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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?

I am looking at a contract with an IRA vendor for purposes of implementing the automatic rollover process. According to IRS Notice 2007-7, the PPA expansion allowing nonspouse beneficiaries to make rollovers does not apply for purposes of Code Section 401(a)(31)(B), the automatic rollover provisions. Does this mean that if one extends the automatic rollover provision to nonspouse beneficiaries, the automatic rollover does not get the protection of ERISA Section 404©(3)?

Employer X sponsors a cafeteria plan in which employees can elect core medical coverage among other options. Assume that Employee A has elected employee plus two or more health coverage for 2007 because s/he has two children from a prior marriage. During 2007, A acquires domestic partner B. Because there is no additional cost of coverage for adding B, A's health coverage amount does not increase. Assuming that the difference between employee plus one dependent and employee plus two or more dependent coverage is $1,000, how does one calculate the amount A has to include in his/her gross income because of adding B as a dependent? Is there no imputation or does the incremental cost of having at least two dependents get divided pro rata between A's child and B?

We have submitted a VCP to the IRS on this very issue. Initially, we proposed to take out the contributions that should not have been made plus earnings and this was approved. In attempting to implement this, however, we found that most of the affected participants did not have sufficient amounts in the money types in question (because of subsequent loans and/or withdrawals) to make this an unworkable solution. We went back to the IRS and they proposed a prospective suspension. The problem was that a number of years had elapsed between the time the amounts were improperly contributed, the first compliance statement was issued and then the second VCP requesst was submitted and resolved and a final compliance statement issued, that the participants who were impacted complained that the prospective suspension would be coming when they earned a much higher rate of pay. The bottom line is, if you are consider the refund method, take a look to see if there would be sufficient money in the participants' accounts to effect the refund. If not, then use the prospective suspension.

As a practical matter, much depends on when, during the year, your TPA does the testing and how proactive they would be to changing employee populations. If the test is done early enough in the plan year, then the prospective salary reductions can effectively be suspended. The key employee concentration test looks at whether the test is met for the plan year, not at whether the test is met at a particulat point in time during the plan year. If the TPA is sufficiently proactice and can track the enrollment elections of new hires enough to allow a recalculation of the test, then it may be possible for the coverages to be prospectively permitted. At the end of the day, however, it may be prohibitively expensive for the employer to have the TPA continually tinker with the test.

I have the following questions on the MA employee HIRD form mandate: 1) For purposes of determining who has to be furnished the employee HIRD form, the employer's medical plan provides that an employee becomes eligible to participate in the cafeteria plan on the first day of the month after s/he has been employed for 30 days. So, for example, if an employee is hired on May 15, s/he will become eligible for the medical plan on 7/1/2007. The HIRD regulation is not very clear on when the employee form has to be furnished to a new hire who has become eligible under the plan because it requires the form to be returned to the employer within 30 days "of the applicable open enrollment period." Does this reference to the open enrollment period mean the annual open enrollment period for the following year which would end in either October or November? Or, since each newly hired employee may enroll within 31 days of when s/he iks first eligible, does this refer to the 30 days after the end of the 31-day period in which the employee may enroll under the plan? In other words when does the employee HIRD form have to be returned to the employer in the example in the above scenario? Would it be August 31 (i.e., 30 days after the 31-day enrollment period in which the employee is first eligible)? January 31 of the following year? If the former, it would appear that we would have to issue the employee HIRD form to employees hired to work in MA on or after April 15, 2007, would have to be issued the form. Such employee would become eligible for the plan on June 1, 2007, have a 31-day period to elect to enroll ending July 2 and, if s/he declined coverage, would have to returned the completed form to the employer by August 1. 2) Under MA law, the cafeteria plan has to cover employees who normally work at least 64 hours per month. These employees would never have been offered coverage under the medical plan (which is confined to those expected to work at least 1,000 hours in a plan year). My question is, when do we need to furnish such employees the employee HIRD form?

Company X provides a severance plan for those employees whose employment is involuntarily terminated. Upon the execution of a release which becomes final, an employee is entitled to continue his/her medical and/or dental coverage under COBRA, with the employer providing the same subsidy that it provides for its active employees for the first 6 months. In addition, if the employee was at least age 50 and had completed at least 20 years of service, the employee would become eligible to continue coverage under the employer's post-retirement welfare plan. The severance plan was recently changed to provide that if an employee is severed and is within 6 - 12 months of satisfying the age and/or service requirements needed to obtain post-retirement welfare benefits, the employee is given the additional credit needed to become eligiible for post-retirement welfare benefits. In analyzing this under Section 409A, it would appear that the COBRA subsidy should be excepted from Section 409A since it is provided on a nondiscriminatory basis under a self-funded medical plan. With respect to the ability of the employee becoming eligible for post-retirement welfare benefits if the employee is severed after having attained age 50 and completed at least 20 years of service, as well as being provided with 6-12 months additional credit needed to satisfy the age and/or service requirements to become eligible for post-retirement welfare benefits, does anyone have any thoughts on how this should be analyzed from the standpoint of Section 409A?

An employer maintains a qualified 401(k) plan for its employees to which any combination of before-tax 401(k), Roth 401(k) and/or after-tax contributions may be made. Participants contribuing up to a specified percentage of compensation receive an allocation of matching contributions. Under the 401(k) plan, once a participant's compensation reaches the 401(a)(17) limit, all further contribution cease for the remainder of the year. Thereafter, the equivalent amount of matching contributions that could have been made to the 401(k) plan but for the limit are continued to a spillover nonqualified plan. Under the plan, the sole triggering event is separation from service. In spite of the final 409A regulations, there is no initial deferral period -- instead, employees are paid in a lump sum at separation from service unless a transitional election of time and form of distribuxtion was made prior to 2008. In bringing the plan into compliance with the final 409A regs, an issue has arisen on when a participant must make the subsequent deferral election. Based on counsel's interpretation of the proposed 409A regulations, the spillover plan proposed adopting a "push-out" rule in which a participant could make a subsequent deferral election up to the date of his/her separation from service, with the election becoming effective 12 months form tthe date it was made. The spillover plan would like to continue using the "push-out" rule when the plan is restated to comply with the 409A final regulations. An examination of the text of the final regulations on this issue provides conflicting interpretations. For example, in Reg. Section 1.409A-2(b)(1), the following language, which arguably supports the continued viability of the "push-out" rule, was added by the final regulations to what had appeared in the proposed regulations: "For purposes of this paragraph (b), except as otherwise provided in this section, a subsequentl deferral election is not considered made until such election becomes irrevocable under the terms of the plan. Accordingly, a plan may provide that a subsequent deferral election may be changed at any time before the last permissible date for making such a subsequent deferral election." This is contradicted by Reg. Section 1.409A-2(b)(9), Example 23, which was also added to the proposed regulations and involves a subsequent deferral election to change the payment trigger from separation from service to payment at the later of separation from service or the attainment of a specified age. The example provides as follows: "Employee W participates in a nonqualified deferred compensation plan that provides for a lump sum payment at separation from service. Employee W wishes to make the payment payable upon the later of separation from service or a predetermined age. Provided that Employee W makes such election on or before the date 1 year bfore a separation from service, Employee W may elect to receive a lump sum payment upon the later of the date 5 years following a separation from service or at a specified age." Does anyone have any thoughts about whether the plan can continue using the "push-out" rule in the 409A compliant plan?

Company maintains Cafeteria Plan Y, which among other options provides employees with the right to elect a preferred provider organization offered by Provider M, a point of service arrangement also offered by Provider M, a preferred provider organization offered by Provider N and a point of service arrangement also offered by Provider N. The PPOs offered by Providers M and N have the same deductibles, copays, coinsurance amounts and out-of-pocket limits and have the same net employee cost. The POS options offered by Providers M and N have the same deductibles, copays, coinsurance amounts and out-of-pocket limits and have the same net employee cost. There may be some geographic areas where physicians on the network of one provider are not participating in the network of the other provider. The plan document for Plan Y has a definition of change of status does not specifically permit an employee in Provider M's PPO to elect Provider N'a PPO unless there is some other change in status event. Operationally, if, say an employee elected the POS by Provider M and learned that her/his favorite physicians no longer participate in its network, the employee may contact HR and would be permitted to switch to Provider Y. Although there is no change in the employee's net cost on a "pre-tax basis," does anyone have concerns about this not following the plan document and not being made as a result of a change in status as well as not being communicated to participants?

Company X maintains a 401(k) plan for its employees, under which employees are permitted to direct the investment of their account balances among several pre-selected investment funds, called core funds, and have the ability to select from a universe of several thousamd mutual funds under a self-directed brokerage window. The plan document requires a participant to transfer that portion of his/her account invested in the brokerage window back to the core funds before taking a distribution. It was recently discovered that one participant, having terminated employment, requested a rollover of his/her account invested in the brokerage window to IRAs for which a mutual fund company was the custodian. The "rollover" was actually implemented by the vendor for the brokerage window. It appears that this was an isolated incident and that no other participant has been able to effect a rollover directly from the brokerage window. Short of making sure that the ability to "rollover" out of the brokerage window does not recur, how should the plan correct this error?

Company X maintains Cafeteria Plan M providing for a health care FSA among other benefits. Domestic partners and civil union spouses of participants are permitted to participate in the regular medical coverage but they are not permitted to participate in the health care FSA. During the year, it is discovered that the new vendor has been reimbursing claims incurred by domestic partners/civil union spouses from the health care FSA. The vendor has been directed to stop making reimbursements to such individuals. However, in determining the tax treatment of the participant for the amounts that were reimbursed, I have a question on the appropriate tax treatment. I know that with medical coverage for such persons, the employer's share of the premiums must be imputed into the employee's gross income and the employee's share of the premiums must be made on an after-tax basis, while the benefits reimbursed to such individuals are considered tax free. With a health care FSA, however, the problem is that it is not possible to ascertain the amount of claims by which the domestic partner/civil union spouse must be reimbursed. Therefore, would it be appropriate to impute into the employee's gross i ncome the amounts actually reimbursed to the domestic partner/civil union spouse or should the amounts withheld from the employee's pay for contributions to the FSA be divided pro rata among the employee and all dependents with the pro rata portion attributable to the domestic partner/civil union spouse be treated as made on an after-tax basis?

Employer X is establishing a 401(k) plan for its employees effective January 1, 2008. X intends that the plan satisfy the automatic enrollment safe harbor to the ADP/ACP tests and for top-heavy purposes. Consequently, it would be adopting a two-year cliff vesting schedule. The employer has been around for a number of years and there are certain entities technically unrelated to the employer which are involved in selling the employer's products. Under its other qualified plans, service with such other entities is taken in to account for eligibility and vesting purposes. Assuming that eligibility is immediate, can X have its plan provide that service for vesting purposes will be credited by looking solely for those employees who are rehired during 2008 or 2009 only, so as to limit the complexity of recordkeeping for any former participant who terminated many years earlier and then returns?

Company A maintains a 401(k) plan for its employees. There is a classification of employees which A requires to undergo a 3-4 week training period. If the prospective employee successfully completes the training period, s/he is appointed an employee of that classification. Company A counts eligibibility and vesting service from the date on which an individual is appointed to the status of an employee of the classification and not from the commencement of the training period. Is A permitted to exclude the training period from the calculation of eligibility and vesting service? Does it make a difference if the plan document states that service is counted from the date that an individual is appointed to a certain status?