J Simmons

Caddieadmin, Vesting years are usually earned per 12-month measurement period, and whether the employee had the requisite (1,000 or less, as specified in the plan document) during a 12-month measurement period. The answer depends on your reference to "1st year" and "2nd year". Is that measured by anniversaries of the date he or she began working? If so, then depending on the date of hire, parts of the employees 3,000 accumulated hours fall into two or three 12-month measurement periods. If the necessary number of hours as specified by the plan to earn a vesting year happened in each of the three 12-month, that person would have three vesting years. If your reference to "1st year" and "2nd year" is to the 12-month measurement periods for vesting purposes, then he or she would probably have only two vesting years. The reason I say probably is you could have a more generous method drafted in your plan documents. It could be one that gave the employee the greater number of years from either the method described above, or simply on accumulation of every 1,000 hours worked he or she is credited with another vesting year.

I agree with QDROphile and leevena--since you've indicated that the employee made a 12-month commitment. The distinction they are drawing is between the cafeteria plan and the health insurance coverage. The cafeteria plan is a mechanism for paying for the health insurance coverage. The cafeteria plan is distinguishable from the health insurance coverage itself. An employee can only make a cafeteria plan change (i.e., a change in election for payroll reduction and to which benefits the reduced amount will be applied in payment) mid-"period of coverage" if there is (and then only to the extent consistent with) certain changes in status spelled out in the regulations. Regs 1.125-4, 1.125-2, Q&A-6. Reg 1.125-1, Q&A-8 provides that a "plan may provide that elections may be made at any time" in accordance with certain guidelines (see Q&A-15) to avoid taxation due to constructive receipt. It won't be an 'election' if the employee can change it after the period of coverage has begun but before it has ended (except for a Reg 1.125-4 specified change in status mid-period of coverage). If the employee is otherwise permitted to revoke the 'election' after the period of coverage has begun but before it ends, that power of revocation is constructive receipt of the taxable income. Reg 1.125-1, Q&A-15. So to be valid, the election must be made before the period of coverage begins and the election must be irrevocable once the period of coverage begins (but for a Reg 1.125-4 specified change in status mid-period of coverage). Jensen spelled out that it was a 12-month commitment by the employee in the election. But that should not be assumed as required when designing a plan. Granted, the 'period of coverage' for a health flex account must generally be a 12-month period. Reg 1.125-2, Q&A-7(b)(3). For any and all other permissible benefits, the regs don't specify. Thus the plan can be drafted to specify different 'periods of coverage' for benefits other than a health flex account. If the plan Jensen mentions is amended, for future purposes, to provide that the insurance-coverage benefits are for 'periods of coverage' of a month each, then the election form can be made to evergreen the election into successive months until the employee stops it. If an employee stops or changes the election, that would take effect at the beginning of the next month after so stopping or changing the election. As jrodgers32 mentioned, this might cause some the health insurer concerns about the premium ratio. It would also increase administrative tasks and burden on payroll. But it would also give some flexibility to the insured benefits that most cafeteria plans simply don't permit, but could. If you have a premium only plan (POP), this latitude can be particularly useful without engendering additional confusion among employees. The cafeteria plan may also allow for different periods of coverage for day care flex accounts than the typical 12-month period so many plans use. One plan I've reviewed used Jan-May, June-August, Sept-Dec as periods for day care flex, reasoning that this reflected differences when children may be in school or on summer break, and when the other spouse may be attending college for a semester at a time.

The 10% penalty will apply on withdrawals before age 59 1/2 (with certain statutory exceptions provided in IRC sec 72). In addition, the plan document may restrict the timing for which the employee may withdraw the accounts you mention. That's why someone considering rolling prior benefits into a new employer's QRP ought to find out what the distribution restrictions are of that QRP before doing so. Also, there is insurance available of the type you mention, in addition to the ERISA bond required for QRPs.

Thanks, Trekker. Did the MEP get a determination letter from the IRS that the safe harbor could work in this fashion, i.e. that the non-controlled group employers did not have to do safe harbor although the controlled-group employer was?

Bird, Again, thanks for your analysis and post. It is the (iii) reference to other DC plan beneficiaries, and the upon-request language there that seems to dispel (i) and (ii) encompassing all DC situations. Part (i) talks about the participant's or beneficiary's self-direct "account" and part (ii) talks about the participant's or beneficiary's "own account" under the DC plan that is not self-directed. For (iii), that leaves only situations under a DC plan where the participant or beneficiary doesn't have an 'account' or 'his or her own account', although DC plans are generally distinguished from DB plans, as an 'individual account plans'. The Committee Report has the same structure and three parts, and relevant language. The FAB 2006-3 passage that you points out appears to be a DoL interpretation that nullifies part (iii) of both the statute as enacted into law and the Committee Report explanation backing it. On a related question, ERISA 105(a)(2)(B)(i) provides "the value of each investment to which assets in the individual account have been allocated, determined as of the most recent valuation date under the plan,... ." This explicit reference to the plan's most recent valuation date is echoed in the Committee Report. Granted it would seem foolish to require a plan that only has annual valuation to issue individual benefits statements with the same information 4 times before that info is updated, but perhaps that is because the individual under a 404c plan is to have at least quaterly the opportunity to re-direct investments--and Congress supposes that employees cannot be expected to keep the statement from one calendar quarter to the next so the plan ought have to provide it each quarter. The day after the DoL issued FAB 2006-3, I wrote to the two listed contacts asking about the valuation dates for use in the quarterly statements, and no reply (nor further published guidance) has yet been provided.

Bird, I think the new rules (annual or quarterly individual benefit statements) only apply if there are separate trust accounts eartagged for specific employees. If self-direction is permitted in those accounts, then the new quarterlies are required; if no self-direction but eartagged accounts, then the new annuals are required. My understanding is that is you do not have eartagged accounts, i.e. you have pooled accounts, then the old statement requirements (upon request and only if not provided in previous 12 months, and simply setting forth the accrued total, the vesting percentage, and thus the vested benefits) would yet apply.

Can a multiple employer 401k plan permit each employer to provide (or not) a 401k safe harbor notice for a plan year for just that employer's employees? or must it be plan-wide or nothing? Since 401k testing in a multiple employer plan is an employer by employer issue, it would seem that whether to safe harbor against that testing would also be permitted on an employer by employe basis, provided the 401k safe harbor notice specified it applied only as to the employees of the participating employer providing that notice. Does anyone know if there's IRS ruling to the contrary?

Thanks, QDROphile. What about a multiple employer DB plan that has no employee contributions?

Is a MEP with one trust to hold benefits of the employees of the different, unrelated employers subject to securities laws registration if no trust assets are invested in securities of any of the participating employers? Or is there a securities law exemption where no employer securities are involved?

We're separating out each participant's benefits into different investment brokerage accounts, having the brokerages send duplicate monthly/quarterly statements directly to the participant (or other beneficiary) and then supplementing that information with a statement from the Plan Administrator to each participant explaining the individual's vesting, referencing which brokerage account it applies to and which it does not, the plan's Social Security integration (if applicable), a statement of the importance of diversification of investment portfolio to long-term retirement security, and the link to the DoL's website page that gives more info about investment diversification. We'll update the vesting years/percentage of the participant once a year, as appears the Plan's supplemental statement each year. Then we'll supply this 4 times (once per quarter) until the vesting again needs updating, etc. As indicated, we're separating out benefits into at least two investment brokerage accounts per Plan participant, using brokerages that charge as little as $25 annual charge for each investment account from the brokerage, separate and apart from the commissions and asset-based fees. The split out will be along the lines of benefits with different characteristics, vesting/forfeiture re-allocation and distribution restrictions. This split-out will be primarily between benefits subject to vesting (like employer profit sharing and possibly match if subject to vesting) and those not (like employee deferrals and employer match, if not subject to vesting). With plans we can do so without violating the rule against a cutback of benefit, right or feature, we're making uniform the distribution rules that apply to all immediately vested benefits and those that apply to benefits subject to a vesting schedule. Rollover benefits received by the Plan are usually placed in a third investment account, because of the employee's ability to withdraw them whenever. Roth deferrals of a Participant will also be placed in a Plan investment account separate from the others, and the Plan would yet need to keep a record of the actual amount of Roth deferrals—to separate that from the investment earnings on that Roth investment accounts, in case they become taxable. Benefit contributions will in the future be placed into the respective investment accounts. The IRS has, through interim guidance pending future regulations, explained that the new quarterly statement requirement can be accomplished through separate writings. That means that if the Plan trustees have the investment brokerage send not only the trustees monthly or quarterly investment account statements, but also directly send duplicate investment account statements to the participant, the Plan can then "finish" the quarterly statement requirement by preparing a short (I anticipate 1 or 2 page) statement for the participant that specifies his vesting percentage, that it applies to the balance of acct # XYZ123, and that he is 100% vested in acct #ABC789, for example. This supplemental statement from the employer would also explain the plan's Social Security integration formula (if applicable), the Plan's rules for participants to direct the investment of their benefits, the importance of investment diversification to the employee's long-term retirement security, and the link to the DoL website where more info on investment diversification can be obtained. The individual, supplemental statement prepared individually for the participant would only need to be updated once a year, to update the info about the participant's vesting years and vesting percentage. The employer would provide this individual, supplemental statement to the participant four times during the year—before again needing to have the individual's vesting status updated. This is our alternative, since we can't just tell the PPA writers to stick it.

Correct

Thanks for the replies and input.

Does anyone know if a plan that uses annual valuation can simply issue the same quarterly benefits statement prepared for a plan participant four times during the year, until the next annual valuation changes the values of each investment in which the participant's benefits are invested? Or is the IRS interpreting this new requirement in a way that makes annual valuation incompatible with plans that permit participant direction (i.e., in essence requiring at least quarterly valuations)? If so, are values of any date within the calendar quarter okay?

Discretionary amendments must generally be made prospectively, or retroactively only to be the beginning of the plan year in which the amendment is adopted. The leeway of time given for making amendments mandated by new legislation, like PPA '06, does not apply to discretionary amendments to take advantage of new design opportunities presented by the new legislation. I noted nothing in PPA '06 that would alter this general scheme.

PPA '06 requires all plans have vesting schedules as fast as what had previously been required of just top-heavy plans. Top heavy or not, a plan cannot now have cliff vesting that requires more than three vesting years, not 20% graded vesting slower than over two-six vesting years. This is required of benefits that accrue for plan years that begin after 2006. So if a plan wants, it can retain its slower vesting for benefits that accrued in earlier years, but then that would require separate accounting. I hope this helps.

The requirement to disclose fees with regards to different investment choices available to a former employee that has the option to and does choose to leave his or her benefits in the plan could be read to mean that what information about such fees that is provided to active employees be provided to former employees facing the choice to leave their benefits in the plan. Alternatively, the requirement could be read to require the plan administrator to cull all the fee information about all investment choices. However, that would render open architecture impractical, without such a policy debate or pronouncement. It would also back door into requiring more fee disclosure than any announced policy has required--though the DoL has been contemplating possibly requiring new fee disclosure rules for the past 10 years without doing so. In open architecture environment, the investment fees are no different for a former employee that would leave the benefits in the plan and make the investment via the plan than the former employee could make via an IRA or private account (which differs from the discounted fees that often accompany certain fund investments by large plans in limited menu situations, due to the large dollars that the plan on the whole then puts into the fund). So in the open architecture situation, the fee issue is neutral in the former employee's making the decision to leave the benefits in the plan or withdraw them. I think, therefore, it is reasonable compliance (until further guidance is provided) to provide and make available such former employees all the same information about investment options and associated fees as is respectively provided or made available to active employees. If the plan has open architecture, then refering in the distribution notices to the same sources of information about fees that are available to active participants ought to suffice.

I agree that an employer that signs a Form 8905 can change its mind subsequently and adopt an individually designed plan. However, if an employer that does not at the time of signing a Form 8905 truly intend to adopt a pre-approved plan, signing a Form 8905 would be making a misrepresentation. If the IRS didn't care, then why have the RAP deadlines for individually designed plans at all, or why even have the Form 8905 procedure and not simply assume every plan sponsor would want more time?

Sounds like the client doesn't yet have the requisite INTENT to adopt a pre-approved plan to accomplish the necessary EGTRRA restatement. Consequently, I don't think the Form 8905 can buy them more time to weigh the decision. They should do the individual restatement by 1/31/2007.

If the existing election specifies, then the insurance coverages elected can automatically renew for the entirety of the new year in the absence of an election being submitted during the annual enrollment for that new year. If it does renew automatically, the employee may only make a change in the middle of the new year if he or she has a change of status under the regs. As for the flex accounts (medical and day care) that the cafeteria plan may offer, the election does not renew automatically. Flex accounts are annual accounts. An employee who has flex accounts currently but does not elect them during the annual enrollment for the new year will not have flex accounts in the new year. To convey this concept to employees, many SPDs refer to them as 'annual flex accounts' and sign-up sheets refer to flex accounts by the year, such as '2007 medical flex account'. This, in a very simple way, conveys to the employee that the flex account ends at the end of the year.

I don't think the employees' suit would have any traction since the 25% limit imposed only prevented new dollars from being invested in employer stock. The employees would have to show not that they missed out on the 2X of the employer's stock, but that the choices they were left with for investment of the other 75% were not prudent and appropriate. That the one stock, the employer's own, went up after the limit was imposed would not in my opinion be proof in and of itself that the remaining choices were not appropriate. On the other hand, if they had required that those who had more than 25% of their benefits invested in employer stock be divested of employer stock, down to the point of 25%, the forced divestiture might be problematic for the plan officials. I've researched this in depth a few years back and would be willing to provide you a copy of the resulting analysis if you want to e-mail me privately at jsimmons@ida.net

If an employer is subject to COBRA and provides an HRA that permits post-employment expenses against the HRA credits otherwise unused at the time of termination, is the 'loss of coverage' under the HRA for COBRA purposes (a) termination of employment, when the employee no longer accrues new HRA credits, or (b) when the HRA credits are all used up (or some other time post-employment, per the HRA design, when HRA credits can no longer be used)?

In Feb 2002, the IRS addressed this issue and held that 401k elective deferrals are taken into account in the average benefit percentage test.

Here's the rub. Cash instead of coverage would be an incentive for employees of all ages not to take the coverage--whether they have coverage through their spouse's employment, they like the cash more than they want any coverage, they have coverage by reason of their Medicare eligibility, etc. Do you think it would be okay in a cafeteria plan that allows employees to cash-out part or all of the value of employer-paid coverage to permit those over 65 (and thus Medicare eligible) to have that same cash-out option? or because cash-out would be an incentive, you cannot allow it for active employees over age 65 even though the cafeteria plan would otherwise permit it for younger active employees? (Paying the premiums for Medicare supplement insurance would not be an option under the cafeteria plan.)

I would appreciate any comments that anyone might have regarding the following: If an employer has or had at least 20 employees on each of 20 or more calendar weeks in the preceding or current calendar year (42 CFR 411.170(a)(2)(i)), the a group health plan of that employer must offer the same health coverage to active employees that are 65 or older and eligible for Medicare that is offered to other active employees. 42 CFR 411.102(b). Such an employer's group health plan must provide the "same benefits under the same conditions as it provides to employees and spouses under age 65." 42 CFR 411.172© provides that an employee or spouse that is age 65 or older "may refuse the health plan offered by the employer. If the employee or spouse refuses the plan (1) Medicare is primary payer for that individual; and (2) the plan may not offer that individual coverage complementary to Medicare." Not only must such an employer not offer 'individual coverage complementary to Medicare', no one may offer "financial or other benefits as incentives" to a Medicare eligible individual to forego coverage in that employer's health plan. 42 CFR 411.103(a). An HRA may be designed under IRC sec 105(h) to permit the employee to choose to have his or her HRA benefits applied either to pay health insurance premiums or reimburse out-of-pocket medical expenses. If the HRA permits benefits be applied to payment of supplemental health insurance premiums as well as major medical insurance premiums, would permitting employees such a choice be 'offering' individual coverage complementary to Medicare for those age 65 or older given such an employee could have his or her HRA benefits applied to premiums for Medicare supplement insurance rather than the employer's major medical coverage? If an IRC sec 125 cafeteria plan gives the employee the option of payment of premiums for Medicare supplement insurance rather than taking employer-paid coverage in the group health plan, is that offering individual coverage complementary to Medicare? Would the ability of the employee to not have his or her HRA benefits applied to the payment of premiums for major medical insurance (but applied to any other health insurance premium or to accumulate and be available for later reimbursement of out-of-pocket medical expenses) be a 'financial or other benefit' incenting an employee over age 65 to refuse coverage under the employer's major medical policy? If an IRC sec 125 cafeteria plan gives the employee the option of cash rather than taking employer-paid coverage in the group health plan, is that a 'financial or other benefit' incenting an employee over age 65 to refuse coverage under the employer's major medical policy? Restricting from such options just those who are age 65 or older would likely violate the Age Discrimination in Employment Act (ADEA). It would seem that since the purpose of the Medicare coordination regs are to prevent employers from inducing those employees age 65 or older into refusing the employer-provided coverage and thus making Medicare primary coverage, rules that applied to all employees regardless of age and regardless of Medicare eligibility would be alright. Extra pay instead group health plan coverage under a cafeteria, or the ability to have HRA benefits applied to AFLAC insurance rather than major medical, ought be no problem for employees of all ages, even those age 65 or older. However, since Medicare supplement insurance is only for those age 65 or older and those for whom Medicare is primary (i.e., those that don't have major medical through the employer's group health plan), it seems that allowing employees to pay the premiums for Medicare supplement insurance as a cafeteria or HRA option would be problematic. Any info or thoughts on this would be greatly appreciated.