially. In the tax scenario, whether Exec-U-Care or the employer that actually bears the brunt financially is critical as to whether the arrangement is fully insured and no discrimination rules apply (i.e., Exec-U-Care bears the financial brunt) or it is not fully insured and nondiscrimination is required (i.e., the employer is bearing part or all of the financial risk). If the arrangement between Exec-U-Care and the employer is that the employer will pay in 'premiums' to Exec-U-Care the entire claims costs (with or without an admin fee) experienced, then it is the employer that is self-insuring and Exec-U-Care simply administering the arrangement. If that is the reality of the product, then it 'looks, walks and talks' like an ASO contract, and the arrangement is self-insured and subject to the nondiscrimination rules for tax purposes. If the Exec-U-Care arrangement with the employer calls for the employer to pay a fixed premium, but also that employer will pay all or a part of claims up to or over a certain point, then you have the employer having retained some of the risk. That's partially self-funded, for tax reasons, and subject to 105h nondiscrimination. If on the other hand the amount the employer pays to Exec-U-Care is fixed, based for example on underwriting results factoring in prior claims experience, and Exec-U-Care takes it, financially speaking, from there entirely, then you have a fully insured product from a tax perspective. Either way, it might be 'insurance' for state law purposes and regulated as such because the risk is shifted away from the individual. But the tax inquiry is whether the risk is also shifted away from the employer. That may be something the state regulators are not concerned with.

A cafeteria plan could be designed to limit all contributions to be from the employer, provided that the employees each have the choice of tax-free benefits paid for with those employer contributions or cash/other taxable benefit. Those employees that choose tax-free benefits will have no taxable income by reason of those contributions, or by reason of having the choice provided that the plan complies with IRC sec 125. If the employees do not have a choice of cash/other taxable benefit, then it would not be a 'cafeteria plan' as described in IRC sec 125, and observance of the requirements of IRC sec 125 would not be necessary for the employer contributions and tax-free benefits to be tax-free. By the way, whether IRC sec 125 applies or not, ERISA might apply and need to be complied with.

I don't think entering kindergarten is a change in family status that in turn changes the number of dependents for which a mid-year change in election is permitted. The child is yet the EE's dependent, and yet under age 13. I once came across a cafeteria plan that allowed, as part of the sign-up sheet, the EE to select differing amounts of payroll deduction per each calendar month during the year (July, August, September, etc.) for day care flex account purposes. It was for the very type of situation you describe. They were seeking help to unwind it mid-year because of the payroll nightmare it created--we determined that they had to live with it through the end of that plan year.

IRC sec 4975(e)(2)(B) has the service provider language. If the bank does not provide services to the plan, apart from the fact it is lending to the plan, I don't think that would be a prohibited transaction. I think there needs to be another relationship. Otherwise, the interpretation would leave part of the prohibition statutes as mere surplus. IRC sec 4975©(1)(B) prohibits "lending of money or other extension of credit between a plan and a disqualified person"; ERISA 406(a)(1)(B) "lending of money or other extension of credit between the plan and a party in interest". If the transaction in question of possibly being prohibited could itself serve as the nexus that makes the other party a disqualified person or party in interest, then the statutory language could simply be "lending of money or other extension of credit by or to the plan". There'd be no need for mention of and definition of disqualified person or party in interest. An interpretation that gives effect to all of the verbiage is preferred to an interpretation nullifies part of the statutory language. The other nexus that could make the bank in your situation a disqualified person and/or party in interest, and thus the loan a prohibited transaction, could arise from a number of different existing relationships, including that alluded to by the question in wsp's post.