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Calendar year 401(k) has been using the current year testing method for all years since prior year testing authorized by the tax law. For 2008, employer determines that, due to the volatility in the equity markets, many NHCEs stopped contributing to the plan altogether. If the 2008 ADP/ACP tests show a failure, but the plan would pass based on a prior year testing methodology, what is the deadline for the plan to be amended to adopt the change in methodology?

Even if the participant was granted sole custody at the time the divorce was entered and the change in custody to the other spouse occurred a number of years after the divorce decree issued?

A participant in a cafeteria plan enrolls in the dependent care FSA to provide after-school supervision to her child who is under age 13. During the year, the judge awards custody of the child to the ex-spouse, who lives in a different state (shich is not contiguous to the participant's state). Is this a change in status sufficient to support the participant's desire to prospectively revoke deductions for the remainder of the year?

A participant in a 401(k) plan requests and obtains a hardship withdrawal to purchase his/her principal residence. Because the contract of sale included a condition that the home pass an engineering inspection, which it failed, the participant was able to cancel the contract. Now, the hardship no longer exists. Assuming that the withdrawal and the disappearance of the hardship occur in the same plan year, should the plan simply reverse the withdrawal to avoid reporting the distribution?

Company A bought Company G. Each has a 401(k) plan and G's plan is merging into A's plan. Under A's plan, employer matching contributions are available for withdrawal by employees prior to age 59 1/2 only to the extent that such contributions were either in the plan for at least 24 months or the employee had participated in the plan for at least 60 months. If such an employee obtains a withdrawal, his/her employer matching contributions are suspended for 6 months after the withdrawal. Prior to attaining age 59 1/2, an employee in Company G's plan may not obtain any in-service withdrawals of employer matching contributions. On or after attaining age 59 1/2, an employee in Company A's plan may obtain an in-service withdrawal of employer matching contributions under the same conditions as applied prior to attaining age 59 1/2, including being subject to a 6-month suspension period following the withdrawal. Under G's plan, an employee who has attained age 59 1/2 may obtain an in-service withdrawal of employer matching contributions without restriction and without being subject to a suspension period. I know that the anti-cutback rules generally apply to optional forms of distribution under merged plans. However, I am also aware that the employer has the right to eliminate optional forms of distribution by amendment if the participant has a right to elect an otherwise available single sum distribution. As applied to in-service withdrawals, that refers to an optional form of distribution in an amount elected by an actively employed participants subject to the satisfaction of certain plan designated conditions. Thus, it would appear that A cannot amend out the G withdrawal availability conditions. Applying these rules, are the following options available to A: (1) Amend the plan to provide that participants with employer match transferred from G's plan are subject to the same distribution restrictions that applied under G's plan; (2) Amend the plan to retain the post-59 1/2 withdrawal availability provisions regarding the G plan matching contributions while subjecting the pre-59 1/2 withdrawals of G plan matching contributions to the more generous A plan availability conditions.

Company G is buying all of the stock of Company X-1, a wholly owned subsidiary of Company X. Both G and X-1 maintain 401(k) plans for the benefit of their employees. X-1's 401(k) had previoiusly had assets from a money purchase plan merge into it, so the plan document has language regarding spousal consent and annuities. Although G's 401(k) plan has language on annuities, it meets the profit sharing plan exception unless an employee elects an annuity form of distribution. It is intended that X-1's 401(k) plan merge into G's 401(k) plan. However, to avoid the complexity associated with obtaining spousal consent for such transactions as hardships and loans, G prefers not to accept a transfer of the money purchase portion. Assuming that the money purchase portion was fully vested prior to the merger into the X-1 401(k) plan, could X-1 simply purchase annuity contracts for that portion and issue them to those X-1 employees whose accounts included the merged money purchase plan?

An employer maintains a cafeteria plan for its employees under which, among other benefits, employees may elect from among various medical coverages. An employee and his spouse have elected medical coverage during 2007. In October, 2007, the couple becomes divorced. However, the employee fails to notify the employer of the divorce until March 2008. In addition, the plan has a requirement that employees provide notice within 30 days of the occurrence of a change in status event. It appears to me that there are a number of options available to the employer in this situation: (1) Drop the former spouse's medical coverage and deny the former spouse COBRA rights as permitted by the IRS Regulations at 54.4980B-6, Q&A-2. The employer could also impute into the employee's gross i ncome its portion of the premium attributable to the former spouse's coverage and treat the employee portion fo the premium attributable to the ex-spouse as if it were made on an after-tax basis. (2) Treat the employee as if timely notice were provided and that the former spouse elected COBRA coverage. The employer could then impute its portion of the portion attributable to the ex-spouse into the employee's gross income and treat the employe's portion of the premiums attributable to the ex-spouse as being made on an after-tax basis. On the basis of the 7th Circuit decision in Trustees of AFTRA Health and Welfare Fund v. Biondi, the employer could also seek to recover the portion of the COBRA coverage equal to 2% of the administrative fee. Under either scenario, this presupposes that the employer is waiving the 30-day notice requirement for notification of a change in status event. Does anyone have any other options?

Company X maintains a cafeteria plan for its employees. The cafeteria plan permits premium conversion of medical and dental coverage and has flexible spending accounts for medical and dependent care expenses. Company X has a number of employees who are paid primarily on a commissioned basis. In many cases, these employees may receive little or no commissions from which to deduct payments for the coverage. Assume Employee C enrolled for coverage in 2008 under X's cafeteria plan for medical, dental and medical FSA coverage. The plan document authorizes the termination of coverage for nonpayment of premiums. Assume Employee C receives no commissions during Januayr 2008 but elects to have Lasik surgery done. Can C's coverage be terminated retroactively?

However, for an individually designed plan that does not mean a whole lot since 414(s) is only relevant in nondiscrimination testing and not in determining the amount of contributions to the plan.

Company maintains a 401(k) for its employees. To prevent deferrals from severance pay, Company's systems automatically shut off all deferrals once employee's status was changed to Terminated. The final 415 regs amended the definition of compensation to provide that certain post-employment compensation that would have been paid had the employee continued in employment must be taken into account as long it is paid by the later of 2 1/2 months after termination of employment or the end of the limitation year. The regs also amended the 401(k) regs to make it a requirement that the compensation satisfy the 415 definition including the post-termination compensation revisions of the 415 regs. Here is my question: while it is my understanding that it is mandatory that the definition of compensation include compensation which would otherwise have been paid to the employee while active (e.g., base salary payments) but which happens to be paid after termination of employment but within the specified timeframe, can the plan choose not to include such post termination payments?

An employer maintains a cafeteria plan for its employees which provides a number of benefits including medical coverage offering a number of different options. Most of the coverage is provided on a self-funded basis with the exception of the HMOs, which are considered insured. The plan defines the term dependent as including any child of the participant up to age 19 or any child of the participant up to age 23 provided that s/he is a full-time student at a post-secondary institution. Someof the HMOs having a service area in certain states have a state insurance law provision which either defines the term dependent child as an individual who is older than the term defined in the plan document. (1) Can the employer impute the employer portion of the cost of covering a child whose age exceeds that contained in the plan definition of dependent into the employee's income and treat the employee's payment of his/her portion of the cost of coverring such child as made on an after-tax basis without either (a) determining whether the child qualifies as a dependent of the employee under federal tax law; or (b) offering the employee the opportunity to prove that the child qualifies as a dependent under federal tax law? (This is particularly relevant in MA which provides for a 2-year continuation period for a child losing dependent status under Section 106 of the Code). (2) Let's assume that, regardless of the answer in (1), the employer is conducting a dependent audit to determine whether the claimed dependents are in fact eligible. If the employer uncovers a child who falls outside the plan definition and the employee is forced to offer proof that the child is eligible to be covered under a state law mandate, which proof also determines whether the child is a federal tax dependent, if the employer determines that the child is a federal tax law dependent, must the employer treat the dependent as a federal tax dependent in spite of the plan's definition of dependent?

Penman 2006, you did not indicate what type of DC plan was involved. If it a profit-sharing plan without a 401(k) feature, there is an exception to the consent requirement provided that (1) the terminating plan does not offer an annuity option and (2) the plan sponsor orr any other controlled group member does not maintain any other DC plan other than an ESOP. If the answer to both of these is no, then the plan may simply cash out the participant without regard to the amount of his/her account balance. If (2) is yes, the terminating plan may simply transfer the participant's account balance to the other DC plan without the partiicpant's consent. See Reg. Section 1.411(a)-11(e)(1). If (1) is yes, then you could purchase an annuity for the participant and distribute it to him/her. If the plan is a money purchase plan, there is no similar exception to the cash-out rule. In that case, the only option may be to purchase an annuity for the participant and distribute it to him or her. If the plan is a 401(k) plan, the rules are pretty much the same as in the case of a profit-sharing plan, but it is important to bear in mind the distribution restrictions on termination of a 401(k) plan. These are that there is no other DC plan is maintained by the plan sponsor or any other entity which is related to the plan sponsor within the meaning of Section 414(b), ©, (m) or (o) at any time during the period beginning 12 months before the date of the plan's termination and ending 12 months after the plan's termination. The following are not considered DC plans for purposes of the special 401(k) distribution restriction on plan termination: an ESOP, a SEP, a SIMPLE IRA, or a 403(b) or 457(b) or (f) plan.

Company X has established a new 401(k) plan effective Januaryu 1, 2008. A portion of the SPD has a section explaining the optional tax treatment of plan distributions (including averaging) and of course, there is the 402(f) notice. My question is, do we still need to refer to averaging since most of the people who could conceivably be eligible have since retired? Is there any conceivable set of facts by which an individual who was age 50 or older in 1986 could average today assuming plan-to-plan transfers involving several plans between 1986 and today? I know that in the case of plan-to-plan transfers, there are a number of private letter rulings concluding that, for purposes of the 5-year averaging requirement, the years of participation with the former plan could be tacked onto the years of participation after the transfer in determining whether the requirement was satisfied. Does this apply as well to eligibility for averaging in general?

I am working on a new 401(k) plan for a client that will be using the new 401(k)(13) safe harbor and which permits participants to make a permissible withdrawal under Section 414(w). The recordkeeper is pushing back and saying that this is not permitted since that would make the plan an EACA (eligible automatic contribution arrangement) rather than a QACA (qualified automatic contribution arrangement). I feel that a QACA can provide for permissible withdrawals at least in part because the proposed regulations on the timing of furnishing the notice specifically recognizes that a QACA may provide for permissible withdrawals, since they allow such a plan to provide the annual notice to a newly hired employee as late as the date on which s/he commences employment. . Does anyone have any thoughts on this?

A client of mine did not suspend contributions as required by the plan's terms. We submitted this to the IRS (given the substantial number of participants, the years involved and the fact that other issues were then before the IRS on a pending filing) and initially proposed to refund the deferrals and earnings and forfeit the match and earnings. The IRS accepted this in its compliance statement. In attempting to implement this, however, we discovered that the vast majority of the affected participants had substantially depleted the contribution types from which we would apply the correction that we could not effectively implement them. We also considered it to be inequitable to implement the corrections against those with sufficient contribution types because it would effectively penalize those participants who were appropriately using the plan as a long-term investment in funding for retirement while those less far-sighted participants who had depleted these funds would get off scott free. Therefore, we made a resubmission to the IRS proposing that we do nothing as to the affected participants since we had recently changed recordkeepers and the new vendor was more diligent than the old. The application sat and then the IRS rejected this approach. Instead, they proposed a prospective suspension, but this requires calculating the sum of the amount that should have initially been suspended with earnings and debiting the prospectively suspended contributions against them.. If the participant terminates employment before the amount is depleted, then the plan administrator has to notify the participant that s/he is not eligible to roll over that amount. There should be no problem with implementing this on a self-correction basis provided you might the requirements for self-correction.

Company X is starting a new 401(k) plan effective 1/1/2008. The employees of Y LLC participated in a 401(k) plan for which all future contributions were frozen. Company X and Y LLC are in the same affiliated service group. If Y LLC terminates its 401(k) plan, I understand that the Y LLC participants' account balances could not be rolled over into the Company X 401(k) plan because it is considered a successor plan. However, are the participants of Y LLC precluded from making rollovers into IRAs?

Newco starts a 401(k) plan that is intended to be a QACA for its employees effective 1/1/2008. For purposes of the minimum contribution increase schedule and the ability to make permissible withdrawals under Code Section 414(w), can the plan be designed so that if the employee terminates employment and is then rehired, s/he is started at the minimum 3% contribution with a right to make a permissible withdrawal? The QACA proposed regs are completely silent on this. Or would it be safer to reset the participant on the automatic contribution increase schedule and/or permissible withdrawal rights only if the employee is rehired with a break in service? Any thoughts?

No guidance has as yet been issued, but to respond to your questions, it will most likely be an optional rather than a mandatory provision, the tax reporting will most likely be that this would be reported on the 1099-R for the year, although there may be a new distribution code since this is a "Roth conversion" type of distribution and not a rollover in the classic sense. Finally, the plan sponsor of the distribution most likely would have no way of knowing the participant's AGI and would have no obligation to prevent an employee from making such a rollover. In all likelihood, the plan sponsor's obligation is to merely issue the 402(f) notice with a statement that the rollover will not be given effect if the participant's AGI exceeds $100,000 or the participant files his/her tax return claiming married filing separately status.

It turns out that the annuity contracts will begin making payments during November 2007. While I know that a participant who reaches the required beginning date and has the annuity contract make a first payment on or before that date is treated as having satisfied the minimum distribution requirement with respect to the first distribution calendar year, I question whether a participant who has been receiving minimum distributions under a defined contribution plan for a number of years can have an annuity contract purchased and receive merely two payments under the annuity contract during the distribution calendar year, and have that satisfy the participant's minimum distribution requirements for that distibution calendar year. I think it would be safer to receive a minimum distribution from the 401(k) plan for 5/6 of the distribution for the year and then have the annuity contract begin making payments. Any thoughts about this approach?

A 401(k) plan participant has been receiving RMDs since s/he turned age 70 1/2 (having previously retired). This year, he decides to purchase an annuity contract with his remaining account balance with payments to begin as of 1/1/2008. He has not as yet received his RMD from the DC plan for 2007. Question: is he required to receive his 2007 RMD before the balance can be applied to purchase the annuity contract?

Unlike qualified retirement plans, there is not currently in place any type of correction program for cafeteria plans or any other welfare benefit plan for which an income tax exclusion is otherwise available. However, if the experience of IRS Notice 2007-78 is any example (in which the IRS said it intends to establish a correction program for 409A violations) and the informal buzz of feedback on the cafeteria plan proposed regulations are any indication, it is expected that there will be a significant hue and cry from the practitioner community that the IRS will establish a correction program. In the meantime, I would not hold my breath until such correction program is established (even if it is, it will likely be very limited and might not cover this type of situation). I would establish a plan document for the plan based on its operation currently and have it effective currently. I would not say anything about there being no prior document and I would in no event create a series of amendments that are retroactively effective that state the plan's operational practice from the inception (assuming there is even a single individual with an ability to recall the initial plan operation). If the IRS were to examine your plan, you would have to come forward at that time and state that you thought you were covered by an affiliate plan but that was not in fact the case. The intent here is not to manufacture evidence that is not in fact there but rather to show you realized the goof and intend to set things straight going forward. If the IRS sees this, they will probably impose some type of penalty or closing agreement fee for the past violation but it will be substantially less than it otherwise might be if you were to wait until the IRS cafeteria plan correction program covers your type of violation.

The example is that the participant signed up for the dependent care FSA for both 2006 and 2007 and s/he has no eligible dependents. I am willing to consider 2006 as off limits. As far as 2007, although the prior posts indicated that this could work for someone in this situation, I am very concerned about the fact that more than 2/3 of the plan year (it is a calendar year) has elapsed before this individual has brought this to our attention. I would think the timing of notification would be a critical factor in deciding whether there has been a mistake in fact.

I have heard that the IRS has informally permitted cafeteria plan elections to be revoked in certain cases after the plan year in question has begun. If anyone has any experience with this, I have the following questions: (1) under what circumstances did the IRS consider it a mistake of fact warranting revocation? (2) how far into the plan year did the participant go before requesting to revoke his/her electio? (3) How far did the revocation reach -- was the participant permitted to get a refund of amounts previously deducted from his/her paychecks? Was the participant able to prospectively cease future payroll deductions? Or both? Thank you for your assistance on this. I have a live situation where this is the crux of the issue.

Because Section 120 of the Code has expired and not been extended, if the employer were to pay the premiums for group-legal coverage, the employees would be taxable on the premiums. More commonly, group-legal plans provided by employers are generally provided on an employee pay all basis. in that way, the premiums are being paid with after-tax contributions and the employee is not subject to tax on either the premiums or the benefits under the plan. While not a lot of employers currently do it, the reason for this is that the status of offering group legal benefits on an after-tax basis under a cafeteria plan was uncleear. The final regs should make it clear that group legal can be offered as a permitted taxable benefit. This would result in more employers offering it under a cafeteria plan.

Assume Corp. X buys a long-term disability contract for its 401(k) plan, P, to provide disability benefits payable to the plan accounts of those participants becoming disabled, equal to the contributions that were made when the employees were actively employed. According to the new proposed regulations, the employer's payment of the premium would be treated as a plan distribution to the participant taxable under Code Section 402(a). If the benefits under the contract are payable to the plan and allocable to the participant's account, the proposed regs provide that the amounts are excludable from the participant's gross income under Code Section 104(a)(3) which is recontributed by the participant to the plan as an employee after-tax contribution. My question is, how is the distribution of the disability benefit portion of the participant's account balance treated for tax purposes: (1) is the portion excludable under Code Section 104(a)(3)? or (2) is the amount of the distribution subject to tax under Code Sections 72 and 402, with the amount of the deemed employee after-tax contributions treated as a nontaxable return of basis?