J Simmons

Check out http://www.dol.gov/ebsa/newsroom/pr041207.html also take a look at http://www.dol.gov/ebsa/newsroom/pr041707.html and http://www.dol.gov/ebsa/newsroom/fsabandonedplan.html

If it was a stock purchase, then Company A is now a subsidiary of Company C. Company A remains the plan sponsor (barring any kind of successor transaction and documentation). So I don't think the plan has been orphaned--it yet has a sponsor, Company A which is now owned by Company C. If Company C doesn't cause Company A, through the stock ownership, to take the steps necessary in the role of plan sponsor, EBSA might go after Company C. It was recently posted on the DoL's website that one of EBSA's enforcement activities was going after the owner of a corporation that abandoned the plan, to reimburse EBSA for it's costs and efforts in wrapping the plan up appropriately. If it was an asset purchase (assets but not liabilities), Companies C and B might be surprised to learn they may have 'bought' the plan too. The federal successor corporate liability standard is much lower than most states' standards to making liability stick to the successor. Can you just quit the plan? It depends on a number of factors. What does your TPA agreement provide? Do you know of any outstanding problems with the plan that you are responsible for? One option you might want to consider is contacting EBSA and involving it in the situation if Companies B and C won't take action.

I know that the day that FAB 2006-3 was issued and it was first explained that the notices for a quarter would not be due until 45 days after the quarter ends, a practitioner wrote the DoL officials listed as contacts re the FAB asking if the 45-day leeway was being allowed to give time for preparation because a valuation date in the quarter was required. That was almost 5 months ago and those DoL officials have not yet responded--so it is possible the issue of what valuation date is required is yet the matter of internal discussion at DoL.

Wedge1, It's not just a comparison of the tax burden later in life compared to now, but more precisely the tax burden you expect during that phase of your life when you'll withdraw and use the retirement savings as compared to the tax years you save into the plan. If you expect that your tax burden on these dollars you're saving into the retirement plan this year will be greater at the time of withdrawal than the tax burden on the dollars going into the plan this year, then for this year's retirement savings the tax burden factor would point towards Roth'ing this year's savings into the plan. Because your tax burden likely changes from year to year, you should re-evaluate this factor each year when making the decision to Roth or not your retirement savings. Also consider that if you do pre-tax savings for retirement, you yet have a powerful Roth option later: converting the pre-tax benefits to be Roth. Once you have the option to withdraw your benefits from the employer's plan, you can manipulate the timing and circumstances of the tax on non-Roth benefits (either through exercise of your right to leave the pre-tax benefits in that plan for a time or through rollover to an IRA). For tax years you meet some qualification rules, you can convert the pre-tax retirement benefits to be Roth IRA benefits. The upshot, you can pick from among a number of years to pay the taxes on those benefits, and can try to pigeon-hole it into the year you will likely have the least tax burden. You might wait until the market value of the benefits dips--you'd be paying taxes on a lesser amount, and the market value rebound post-Roth conversion would all be tax free if not withdrawn until permitted under the Roth qualified distribution rules. What if the market goes down even further after you convert to a Roth, under certain limitations, you can once do a Roth do-over and perhaps be taxed on benefits valued even at the lower market value. You might wait until right after a tax cut takes effect. Tax rates inch up over years, but usually drop dramatically when a tax cut is enacted. Generally speaking it's better to pay taxes at the low rates right after a tax cut than when higher as they inched up over years that you were saving as Roth 401k. Also, where will you be a resident at the time of conversion? Maybe you are working and earning the money while in a high taxing state and city, but plan to retire to Nevada or some other state where there's no state income tax. If you save into the plan on a pre-tax basis, you avoid those high state and city taxes where you are now living. Then wait until after you've truly established residence in the state with little or no income tax and pull the Roth conversion trigger. You could save a bundle. But residence for this purpose is not necessarily changed just by getting a new address, bank accounts and driver's license. Those matters factor in, but it's whether or not you are living in that state with the present intent to stay there indefinitely. Get an attorney's opinion of where your residence is before choosing the Roth conversion. In short, saving in the Roth mode is not as flexible and doesn't present as many opportunities for tax savings as saving in the pre-tax mode does because of the Roth conversion option later--but depending on your individual situation, saving in the Roth mode might yet be better for you.

Hi, Francis, What pax means by governmental plan depends on the ownership of the hospital. Many hospitals are owned by governmental entities, like counties or cities, though others are 'privately' owned. ERISA generally does not apply to plans if the employer is governmental. Governmental bodies, for this purpose, usually have the authority over those living and/or property located in a geographic area to impose and collect taxes, and are managed by a person or board that is elected by those living in the geographical area. In some states, there are hospital districts with this type of taxing authority and electing of officials. But a state, county or city owned hospital would also be governmental. The public policy behind exempting them from ERISA is a notion of respect by one governmental body for another, here it would be the federal government deferring to the state and local governments to set their own policies for retirement and other employee benefits. Legally, this concept is known as comity and in ERISA is manifested in the exemption for governmental employers. If the hospital you work for is owned by a local government body, and ERISA does not apply, then your state's laws would kick into play. Depending on your state, this might actually make your quest for parity of benefits with what those that were once Hosp B benefits easier. In other states, harder--for example in some states, there may be no statutory, regulatory or case law that addresses the issue. If ERISA does not apply, it would be important to hire an attorney that is familiar with the laws of the state where the hospital is located.

The 'Capital Accumulation Plan' terminology sounds like a defined contribution plan. If so, then you ought to be able to restate it as a 401k, whether the Capital Accumulation Plan did or did not in fact have a 401k feature. Only a review of the current plan document will let you know for sure what type of plan you're dealing with.

The 10% penalty may be the least of your concerns. You only have until the end of the next year to correct ADP testing falure for a plan year in order to avoid plan disqualification by reason of the ADP failure. If the 2005 ADP failure was not corrected by the end of 2006, you have a serious plan qualification issue and need to involve the IRS in the correction.

Outdated? No. It is only permissible in the manner, if any, described in the plan document. The more usual plan provision tries to favor those yet employed on the last day, so it does away with the year end requirement but only credits those that quit before the last day of the year with 1 hour of service per each week worked in the year before they quit. Those yet employed on the last day of the year but who had less than 1,000 hours of service are credited with their actual hours. Then as the hours threshold is dropped to pick up the minimum number of additional participants necessary to pass minimum coverage, it generally favors those employed on the last day of the plan year but with fewer hours over those who quit before year's end but have higher levels of actual hours. This method actually saves money because it picks up and requires a contribution for employees that generally earned less than those that had more during the year, but quit before year end. This method is also more attractive to employers--they tend to have a greater aversion to picking up an employee that quit than they would have to picking up an employee who is yet working, albeit "part time". Those picked up in this process are subject to the same vesting rules as those who otherwise had a benefit accrual year. If those picked up in this process receive a profit sharing contribution allocation and the plan imposes a vesting schedule, then the vesting schedule applies to the allocation of that contribution to any picked up employee. If the picked up employee receives a QNEC and/or safe harbor match, he or she is 100%, immediately vested in it. I would either amend to have a provision like the one described in the first paragraph--if that isn't what the plan already provides. Or drop both the year-end employment and the hours to just 500, and you'll by definition satisfy minimum coverage.

The premiums for individual policies listing the employee as the owner may be a proper expense reimbursable under an HRA, unless the HRA document prohibits that. However, individual policies often do not include group health plan requirements, and may pose problems for the employer to comply with HIPAA, COBRA, PDA '78, etc. If a required coverage is not provided by the individual policy, is the employer liable to cover the expense? Probably. There is a very narrow opportunity to design a payroll reduction policy that meets IRC 125 but does not rise to the level of a 'group health plan' for the definitions of HIPAA, COBRA, PDA '78, etc. However, that would provide a tax benefit only if the employee bears the expense, not the employer as is the case in an HRA.

Francis, In answer to your follow-up question, each and every fact and circumstance would need to be taken into account. Those you mentioned are not determinative, but might have a bearing. With different plans, the ER may choose different eligibility and service parameters, within the legal guidelines that apply to each specific kind of plan. What Effen mentioned, i.e. what Hosp A EEs were told in 1994, would be important--particularly what was presented to them in writing. For example, if Hosp A EEs were provided, and perhaps even signed, statements that they understood that their Hosp A employment was coming to an end, and that new employment with the resultant hospital was being offered to them would be some key evidence of the true nature of things, both as to how the 'merger' was truly structured and what was disclosed to employees. As Effen noted, what is sometimes called a 'merger' is commonly structured as a purchase of one business entity of the assets and/or business concern from another entity. There might be a problem lurking under the fact scenario you've sketched out. It might be worth your while to contact an ERISA litigator to do some investigation into what took place.

Francis, from your sketch of the facts, it would not necessarily be a violation of ERISA for this differential treatment. While the hospitals merged and had a new name after that, it may have been structured that Hosp B's legal entity was continued, albeit with a new name. Employment with Hosp A may have ended for its workers, and Hosp B then extended offers of new employment with it to old Hosp A workers, rather than their employment being 'transferred' from Hosp A to Hosp B. Hosp B's plan recognizes only service as an employee of Hosp B, and so if you only became an employee of Hosp B on 1/1/94, you'd only have service under Hosp B's plan from that date. And you've indicated that you yet have benefits under Hosp A's old, frozen plan (which Hosp B may have assumed the roles and responsibilities of sponsoring employer and plan administrator). I think you'd have a difficult time getting such a scenario recast, legally, as your employment having continued. Even then, you'd have to demonstrate to a court's satisfaction that there was a disproportion of non-highly compensated employees on the Hosp A side of the ledger when compared to those on Hosp B's side, just before 1/1/94, and that the disproportion is great enough to be considered a violation.

In general, if employee turnover is causing cross-testing problems, you might have too restrictive of eligibility and/or benefit accrual rules in your plan design. If you impose a vesting schedule, you might consider relaxing those eligibility and benefit accrual requirements. More of the newer employees will be brought into your testing pool, and if they are younger, lesser earning employees than the owner-employees and others you are trying to favor, this will help you pass testing. At the same time, the dollars put in for these newer employees won't be leaving the plan if those employees quit after a short stint. Another design angle to consider rather than perhaps abandon cross-testing altogether would be to amend the contribution provisions to allow for a contribution to be designated, when made, to be an "integrated contribution" rather than for any cross-testing grouping. If for a year the testing shows that integration would be better than cross-testing, make no contributions for any cross-tested grouping per se, just make an "integration contribution" for that year that is allocated across all those eligible for the plan and for whom the plan year is an accrual year. This way, no amendment is required. During the GUST II restatement process, 7 or 8 different IRS district offices challenged this design when applications were made, claiming it did not meet the definitely determinable allocation formula requirement. However, each challenge was dropped and the design approved after pointing out some of the Service's internal memos on the topic. Also, I've incorporated this design into my DC prototype for EGTRRA and the Service did not challenge this when they gave me their punchlist of changes for the prototype a few months back.

Your are correct as to the rollover in 2007, the year of death. As for 2008, I understand the logic but I'm not sure the IRS pronouncements would allow for the first LE RMD to come out of the IRA rather than the QRP. The reason is that if no LE RMD for 2008 comes out of the QRP, then it might be that the RMD is the 5 year one and you'd not have the option of LE RMDs out of the IRA. It shouldn't matter whether the RMD for a year comes out of the QRP or the rollover IRA, but that's how I read Notice 2007-7. What you could do, even if the QRP is not cooperative, is to determine the LE RMD for the year of rollover yourself, and then elect a rollover to the IRA of only the remainder and direct payment to the nonspouse beneficiary of the rest (i.e., of the amount to satisfy the LE RMD for that year). As for 2nd - 4th Year After Death (2009 - 2011), Notice 2007-7 indicates that the LE RMD for the year of rollover needs to come from the QRP. See paragraph above. As for 5th Year of Death (2012), you are correct that there can be no rollover--unless, of course, each of the LE RMDs for years 2008-2012 have been made from the QRP.

Yes

My understanding is that both Examples 1 and 2 are allowable, provided the QRP (qualified retirement plan) is amended to permit the nonspouse beneficiary to have a direct rollover. RMDs from the IRA, for years after the rollover, would have to be based on the same life expectancy (the employee's or the nonspouse beneficiary's) as were the RMDs from the QRP.

I think that the limit on HSA contributions that ties to the deductibles would be driven by the lower of the deductibles of the HDHP or or the FSA that are used in combination. So if you have a HDHP with deductibles of $2600 for employee-only and $5,150 family used in combination with an FSA with deductibles $1,100 employee only, $2,200 family, then the limit on HSA contributions due to deductibles would be keyed off of the lower FSA deductibles ($1,100 employee only, $2,200 family) not the higher HDHP deductibles ($2600 for employee-only and $5,150 family).

Fees for truly settlor functions (e.g., advice about plan design and its impact on the sponsoring employer, advice about whether or not it is in the best interest of the sponsoring employer to terminate the plan at a certain point), no. Reasonable fees necessary for implementing and operating the plan, and to update its documents for legal developments, possibly.

Carolyn, I think on your scenario, the post-deductible FSA could be designed to pay otherwise qualifying medical expenses to the extent they exceed the statutory, sec 223©(2)(A)(i) deductibles ($1,100 employee only, $2,200 family) for the year, despite the fact that the employer's HDHP deductibles are $2600 for employee-only and $5,150 family. However, if so designed, the HSA contributions will be limited by the lower sec 223©(2)(A)(i) deductibles ($1,100 employee only, $2,200 family) rather than the higher HDHP deductibles are $2600 for employee-only and $5,150 family.

Blinky, Thanks. I was thinking that giving "the NHCE's a second, duplicate gateway if we tried that" would make the amendment pass nondiscrimination and coverage. Maybe I was too oblique. On top of the 5%-of-pay the NHCEs already receive on the 'initial' allocation, we'd be giving them another, second 5%-of-pay as part of the -11g amendment (so the NHCEs woud receive a total 10% of pay for the year). Would that satisfy the nondiscrimination and coverage issues? Would the amendment allocation amount not be deductible for PY 2006, the plan year being tested, even though that's when the money that would be allocated per the amendment was actually placed into the plan?

Facts: On 1/1/2006, a sole proprietor with 3 employees and a calendar year x-test k plan incorporates, and amendment is made to plan for the corporation to succeed the sole proprietor as the sole sponsoring employer. However, after 12/31/2006, the plan's advisors learn that the sole proprietor only took a small chunk of his earnings as W-2 wages from the corporation, running the rest 'outside' of the corporation, in essence as a sole proprietor. (All the compensation for 2006 for the other 3 employees was W-2'd from the corporation.) Contributions were made to a suspense account held in the plan's name, throughout the year. Totaling about $50,000--about the same amount that had been contributed for 2005. Giving the other 3 employees their 5% gateway (about $5,500), the owner snags about $18,000 through x-testing. That leaves about another $26,500 having been contributed, and as yet unallocated. Under 404 and given the total corporate payroll, only $34,800 is deductible. I was thinking first to have the $15,200 ($50,000-$34,800 deductible limit), and proportionate share of earnings while in the plan, returned to the corporation as a mistake of fact under IRC sec 403©. We can boost the allocation for 2 of the 3 NHCEs (two separate groupings of them) so that the NHCEs, in the aggregate, would receive about $7,000, and the owner (based just on the W-2 earnings) receiving $27,800. That looks like the cleanest thing to do from my perspective. I was wondering if anyone thought we could do an 11g amendment to add the owner's sole proprietorship earnings for 2006 into consideration. It looks to me like we'd at least have to give the NHCE's a second, duplicate gateway if we tried that--even if it were otherwise doable. Any thoughts or other suggested approaches to correct the situation?

MARYMM: I think you got that right.

Bjorn, FYI, there is a corollary in the law. When a bank accepts and acts on a forged check, and therefore makes a payment to the forger and deducts the funds from a depositer's account, the law generally favors the depositor against the bank. That is, the bank has to restore the amount to the depositor's account, and the bank is left holding the bag if it cannot recover against the forger. The rationale is that between the depositor and the bank, the bank was the one in a position to have prevented the forgery from succeeding. Therefore, the bank should have to stand the loss, not the depositor, if the $ cannot be recovered from the forger. Here, as between you and Fidelity/AT&T, they should have to bear the loss (not you) if recovery cannot be had from your ex-wife. Fidelity/AT&T should restore your 401k account, and be subrogated to the claims against your ex. Also, that remedy would give you back the tax advantages of having those funds in the 401k. Your collecting from your wife won't do that.

I'm reviewing a DRO for a plan. The DRO awards a percent to the AP as a separate interest. The DRO also specifies that the AP is to be treated as the 'spouse' of the portion awarded to the AP (rather than the benefits retained by the participant). There is no significance to DRO specifying that the AP is the 'spouse' of the awarded benefits, because no QPSA/QJSA rights apply to awarded benefits. It would seem that since the QDRO concept is an exception to the general rule of anti-alienation from the participant, that the QDRO ought not be interpreted expansively. So on top of the literal reading, there's reason that the plan would also not presume to apply this 'spouse' treatment for the AP to the benefits retained by the participant. Does this general rule of legal interpretation apply to QDROs? This provision in the DRO does not preclude it from being a QDRO. Since the plan merely reviews the DRO to determine if it qualifies as a QDRO, it would seem that it is not the place of the plan to bring this error to the attention of the alternate payee and the participant--the participant may not be too happy about the plan doing so and thus setting in motion a course of events that might lead to the participant's rights to the retained benefits being encumbered by the AP fixing the QDRO and being the 'spouse' as to those retained benefits. Is there a duty on the plan to bring the error to the attention of the AP?

I think you'll need to add a description of those limitations to the quarterly statements (and possibly individual vesting information, the plan's integration formula if applicable, the diversification-necessary-to-long-term-retirement-security statement and DoL weblink, if these items are not already in quarterly statements to be provided).

The statutory language that gives the QDRO exception to the rule against alienation of the benefits away from the employee reads: "Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order." ERISA 206d3A. So it would appear that a payment that doesn't square with the QDRO is a violation of the statute and the statutorily required plan language. EPCRS would appear needed from a plan qualification perspective. The employee would also be someone aggrieved by the off-QDRO payment since it's an alienation of the employee's benefits for which the exception does not apply. As pax wrote, the plan should have its own ERISA counsel--to help fix this one.