J Simmons

If the employee may choose to have employer funds applied between deferred taxable income (401k or 403b benefits) and a deferred tax free benefit (say health benefits in retirement), but not cash now or any other current benefit, then I would think the choice should not under constructive receipt cause taxation for the employee now. That's because the employee could not choose to receive anything currently. The implications for the 401k or 403b plan, however, would probably be true employer contributions (not merely deemed 'employer contributions' the expense of which are actually borne by the employee through salary reduction). This is because of no current "cash" option. Since those employees that would choose the retiree health benefits would not receive the employer contribution to the 401k or 403b plan, you'd likely have some interesting nondiscrimination and perhaps minimum coverage issues to deal with--but they might not be insurmountable. The choice, albeit now not later, might cause those choosing the retiree health benefits to be taxed on those at the time they could have withdrawn and been taxed on benefits from the 401k or 403b plan. That's because of the choice, and thus constructive receipt. They chose the retiree health benefits, but could have went the other route, a contribution into the 401k or 403b plan that would have been taxable on withdrawal. If the choice now is couched into the context of a 125 plan attempt, that might not give those that choose the retiree health benefits cover from taxation at the time 401k or 403b plan benefits could have been withdrawn. The reason is that the cafeteria plans have to be primarily for active employees, and only incidentally provide benefits to former employees, and there's the general prohibition against deferral of compensation using a 125 plan. This is my first time taking an analytical whack at such a choice, so the analysis might not be quite as developed as I would normally like.

The court in Express Oil Change noted that the IRS argues persuasively that because [Express Oil]'s employees had the choice of accepting a salary reduction in exchange for health insurance coverage or a higher salary, they effectively assigned the amount of the salary reduction to plaintiff, controlling that income. Therefore, pursuant to the assignment of income doctrine, [iRS] asserts that the salary reduction amount constitutes gross income to the employees who entered into a salary reduction agreement. See Caruth Corp. v. United States [89-1 USTC ¶9172 ], 865 F.2d 644, 648 (5th Cir. 1989) ("assignment of income doctrine holds that one who earns income cannot escape tax upon the income by assigning it to another"). The question in this case, however, is not whether the salary reduction amounts constitute gross income to the employees, but rather, whether they constitute "wages" for purposes of income-tax withholding. As [Express Oil] correctly notes, an employee's gross income is not the same as his "wages" for purposes of income-tax withholding, and "many items [that] qualify as income ... are not wages." Central Illinois Pub. Serv. Co. v. United States [78-1 USTC ¶9254 ], 435 U.S. 21, 25 (1978). The court that found such amounts were not 'wages' for tax withholding and FICA purposes found persuasive the IRS arguments that these amounts would be taxable income to the employees (though that was not the issue before that court). Treas Reg sec 1.125-1, Q&A-9 includes the following explanation-- Section 125 thus provides an exception to the constructive receipt rules that apply with respect to employee elections among nontaxable and taxable benefits (including cash). These constructive receipt rules generally provide that an individual will be required to include in gross income the taxable benefits that he could have elected to receive if the individual had the opportunity to elect to receive or not to receive the benefits even though both the opportunity to make this election occurs and the actual election is made before the benefits become currently available to the individual. Section 125 does not, however, alter the application of the constructive receipt rules to a situation in which benefits become currently available to an individual even though the individual elects not to receive and does not actually receive the benefits.

rdd, From your posts, it sounds like the plan had 'divorce papers on file' before they started the benefit payments to your husband. However, a key fact will be whether the first payment of benefits to your husband preceded Fidelity (or the benefits department) receiving the QDRO from the ex-wife in August. As Mike pointed out, that will be important. You need to get that sorted out quickly, and you need to continue to be proactive about this. Ask for a copy of the written QDRO processing procedures of the plan, as required by ERISA 206(d)(3)(G)(ii)(I). It may or may not specify that the plan was to put your husband's benefits payout on 'hold' pending resolution of the divorce rights of the ex-wife to part of your husband's benefits. Begin an e-mail dialogue with the benefits office and Fidelity, asking what the normal procedures for THIS plan are regarding a hold, what type of order or mere notification received will trigger the hold, and for how long. Then follow this with questions probing into more detail than the "non qualified response" gave for denying the QDRO attempt from August. The more detail you have, the better equipped you'll be and the more times they repeat their reasons, the firmer they will be in defending them against the claims of the ex-wife. You also want to ask for the plan document provisions about how much discretion the plan administrator is given with respect to interpreting the plan and deciding claims. Most plans give broad discretion. Then, you might want to put the benefits office and Fidelity on notice that you and your husband will not accept any reversal of the determinations made in August and September, and suggest that before the plan kowtows to the state divorce court (that will likely continue to favor the ex-wife), the plan ought to interplead the issue into federal court. There, if the benefits office/Fidelity's decision was a reasonable one, it will likely be upheld by the court--even if the ex-wife's position is also a reasonable one and perhaps viewed as a more persuasive one. The court will defer to the plan administrator's decision, provided the plan gave broad discretion to the plan administrator and the plan administrator's position is a reasonable one.

Kim, I agree with your former (aggressive) employer. Once 30 days and the proposed distribution date specified in the distribution notice have passed, you can proceed with the force out.

Thank you for the responses. The claim with the PA is the stage we're dealing with right now. All the benefits accrued to the employee were paid to him in a lump sum, upon only his signature. The widow has lodged a claim for surviving spouse benefits. We're at the initial claims determination stage. The QJSA was, prior to the amendment of this plan, stated in the plan documents to be the normal form of benefit, not just an optional form. I think the real determinant here will be whether the spousal rights attached when and as the benefits accrued (then the widow is probably entitled to a survivor benefit) or only attached at the time of payout (then the employer won't have to pump more funds into the plan just to pay survivor benefits, given that the plan has already paid out all the benefits that accrued to the now deceased employee). The mere concept of a QDRO suggests that ERISA recognizes that spousal rights accrue when and as the benefits accrue, but that is a reflection of state community/marital property rights (albeit accruing when and as the benefits themselves do). The QJSA/QPSA rights are as to a form of payment. They only impose requirements for, among other things, spousal consent at the time of payout. That cuts in favor of the plan--the rules in the plan document at the time of payout specified lump sum as the normal form of benefit.

Did Express Oil Change go so far as saying that the employee would not be taxable, or did it merely decide that the employer did not have a withholding obligation?

No, there are no MPP benefits involved; the widow's attorney is using those rules by analogy. His argument is if you can't merely strip MPP benefits of their attributes by amendment putting them under a profit sharing plan and documentation, how can you strip QJSA attributes that attached to profit sharing benefits when and as they accrued merely by an amendment to the plan documentation.

To expand just a bit further on what the widow's attorney is saying--and it seems he has experience with this issue--he cites to ERISA 205(b)(1)©(iii) requiring for the 'profit sharing exception', as to a participant, that the plan not be a transferee of benefits for a DB plan or other plan subject to minimum funding. He argues that a mere amendment cannot strip these spousal rights that have once attached to benefits accrued before the amendment. He points out that merely amending a money purchase pension plan to be or merging it into a profit sharing plan will not 'divest' those money purchase benefits of their attributes as such, even citing to Rev 94-76, and then asks if the employer can't denude those money purchase benefits of their attributes by folding them into a profit sharing plan what authority is there that the employer can denude the pre-2002 amendment benefits of the spousal right attributes by amending the plan? Again, it's not the tax qualification, but the ERISA protection of rights that he's barking about.

Thank you, Bird and Rcline46, for your responses. The situation that I'm facing is a plan I've been advising since last summer was set up in the late 1970s. In 2002, it was amended to eliminate the QJSA in favor of just a lump sum payout option. In 2005, one of the employees retired and elected payout of the lump sum at that time. No spousal consent was required, and he was paid the lump sum. He died a few months ago, and his widow's attorney is making a lot of noise. He has a 'working knowledge' of ERISA and his position is that since the widow's REA rights attached to the benefits that accrued pre-2002 amendment and she did not sign a consent or waiver, she's entitled to a REA survivor benefit on the pre-2002 amendment benefits. It's not the tax qualification of the plan that is in issue, but whether the sponsoring employer could take her spousal rights away through amendment. His claim is based on the plan document having provided, while the benefits accrued, that payout could not be made to the employee without the spouse's consent. I've taken the position that the spousal rights do not attach prior to the time of payout to or the death of the employee. At that time, the plan did not provide the QJSA as a form of benefit, normal or optional, and that the spouse's consent to payout of benefits AT THAT TIME was not necessary. I fear that the plan will be incurring substantial litigation costs unless I can locate some authority for my position.

Anyone have any insight about this?

If the choice is health benefit (tax free) or contribution to 401k plan (taxable, albeit later), constructive receipt would make the health benefit taxable by reason of the choice, per constructive receipt. You'd need a 125 plan to keep the health benefit nontaxable, despite having the choice. The problem with a 401k contribution is that it cannot be a 125 plan option because it is deferred compensation (as would be a contribution to a 403b annuity). From the 401k or 403b side of this situation, those vehicles give an employee choice of when compensation will be taxed, now or later. Not a choice of later or never.

Good point on 318(a)(3), and that would make each of the doctors' separate entities controlled subsidiaries of Overhead--a control group. Each of the doctor's entities could have its own plan without necessarily covering the Overhead employees. So long as it can pass the applicable tests, a plan can cover less than all employees. Through permissive aggregation by the doctor's entity's plan with the Overhead plan, the doctor's entity's plan might be able to demonstrate nondiscrimination (401a4) and minimum coverage (410b). All the employees of the control group--Overhead's employees and all the doctors--would have to be taken into account in testing under each plan. Through permissive aggregation, a doctor's entity's plan could "play off" of the contributions allocated to the other employees under the other plans of the control group. If a doctor's entity's plan is a defined benefit plan, then that plan (given the numbers of employees you have) will likely have to cover some of the Overhead employees in order to meet minimum participation. 401a26.

and, the trustees of the 401k plan would likely be legally obligated to pursue repayment from you even though it was taxable income to you in the year of default. Repayment would establish tax basis, so you wouldn't have to pay tax a second time. But you'd lose the advantage of paying the income on that $50,000 later rather than now. Another angle might be to take a regular distribution (if you've experienced an event that, under the terms of the plan, permit payout), elect to roll it directly into an IRA, and then withdraw from the IRA. Still taxable, but you avoid the 20% withholding.

I think you can, but you'd pay taxes on the 'unrelated business taxable income' generated from the debt-financed property (i.e., the leveraged margin account).

Troy, My experience in representing clients that have had DoL ERISA audits is that, if it is a 'spot' check, they are primarily assessing the attitude towards compliance and whether there's a real effort by the employer and plan officials to meet their compliance responsibilities, given that what they do affects employees' retirement savings. I had an employer first contact me after receiving the audit notice. They brought 4 banker's boxes of records to my office four days before the audit. It was a mess. The employer's attitude about complying with plan rules was much less than stellar. I basically dropped all my other projects, compiled the records as best I could into the categories of documents listed in the audit notice and had them in piles on a table and on the floor around the perimeter of a conference room, each pile labeled and each in chronological order. Then, the day before the audit, I took my new clients to the 'woodshed' and had them quite frightened. (There was a lot of 'holes' in the records.) Then I told them we needed to look cooperative and helpful, without looking obsequious. During the audit, the DoL rep asked for certain numbers to be assembled (the DoL rep had discovered a couple of those 'holes'). I put my clients to the task of doing so in another room, while I continued to sit across from the DoL rep and retrieve whichever pile she asked for. When the numbers were crunched and presented, the DoL rep looked at them, pointed out a couple of problems, then gave me and my clients a 5 to 10 minute explanation of the need for compliance and being vigilant. Then she covered a list of 6 or 7 items she wanted corrected, asked that we send her a letter representing that such were corrected and the mistakes wouldn't be repeated in the future and that she would then send a no-action letter closing the audit. She did. While I can tell you this, I would first of all look at the Forms 5500 filed over the last 4 or 5 years for the plan being audited and see if anything looks odd or unusual. That might be what flagged this plan for audit. Good luck.

From the facts you've drawn out, it is probable that you have 4 affiliated service groups (ASGs). ASG one is between Overhead and A. ASG two is between Overhead and B. ASG three is between Overhead and C. And ASG four is between Overhead and the controll group D&E (their LLC and S Corp). Any plan that benefits anyone in an ASG must take into account all of the employees of any component member of the ASG, when testing. (Diagrammed out with Overhead in the center and the other four around it, you could draw separate elipitical circles including Overhead in each one and only one of the A, B, C or D&E for each--looking like a 'daisy', ergo, arrangements like these are sometimes referred to as a daisy wheel of ASGs.) Overhead has no HCEs, and thus has no problem demonstrating nondiscrimination and therefore should not permissively aggregate with any of the other plans you mention. If a plan of A, B, C, or D&E have the same plan year as Overhead, then that plan may specify in its governing documents that such plan is permissively aggregating with the Overhead plan. Depending on the testing method and the contributions for the Overhead plan employees, the permissively aggregated plan of the doctor(s) might pass. For example, suppose that 5% of pay is contributed for all Overhead employees into the Overhead plan, that at least 3 of those 5 percentage points contributed is 100%, immediately vested and a 401k safe harbor notice was posted for that plan for the year. If the B plan has the same year as the Overhead plan and the B plan specifies that it is permissively aggregated with the Overhead plan, then the B plan can permit B to make 401k elective deferrals to the B plan up to the 402g limit ($15,500 for 2007; $20,500 if at least age 50 by year's end). B is an S Corp, so it could also have a cross-tested formula and give B more (the gateway is satisfied in the Overhead plan with the 5% of pay contribution assumed for this example). So B could perhaps receive in employer contributions from the S Corp to the B plan another $29,500. Because A is a single member LLC, even if the A plan is on the same plan year as the Overhead plan and the A plan specifies that it is permissively aggregated with the Overhead plan, A would likely be limited to just the 401k elective deferrals--concerns for nonqualified CODA given recent informal comments by IRS officials.

DAHO, Right now the company is benefiting from the savings in health care premiums for 25% of the employees choosing not to take the insurance coverage. If you allow those employees to apply those dollars that the company would have paid for their coverage (had they not waived it), to other benefits, then the company will be paying for those other benefits what it currently is saving in premiums due to those waivers. It can't be cost neutral compared to the current state of things if the company is going to provide other benefits for as elected by those employees waiving the health insurance. However, it may be much more equitable in the treatment of those 25% of employees compared to the other 75% for whom the company is paying their health insurance premiums. If the leadership team wants to keep its arrangement for paying health insurance premiums cost neutral, but give employees more flexibility, it could add options that would have be funded by electing employees to compensation reductions equal to the cost of these other, elected benefits. That could be the payment of premiums for certain other types of insurance (disability, group term life, or other health like dental, vision, supplemental health), medical flex accounts, and/or day care flex accounts. That would require a "full" cafeteria plan subject to IRC 125. What you have now may not be an IRC 125 cafeteria plan. You only have to deal with IRC 125 if the employees have an option between cash (or some other taxable benefit) and a tax-free one (like payment of premiums for health insurance coverage). Right now, if your employee declines the health insurance, he or she doesn't get anything else. What you would likely have is a plan governed by IRC 106a.

Profit sharing plans are not required to have the QJSA and QPSA forms of benefits, but many have had in their early history. The 411d6 regs were changed a few years ago to permit the elimination of certain forms of benefit payout. Many profit sharing plans have since been amended to remove the QJSA/QPSA forms of benefit, as they may do so without such disqualifying the plan from tax advantages. But what about the spouse whose REA rights were stripped by such an amendment? Aside from the tax qualification issue for the profit sharing plan, if the plan as amended paid out all of the benefits in a lump sum on just the employee's signature, does the spouse have a valid claim against the plan for the survivor benefits after the employee dies?

Your client is not prevented from having the 401k because his wife's business has the SIMPLE IRA plan. Rather, it is the wife's business that cannot have a SIMPLE IRA for a year that her husband's business had or has a 401k. IRC 408p. It's the SIMPLE IRA that needs to be undone. That would require re-doing tax returns and W-2s, to eliminate the claimed deductions. Implications to your client's 401k grow out of the fact that his wife has a business, and presumably employees. They have to be taken into account in the nondiscrimination and minimum coverage testing of your client's 401k. That might cause your client's 401k to be disqualified. As for the prior TPA's position that the 401k could be combined with the the SIMPLE IRA, it can't because there are no proper SIMPLE IRA accruals in the same year that the 401k existed. Barring that, I'd suspect that the 401k plan does not provide, in its documents, that it is permissively aggregated with the SIMPLE IRA.

Don, if you want to contact me offline (jsimmons@ida.net), I'll provide you some more info re these questions. John

My understanding is a MERP under 105h and not part of a 125 cafeteria plan can be accessed by the employee to reimburse for either health insurance premiums or other out-of-pocket medical expenses. A medical flex account that is offered under 125 (and governed by 105h as well) cannot, however, be used to reimburse for or otherwise pay premium costs--just non-premium, out-of-pocket medical expenses.

Hey, Don, I do not think the relationship between premiums charged and deductibles, per the example you posit, would be discriminatory. If there are differences in the amounts of the third-party insurer's premiums that are subsidized (paid) by the employer, the amount paid on behalf of each employee would yet be tax-free to that employee despite the variances. IRC 106(a). Under HIPAA nondiscrimination (ERISA 702), no group health plan may discriminate against employees or beneficiaries based on any adverse health factors. And, a group health plan must treat uniformly all similarly situated employees. The regulations provided that "if individuals have a choice of two or more benefit packages, individuals choosing one benefit package may be treated as one or more groups of similarly situated individuals distinct from individuals choosing another benefit package." DoL Regs 2590.702(d). No employee that has adverse health factors and picks a certain deductible/premium combination (a 'benefit package') should be required under the group health plan to pay more of the premiums than any other employee choosing that same deductible/premium combination. But the fact that employees choosing a certain deductible/premium combination pay more than those that choose a different deductible/premium combination does not mean that similarly situated employees are not treated uniformly. Differences based on other classifications than which option employees choose are also permitted. The test for classification is a "bona fide employment-based classification consistent with the employer's usual business practice", as determined on all relevant facts and circumstances such as whether the employer uses such classification for other, non-benefit purposes. DoL Regs 2590.702(d)(1). The quote from oriecat includes examples set forth in the regulation of such classifications that may, given all the facts and circumstances, be permissible. It's also interesting to note that the uniform-treatment-of-similarly-situated-employees requirement does not apply to beneficiaries. With beneficiaries, it is enough that differences in treatment simply are not based on an adverse health factor. DoL Regs 2590.702(d)(2)(i)(E) and (ii). Even if similarly situated employees are uniformly treated, the group health plan's cost-sharing requirement must not be "directed at individual participants or beneficiaries based on any health factor of the participants or beneficificiaries." DoL Regs 2590.702(b)(2)(i)(B); see also DoL Regs 2590.702(d)(3). Suppose you have a plan where the employer pays $400/month towards the premiums of all employees that choose either a low deductible/high premium option or a high deductible/low premium option. Most of those with adverse health factors opt into the low deductible/high premium option, while the healthier opt into the high deductible/low premium option. Reviewing that data, the employer then decides to cut its subsidy just for the low deductible/high premium option to $150/month, keeping it at $400/month for the high deductible/low premium option. Since such a modification diminishes the subsidy based on adverse health factors, this would likely be a HIPAA nondiscrimination violation. DoL Regs 2590.702(d)(4), Example 5. Of course, if the differences are a pretext for any of the other discriminations mentioned in my March 14th post in this thread, that too would be problematic.

I understand the Service's position is that a cross-tested plan by a non-corporate employer cannot specify one self-employed person to be a cross-tested group. That would be a non-qualified CODA. What about a categorization that given the data for a given year results in just one self-employed person qualifying for that categorization, but may in other years result in two or more self-employed persons being in that group?

Exclusion of the health insurance premiums paid by the employer from the employee's taxable income does not depend on the employer so paying the premiums for any other employees. But the employer would violate other laws if the premiums it pays leaves those with poor health condition having to pay a greater premium than those with better health (or similarly runs afoul of the other rules referred to in my March 14 post in this thread). A 'cut' on the basis of health status, against those in poor health, violates HIPAA nondiscrimination.

If the first breakout of groupings of physicians is referring to the profits of the medical practice, per a lockstep partnership agreement, for example, then that would be the factor of independent significance that Bird is concerned about. I think Bird is correct about the second breakout of groupings of owners. It looks like a nonqualified CODA.