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A client has discovered that it has inadvertantly paid SERP administrative expenses from it's DB plan's assets. The amount involved is small- $2,500. Clearly, the client should reimburse the plan. But how? This would not seem eligible for EPCRS, because it is probably a reversion of assets. It would not seem eligible for correction under VFC because it is not a "loan." It is also presumably a prohibited transaction. Is the simplest correction methodology to reimburse the plan, with lost earnings, and pay the excise tax? Thanks for any ideas. card

An ongoing defined contribution plan purchases and distributes an individual annuity contract in full settlement of the participant's benefit under the plan. 1. On the 5500, does the plan check off box 9(b)(1) (insurance as a plan benefit arrangement)? Proposed answer: No. The instructions say "Insurance" means "the Plan" has an account, policy, or contract with an insurance company..." Here the plan is not a party to the contract. 2. Is Schedule A required? Proposed answer: No? The contract is not a plan asset, and no participants are covered by the contract at year end. (The employee ceases to be a participant by virtue of the annuity purchase). 3. On Schedule H, is Line 2(e)(2) completed for the annuity purchase? Proposed answer: Yes. 4. On Schedule R, is Line 2 completed for the annuity purchase? Proposed answer: Yes, for the year the contract is purchased only. Thanks for any assistance... card (I hate 5500's...)

Hi. Does anyone have an issues checklist they use in performing a legal review of administrative services contracts (BC, Kaiser, etc.) for self-insured health plans? Thanks. card

Hi- Employer maintains a dependent care flexible spending account. Employer anticipates failing the 55% test and decides to cut back all HCE's from $5,000 maximum deferral to $4,000. HCE's spouse is employed by a different employer. Can HCE's spouse elect to increase her coverage under her employer's dependent care reimbursement account plan by the $1,000 lost under the HCE's plan? This type of change would have to be showhorned into 1.125-4(f)(4). It doesn't seem to fit nicely. But the spouse's employer might argue that there has been a reduction in coverage in the HCE's plan (the change in the maximum permitted dependent care deferral/reimbursement), and the HCE has made a "deemed election" under the other employer's plan consistent with that reduction. Anybody see this before? I haven't been able to find any IRS guidance. Thanks. r.

Gordy- As you indicate, the regs do not provide carte blanche to rely on an employee's certification. To allow a hardship withdrawal there must be both an immediate and heavy financial need, and the distribution must be necessary to satisfy that financial need. The regs address the second part, stating that you can rely on the employee's certification that the need can't be satisfied from other sources. (And you don't need this at all if you follow the safe harbor in 1.401(k)-1(d)(2)(iv)(B).) The regs and examination guidelines do not specifically address what documentation is necessary to satisfy the first part- that is, to establish the existence of the hardship itself. (This is true even if the plan follows the safe harbor and allows hardship distributions only for the four prescribed events.) I have seen plans that go both ways- some relying solely on the employee's certification that the hardship event exists, others requiring varying levels of documentation, and others simply reserving the right to request documentation at any time. What's the general experience of others on this issue? card

Anyone see a good sample claims procedure for health plans that complies with the "new" DOL regs? card

Thanks. I called the DOL's Office of Chief Accountant (they handle 5500 questions and are available at 1.866.275.7922, if anyone is interested) and they (infomally of course) indicated that since this is a fully insured welfare plan, they did not really care so much... card

Hi- My original question is below, but the question can be stated simply as "How do you report an insurance contract that is longer than 12 months on Schedule A?" Thanks. card I have a client with the following situation: Plan year 10/1/00 to 9/30/01 Insurance contract that has a term of 11/1/99 to 12/31/00. So the insurance contract ends in the 2000 plan year. So the contract would be reflected on the 2000 5500. But the insurance contract is for more than 12 months. The instructions to Schedule A seem to say that you should not report data for more than 12 months. What to do? One option is report the 14 months anyway. Another option is to split the reporting into 2 Schedule A's, one for 12 months and one for 2 months. Anyone else deal with this before? Thanks as usual- card

Qphile- The company amended and restated a DB plan into a cash balance plan in 1988. At the time of the restatement the company purchased a group annuity contract that covered all benefits accrued through 1988. The group annuity contractholder is the Plan's trustee. Certificates were issued reflecting the insured benefit. The participant in question is a vested term. Benefits have not yet started. card

Qphile- I agree that the plan administrator should be out of the picture where an individual annuity contract is distributed from the plan to a former employee. What's your feeling about a group annuity contract held by an ongoing plan where an employee receives a certificate describing his/her benefit? You think the result is the same? Thanks- card

Thanks. I think this is correct, based on 2510.3-3(d)(2)(ii). Having read that section again, however, it also states that an individual is not a participant if the benefit is fully guaranteed by an insurer, and a "contract, policy, or certificate" is issued to the individual. This seems to sweep group annuity contracts into this as well. One part that is not clear on its face is that the insurance benefit must be "legally enforceable by the _sole choice_ of the individual against the insurance company." I assume the certificate would provide the employee with the right to sue the insurer for the benefit. Has anyone thought this through? It seems unlikely all benefits represented by group annuity contracts are exempt from the QDRO rules... card

Employee terminates employment with a vested deferred benefit, and the DB plan distributes an annuity contract to her. The employee and spouse later divorce. Is this annuity contract subject to the QDRO rules (and the plan administrator determines the validity of the QDRO)? Or is it subject to state domestic relations laws, and the insurer determines the validity of the DRO? If, instead, the plan purchased annuities using a group annuity contract, I assume it is clear the QDRO rules apply. Thanks- card

MJB- My question to Richard was really this- if you establish a window benefit and, for example, limit it to 100 positions, and you indicate you will accept the first 100 that apply, does this affect the voluntariness of either the window itself, or any ADEA waiver given in conjunction with the window? Also, what are other technicques are available where an employer wants to limit a window to X number of employees? I've seen employers take applicants based on seniority. What other methods are used? card

Hi Richard- You said "Now you can limit the cost by saying only the first 50 eligible employees (for example) who apply for retirement can get the window." Is there any official guidance that discusses this technique? Thanks. card

Appleby- Could you post a cite to the source of this correction method? Thanks- card

Employer excludes bonuses from its 401(k) plan definition of comp for contribution purposes. During 2000 employer inadvertantly permits deferrals from bonuses and matches these contributions. The variation on the theme is that the employer has determined that if the participants' accounts are retroactively corrected back to the date of the error (the employer's recordkeeper has the capability of doing this) then (1) certain employees will have received a loan higher than they should have received (ie, in excess of 50% of the revised plan balance) and (2) other employees will have received hardship distributions in excess of the amount permitted under the plan. If the employer corrects the improper bonus deferral (either by forfeiting the deferral and making the employee whole outside the plan, or by distributing the excess deferral), and forfeits the match, do the loans and hardship distributions need to be corrected as well? Thanks- card

Thanks. But the facts are a bit different. This is a contributory group life plan. So the employer has made an allocation of the demutualization proceeds between employee and employer contributions. The employer keeps the employer derived portion, and uses the employee derived proceeds to provide a premium holiday for employees. The question is: are these dollars the portion of the demutualization proceeds allocated to employee contributions) taxable to the employer when the stock is sold and the insurer is instructed to pay the group life premium? If so, then I assume the employer is entitled to an offsetting deduction (absent some section 419 complications). But are the premiums paid then employee or employer contributions for purposes of section 79 imputed income calculations? The DOL has only addressed, obviously, the trust issues. I have not seen anything from the Service addressing the taxation issues. card

Thanks Pax. I always do that first. I've read all the messages, and all the articles. The problem is that the Pru demutualization introduces a new variable with the DOL Trust Policy- the custodial account that DOL has indicated would satisfy the ERISA trust requirement. None of the articles discuss the tax impact of using this custodial account, which unlike a trust, is not a separate taxable entity. None of the messages or articles specifically deal in any great depth with group life plans and imputed income under section 79. If these demutualization proceeds are allocable to employee contributions in the first place, then when paid from the custodial account to provide the premium holiday are they employee paid premiums or employer paid premiums? I don't think there are any definitive answers to any of these questions. However, employers have received their proceeds so there must be plenty of other group policyholders out there providing premium holidays- I was hoping someone could share their conclusions on how they are handling the tax consequences. card

Client has contributory group life plan. Has allocated demutualization proceeds between employer and employees, and has established a custodial account with Pru under the DOL Trust Policy, to be used to provide a premium holiday to employees. What the heck is the tax impact of this? When client instructs Pru to sell the stock, and use the proceeds for the premium holiday- Is client taxed on the gain? Does client get an immediate corresponding deduction? Do the section 419 welfare benefit rules apply? Is there imputed income to employees? Is this an employer contribution under section 79, or is this an employee contribution? My guess is that since this custodial account is not a separate taxable entity, the client has to take the proceeds of the stock sale into income; the client gets a corresponding deduction for the contribution to the group life premium; and the employees have imputed income. Except for the imputed income, the net affect of handling the transaction this way is that the proceeds wind up as nontaxable. But had the stock been distributed instead to the employees, they would have tax liability on the sale of the shares. Anyone work through this???????? Thanks- card

I have a similar situation. In my scenario, employee works for Company A. 5 year cliff vesting. Employee terminates with 4 years of vesting service and goes to work for Company B, an unrelated employer. Six years later Company A acquires Company B and Company B's DB plan is merged into Company A's DB plan. Can Company A ignore the prior vesting service under the rule of parity? Or do the predecessor employer rules require Company A to count all service with Company B, effectively overruling the rule of parity? (Kathy- I think your prior answer is correct except the 5 year break in service rule would not apply in that case because the employee is partially vested.) Thanks- card

If a Dependent care Reimbursement Account Plan is discriminatory (fails the 55% utliziation test) the amounts received as reimbursements under the plan are taxable to HCE's. If, for example, the plan is discriminatory for the 2001 plan year, and the HCE has expenses that are reimbursed during the run off period in 2002, are those amounts taxed in 2001 or 2002? It seems to me that the impact of failing the test is that 129 does not apply to the HCE's. Therefore reimbursements for dependent care are taxable when paid. But can the employer use the same rule that is available for reporting dependent care expenses on Form W-2 and treat the estimated reimbursements as taxable income in 2001 (if the employer is comfortable that the employee will in fact have the expenses)? Thanks- card

Hi- Thanks. Yes I was asking about the taxation to employees. For example, if the employer picks up the tab, are the benefits and coverage excludable under 105/106? What about coverage for the employee's spouse? Any 105(h) issues (I assume not). I haven't been able to find any IRS guidance. card

Can someone point me in the right direction for the taxation of Travel Assistance benefits for employees and spouses? I don't have the full details yet but I am told the program primarily provides referrals so employees can find English speaking physicians whereever they may be traveling. Thanks! card

The IRS made short work of this (at least the "bootleg" version) this week in Rev. Rul. 2002-3. "HOLDING The exclusions from gross income under ß ß 106(a) and 105(B) do not apply to amounts that an employer pays to employees to reimburse the employees for amounts paid by an employer for health insurance coverage that are excluded from gross income under ß 106(a) (including salary reduction amounts pursuant to a cafeteria plan under ß 125 that are applied to pay for such coverage). Accordingly, the reimbursement amounts that the employer pays to the employees are included in the employees' gross income under ß 61 and are subject to employment taxes under ß ß 3401, 3121(a), and 3306(B)." card

Client maintains a final average pay defined benefit plan, and a nonqualified excess plan to make up for the limits imposed by 415 and 401(a)(17). Client has allowed the NQDCP participants to pay FICA tax on each year's vested accrual, per the 3121(v) regs which permit inclusion before the date the amount deferred is reasonably ascertainable. Now client will adopt EGTRRA's $200,000 401(a)(17) limit retroactively per Notice 2001-56. This will result in significantly higher qualified plan accruals for certain participants, and a corresponding reduction in the nonqualified plan accruals. Therefore the FICA tax for years prior to 2002 would have been significantly overestimated. The regs don't seem to permit an adjustment until the resolution date. Has anyone addressed a similar situation? What about a "negative accrual" for 2002 to offset other income? Thanks- card