rocknrolls2

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?

A 501©(6) can have a 401(k) plan. I am not aware of any special recodkeeping requirements that apply to them as opposed to any other sponsoring employer.

Company maintains a 401(k) plan for its employees. One of the provisions states that if the plan administrator is unable to have a check to a participants or beneficiary cashed, after the use of reasonable diligence in attempting to locate the person, then the check amount is forfeitred until or if a claim is made for the amount, in which case it will be fully restored without earnings. Similarly, if a benefit is required to be paid by the plan, but cannot due to inability to locate the participant or beneficiary, then the account balance is forfeited until a claim is made, in which case it will be restored. Based on IRS regulations, I am comfortable with this approach. The question that arises is how is the Schedule SSA reporting handled? If the participant terminates employment and does not take a distribution, then the participant's account balance is reported on the Schedule SSA. If there is an uncashed check or an account balance that is forfeited because the participant could not be located, are you now required to enter Code B or C in line 4 box A? What if the check remains unclaimed or the account balance remains unclaimed? Do you enter Code D in line 4, Box A?

Company X maintains a nonqualified deferred compensation plan permitting certain employees to defer all or part of their compensation with a separate election permitting the deferral of the employee's bonus payment which is made in early March. Assume that Employee L is elitgible to participate in the nonqualified deferred compensation plan and that s/he elects to defer 0% on his/her regular compensation and 100% on his/her annual bonus, and that the election was made in compliance with Code Section 409A. Assuming that L has exceeded the Taxable Wage Base before the bonus is paid and that his/her gross bonus is equal to $100,000, $98,550 is contributed to the nonqualified deferred compensation plan and $1,450 is withheld as FICA tax. Can the amount withteld as FICA tax be considered a 401(k) contribution and require the employer to make a matching contribution (to the extent that the deemed 401(k) contributions does not exceed the plan's matching contribution formula)?

Company x is headquartered in the United States and has a Canadian branch. The branch maintains a "retirement contribution arrangement" ("RCA") which is essentially a non-qualified plan where the employer gets much of the benefits of a qualified plan, by being able to make a current deduction for contributions to the RCA, the participating employees are only taxed at the time they receive a distribution and while, in the RCA, the assets are protected from the employer's creditors. In addition, the assets are held by either a custodian or trustee. Assuming that the 90% resident test is satisfied, can a US employer elect to deduct contributions pursuant to Code Section 404A?

Employer X is in the process of designing a new 401(k) plan for certain of its employees, effective January 1, 2008. Based on the last digit of its TIN, Employer X's cycle under Rev. Proc. 2005-66 is Cycle B, which ends February 28, 2008. Does Employer X need to file its newly established 401(k) plan by February 28, 2008 or risk filing off-cycle?

Yes If an active employee participated in the FSA in 2006 but not in 2007, s/he would be able to claim reimbursement for expenses incurred during the grace period in 2007 COBRA beneficiaries have the same rights as active employees. MaryMM, Is there some basis for your statement, such as an IRS pronouncement?

Company X sponsors a Code Section 125 for its employees containing a medical FSA. X administers COBRA under the medical FSA by allowing all COBRA beneficiaries the right to continue coverage for the remainder of the plan year (a calendar year). X's cafeteria plan has adopted the 2 1/2 month grace period. Employee G participates in the X cafeteria plan and selects medical, dental and the medical FSA for 2006. Assume that G terminates employment on October 20, 2006 and elects COBRA continuation for all eligible coverages (viz, medical, dental and medical FSA). If G has a $800 balance at the end of 2006, can G utilize it on medical expenses incurred during the grace period beginning 1/1/2007 and ending 3/15/2007, even though G has no further medical FSA coverage under COBRA? If you conclude that the answer is "yes" what is your support for that position?

Company X buys Company Y. One year later, Company Y's defined benefit plan is merged into Company X's defined benefit plan. Included in Company Y's DB plan is a frozen voluntary employee contribution account. Go ahead five years. Now the insurer that supported the administration of the frozen voluntary employee contribution account has sold a line of business and will no longer be able to support it after 2006. What Options Do I have? Although there is a 401(k) plan, spinning off the voluntary contribution account is not a viable option since the account assets have to be distributed under the defined benefit plan's distribution options. While the DB plan is overfunded, I would hate to have to go to the PBGC with this.

Company X requires employees performing certain functions to sign a contract providing that upon their satisfaction of the eligibility requirements to participate in the X Profit Sharing Plan, the employee will receive 90% of the amount s/he has earned working in the stated function. The contribution is treated by X as an employer contribution and is thus not included in the employee's gross income at the time it is made. Sometimes an X employee will perform an unrelated function before being transferred into the function requiring the signing of the contract. I am very concerned on how this contribution should be treated for tax purposes, because any of such possible treatments have vastly different tax consequences. Here are the three alternative ways I see this contribution being treated: (1) For those employees who previously worked for X in another capacity, I can see the contribution being treated as either (a) a 401(k) contributions, since it is made under a cash or deferred arrangement (since it fell outside of the one-time irrevocable election exception) for which ADP testing would be required or (b) a mandatory employee contribution which would be subject to ACP testing. (2) For those employees who had to sign the contract at the time they were initially hired by X, I can see the following possibilities: (a) the contribution is an employer contribution since it was made under the one-time irrevocable election rule; or (b) the contribution is a mandatory employee contribution, subject to ACP testing. For (a), unless the contribution could satisfy a safe harbor, the contribution would have to be subject to the general test to determine whether it satisfies the nondiscrimination test for the amount of such contributions. Any thoughts?

Has anyone seen any unofficial estimates on the COLA amounts for 2007 applicable to qualified plans, 403(b)s and 457(b)s? I have seen unofficial estimates for the tax brackets, HSA amounts, and transportation fringes as well as the new IRA COLAs.

Company X has a 401(k) plan permitting participants to elect, among other options, distribution in the form of an annuity contract. The plan language lists three or four available options. Under the annuity contract provided by Insurer I, more annuity options are available than are described in ths plan document but because of the plan's language, annuities offered to X's participants have been limited to thos specified in the plan. X would like to adopt a more flexible provision, basically allowing a participant to select any form of annuity offered by Insurer I. However, I see two problems with amending the X plan to state "and any annuity form of benefit provided under the annuity contract with Insurer I at the time of the Participant's Termination of Employment." They are: (1) The IRS consent regulations require that the plan furnish a participant "a general description of the material features of the optional forms of benefit available under the plan." Reg. Section 1.411(a)-11©(2). and (2) IRS regulations provide that it is a violation of the anticutback requirement if the availability of an optional form of benefit is conditioned upon the exercise of discretion by the employer or a third party. See Reg. Section 1.411(d)-4, Q&A-4 and 5. Does anyone have any suggestions on how to deal with these issues in this context? Could the plan be amended to state that an annuity contract will be purchased to provide an annuity in form X, Y or Z and such other forms as are then provided under the annuity contract between the insurer and the plan." The description required to satisfy the consent requirement would have to be updated to reflect the addiion of optional annuity forms.

Bob R, Thanks for your observations. I wanted to respond to two of the points you raised: (1) I agree that you can limit participation in the DCAP so long as you cover a nondiscriminatory classification of employees. However, I disagree that you can exclude those who meet the eligibility rules and I disagree that those who actually elect the benefit should be included in the test. Instead, I am concluding that, unless the employer elects to test on a "separate line of business" basis, the average benefits test has to include all employees other than those excludable under Section 129(d)(9) and those earning $25,000 or less. I am rejecting the notion that only eligible employees should be included because Section 401(k)(3)((A)(ii) refers to "eligible highly compensated employees" and Section 129(d)(8) does not limit the group of employees taken into account for the average benefit test to "employees taken into account for purposes of paragraph (3)." I am rejecting the notion that only those employees actually participating should be taken into account because Section 129(d)(8) is not limited to "those employees participating in the plan." (2) The other point I wanted to make is on the treatment of employees when the test is violated. According to the Employee Benefits Answer Book, Section 8:18, if a dependent care plan is provided under a cafeteria plan, "then any failure under Code Section 129 [will result in highly compensated employees being taxed on the benefits received from the program]; however, failing the nondiscrimination requirements of Code Section 129 will not disqualify the cafeteria plan." In other words, all employees get to make pre-tax contributions to the plan under Code Section 125. Upon receiving benefit payments, however, highly compensated employees are taxable on the amount of benefits received.

Has anyone seen any guidance on whether the grace period for the health care FSA could cause the FSA to fail to the HIPAA portability exemption and thereby the limited COBRA exemption?