Carol V. Calhoun

I've got a plan that erroneously excluded a total of three employees in 2014 and one in 2015. It looks like the employer can use the new corrections procedure in Rev. Proc. 2015-28 (requiring only a 25% QNEC instead of a 50% QNEC to make up for the lost deferral opportunity). For 2014, it's fairly clear how this is to be done. However, I've got questions with respect to 2015: Is there a missed deferral opportunity at all for 2015? The Rev. Proc. says you've got to give the employee a notice saying that he or she can make up the missed deferrals, subject to the 402(g) limits. Since we're only halfway through the year, the employee should be able to defer the full 402(g) amount in the second half of the year. At the same time, the procedures are different if the error is discovered within 3 months than if it is discovered thereafter, so presumably some correction is required if the error goes on for more than 3 months but still within the same year? If the employer has to make a QNEC for 2015, how is it calculated? The QNEC is based on the ADP of the HCE or NHCE group. But presumably, the ADP can't be calculated until after the end of 2015. Does the employer have to defer the contribution until after 2015 ends, or is there some way to determine the amount of the QNEC before that time? The notice to the employee must include "A statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan (or that appropriate deductions and contributions will begin shortly)." What does this mean in the context of employee elective deferrals? Presumably, no amounts should be deducted from compensation until and unless the employee makes a deferral election.

This is not one of the issues covered in the example corrections, so any corrections method would have to be cleared with the IRS on filing of the VCP submission. Thus, you are not going to get a definitive answer. However, I can think of a couple of possible corrections methods you could consider. The first method is based on the fact that in general, picked up contributions are treated as employer contributions. The pickup rules were originally adopted to reflect the fact that a private employer could simply make a nondiscretionary employer contribution to a plan (and calculate the wages it was willing to pay by taking into account the contributions made), and thereby cause the contribution to be pretax. However, a governmental employer was often subject to the terms of a statewide plan that called for a particular level of mandatory employee contributions, and had no ability to modify the plan to eliminate such contributions and substitute nondiscretionary employer contributions. The pick-up rules allowed a governmental employer by resolution to redefine mandatory employee contributions as nondiscretionary employer contributions, and thus to achieve the result a private employer could have obtained by amending the plan. (It is for this reason that pick-ups are limited to governmental employers.) If we treat a pick-up as a nondiscretionary employer contribution, it would seem that the appropriate correction method would be to treat the employees as having been improperly included in the plan, or as having received contributions in excess of those permitted by the terms of the plan. In either event, the picked up contributions to the plan would be treated as employer contributions, and would be forfeited by the employee. (The forfeitures could be used to reduce future employer contributions to the plan.) To the extent that employees' wages were erroneously reduced to reflect the erroneous contributions, the employer should be paying back wages to the employee equal to the erroneously made contributions plus interest thereon. Alternatively, the picked up contributions might be treated under the rules applicable to erroneous 401(k) contributions. In this case, the excess contributions would be returned directly to the employee, with earnings, and include a written notice explaining the refund is taxable and not eligible for rollover. As a theoretical matter, I think the first approach is better, because it reflects the fact that the contributions were not discretionary with the employee. However, I don't know that the IRS would care about the theory all that much so long as the result was equitable. The net effect of either of these methods is similar. The employee gets the same amount back. The difference is whether the amount comes from the plan or from the employer. But even if it comes from the employer, the employer can get a corresponding reduction in future contributions. And Social Security should not be owed on the back wages under the first approach, because you have said that Social Security was already paid when the contributions were made.

No. ERISA section 203 is part of Subchapter I of ERISA. ERISA section 4 states that The only vesting standards to which governmental plans are subject are those found in the Internal Revenue Code. See this link for the IRS position concerning what vesting standards would apply to a governmental 401(a) plan.

I suspect that you would have issues applying the rule to existing employees, even as to future accruals, if the "California rule" applies. The best you can probably get would be to have it apply to new hires.

When you say "prospectively," do you mean that the new rule would apply to this employee (because Participant X hasn't yet begun to receive benefits)? Or only to employees convicted in the future? Or only to benefits accrued in the future? Or only to employees hired after the date of the change? Having a provision that employees forfeit benefits on a conviction should not in itself be an issue, as such provisions are common in governmental plans. However, many courts have interpreted federal and state constitutional provisions concerning nonimpairment of contracts to prohibit modifying a public plan in a way that is unfavorable to current employees. CalPERS at one point did an analysis that suggested that imposing forfeitures on "existing members who have already acquired substantial rights to their pensions" could be an issue under this authority.

One thing to watch out for is that although a governmental plan isn't subject to ERISA, it is also not subject to ERISA preemption of applicable state law. If what they have adopted is not intended to be a governmental plan, it is unlikely to take account of applicable state law provisions. Some common examples are limitations on the investments of a governmental plan, and requirements that the existing benefit structure (not just the existing accrued benefits) not be changed in a way adverse to any existing participant without that participant's consent. There are a few consulting firms with existing approved prototype/VS plans intended for adoption by governmental plans, which may be your best option.

No. The issue there was whether is whether a claim based on the ERISA prudence rules is barred by the ERISA statute of limitations. A governmental plan is not subject to the ERISA provisions concerning either prudence or statute of limitations. While many state laws governing prudence are similar enough to the ERISA prudence rules that state courts look to ERISA precedence in applying them, the statutes of limitations that apply are totally unrelated.

I've deleted my comments above, because apparently the IRS has changed its position on reporting. The current instructions to the Form W-2 state as follows: The amounts are also subject to Social Security and Medicare withholding as of the later of when the services giving rise to the deferral are performed or when there is no substantial forfeiture risk of the rights to the deferred amount. However, under Technical Advice Memorandum 199903032 (October 2, 1998), amounts are still subject to income tax withholding only when paid or made available. So in your situation, the whole $200K would be subject to reporting and Social Security and Medicare withholding in 2014. However, it would not be subject to income tax withholding until 2015 and later years, when it was actually paid out. Our experience is that most employers modify their plans to provide a payout in the year of vesting at least equal to the income taxes owed, in order to prevent hardship on the employee. The employee can then elect additional withholding to have the entire amount of such payment withheld. Of course, the employee will still have overwithholding in 2015 and future years, but can recover that amount when the income tax return for each year is filed.

And the chart showing the numbers for 1996 to 2015 is now up.

Every year in my memory, the IRS has announced the COLAs for 415, HCE, etc., the same day as the Social Security Administration has announced the new wage base. But SSA issued its announcement this morning, and there has still been nothing from IRS. Anyone know what the hold-up is?

An employer can have a non-ERISA 403(b) plan even if it maintains another retirement plan (such as a SEP). Perhaps your impression that this is not possible arises because the DOL won't treat a 403(b) as non-ERISA if contributions to the other plan are contingent on contributions to the 403(b)?

Unless the participant has made his or her own agreement to the contrary with the IRS, the IRS has no authority to go beyond the statute of limitations. So the fact that the employer is required to report the distributions does not impose any corresponding duty on the part of the participant to report them for closed years.

Under Rev. Rul. 2006-43, a pick-up arrangement must "not permit a participating employee from and after the date of the 'pick-up' to have a cash or deferred election right (within the meaning of § 1.401(k)-1(a)(3)) with respect to designated employee contributions." Treas. Reg. 1.401(k)-1(a)(3)(v) excludes from the definition of cash or deferred election: Thus, although new employees can have a one-time election as to the level of contributions, existing employees are still subject to the prior election.

No. From a federal perspective, pick-up contributions are treated as employer contributions, even if there are corresponding wage reductions to finance them. And the federal laws governing the timing of employer contributions don't apply to governmental plans (which are the only kind of plans that can have pick-up contributions). If there are restrictions, they would have to come from state law, not federal.

I suspect that a lot of employers did not report spousal health insurance this past year, even when they should have. A lot of them just never realized the issue. Even for those that did, the issue is complicated. For example, you mention Pennsylvania. Pennsylvania will not allow same-sex married couples to file jointly, but does exclude from income health insurance coverage provided to a same-sex spouse. Three states that do not otherwise recognize same-sex marriage (Missouri, Colorado, and Utah(!)) nevertheless treat same-sex married couples as married for state tax purposes due to federal conformity. And even when an employer knows that health coverage should be taxable, there are also, as you say, issues in how health coverage is valued (particularly in the case of a self-insured plan). State tax withholding depends on the state of an employee's residence, not the location of the employer's business, so it's not even a question of just mastering one state's rules. And I suspect that enforcement will be difficult. Most states rely heavily on federal matching as an enforcement mechanism. And this is an area in which the states have in effect said that state reporting is not supposed to match federal reporting. So they are going to be on their own as far as how to find the underreported income. And if a state did decide to litigate the issue, presumably it could succeed only if its ban were upheld, which seems unlikely (see below). There are currently challenges going on in all but five of the states with bans on same-sex marriage. They are typically not just against the higher taxes, but against the ban as a whole. And every one of them in which a decision has so far been issued has resulted in the ban being struck down. In Oklahoma, Virginia, Michigan, and Texas, federal District Court judges have struck down the state Constitutional ban on same-sex marriages, but the decision in each case was stayed pending appeal. In Kentucky, a federal District Court judge has struck down the ban on recognition of out-of-state marriages of same-sex couples, but the decision has been stayed pending appeal. In Tennessee, a federal District Court judge has struck down the ban on recognition of out-of-state marriages of three named same-sex couples, although the decision does not by its terms apply to other couples. In Ohio, a District Court struck down the ban on recognition of same-sex marriages from other states, although the judge stayed the decision pending appeal with respect to all couples other than the named plaintiffs. In Indiana, a District Court has required the state to recognize one same-sex couple’s out-of-state marriage. We'll have to see what happens with these cases on appeal. But at this rate, it's going to be hard even to get a conflict in the circuits that would motivate the Supreme Court to act. My chart on the issue is being updated daily with new developments, in case anyone needs a reference source.

IRS confirms that "Universal availability ... applies to each common-law entity separately rather than grouping controlled groups together."

One way of getting around this issue is to have the matching contributions made to a 401(a) plan, instead of to the 457(b) plan. That way, the employer contribution would not be counted toward the limit.

As to the 457(b) plan: How tough would it be to add something to the 457(b) plan to say something like, "This plan covers individuals treated by [Employer] as leased to [XYZ subsidiary], regardless of whether such individuals are later determined to be common law employees of [XYZ subsidiary]"? That would seem to be the cleanest approach. However, unlike in the 401(a) context, 457(b) doesn't have a specific requirement that a plan be operated in accordance with its terms. At most, this would be a contractual requirement. And I can't see that employees would object to receiving more benefits than the plan arguably provided. As to the 403(b) plan: I think including the employees is going to be risky, no matter how you do it. And designating them as "co-employees" would likely make the situation worse, not better.

I can't really see how participation in the 457 plans would be an issue. Outside of a governmental context, section 457(b) is a limitation, not an enhancement, of what could otherwise be provided in the way of deferred compensation. If the IRS recharacterized the employees as being employed by the for-profit, then as to them, the plan would merely be a nonqualified deferred compensation plan. Since both a 457 plan and a nonqualified deferred compensation plan must be limited to a select group of highly compensated and management employees in order to avoid ERISA issues, I cannot see how the recharacterization would be a problem (assuming that the requirements of 409A are met, since a 457(b) plan but not other kinds of deferred comp plans are exempt from 409A). I'd be more concerned about their participation in the 403(b) plan. If the IRS were to take the position that the employees in question were common law employees of the LLC, their participation in the 403(b) could be an issue. And participation in a 403(b) by individuals employed by an ineligible employer is a hot-button audit issue.

No plan is required to file for a determination letter. However, given the complexity of the law today, no lawyer I know is ever willing to give an opinion that a plan is qualified. And the consequences of disqualification are potentially serious, even in the case of a governmental plan. (Although deductions and trust taxation are not an issue, they still need to worry about employer withholding obligations and tax consequences to participants.) I suspect that what the lawyer meant to say is, a) it is highly advisable to have a determination letter, and b) if they are going to get a determination letter, Rev Proc. 2007-44 requires them either to get it in Cycle C (before January 31 of this year) or during Cycle E. But why is this question on the 403(b) Plans, Accounts or Annuities board? A determination letter would apply to a 401(a) plan, not a 403(b)?

PPA provided some guidance, since amplified by Advance Notice of Proposed Rulemaking REG-133223-08, as to when an Indian tribal government would be considered "governmental," but still did not provide any basis for treating it as a "state or local government." Certain tribal governments have, in the past, maintained Section 457(b) plans for their employees, on the theory that they should be considered state or local governments. However, as far as I can make out, none of them have sought an IRS ruling. The only instance in which an instrumentality of an Indian tribal government can clearly have a 457(b) plan is if it is also an organization exempt from tax under one of the provisions of section 501© (e.g., a school or hospital exempt under section 501©(3)). However, remember that section 457(b) is primarily a limitation, not an enhancement, on the deferred compensation that an organization can provide. An Indian tribal government, unlike a state or local government, can have a 401(k) plan. And an arm or instrumentality of Indian tribal government that qualified as "governmental" (and thus exempt from ERISA's funding standards) could always provide an unfunded deferred compensation arrangement for any or all of its employees, without being bound by the limitations of section 457(b). Even an instrumentality that was considered "commercial" could have an unfunded deferred compensation arrangement for a select group of management and highly compensated employees that was not bound by the limitations of section 457(b).

No, i haven't seen an instance of this. I suspect that it is one of many areas relating to governmental plans in which there just isn't case law.

I can't comment on most of this. But it is entirely possible to have a governmental entity in the same controlled group with a non-governmental entity. In Alley v. Resolution Trust Corporation, 984 F.2d 1201 (D.C.Cir. 1993), the court analyzed whether the Federal Asset Disposition Association (FADA), a savings and loan association established by the Federal Home Loan Bank Board, was a Federal instrument ality for governmental plan purposes. Its analysis focused on the employment relationship between the entity and its employees. In looking at the employer-employee relationship, the Alley court concluded that FADA functioned more like a private enterprise than a governmental agency in the area of its employment relations. “Measured by the terms and conditions of their employment, FADA personnel far more closely resembled private sector employees than they did government workers. Like employees of ‘ordinary’ Federally chartered S&Ls, FADA’s employees were outside the civil service system, and were not subject to the personnel rules or restrictions on salaries and benefits imposed generally on Federal employees." This decision was quoted with approval in the Advance Notice of Proposed Rulemaking regarding governmental plans.

Provided that local law doesn't impose any limitations, they can have as many 457 plans as they want, so long as no individual contributes more than the maximum to all plans combined. The question is whether it makes sense to do so. If Nationwide's products are a better investment, can they just fold the one existing participant into the new plan? There may be reasons not to (e.g., the old plan has substantial fees for early withdrawal), but it's worth considering. And if the problem is substantial early withdrawal fees, they should at least make sure the new contract doesn't have similar provisions. Having a bunch of different contracts, because there is never any way to move money from a poor investment to a better one without substantial fees, is both an administrative nightmare and an invitation to participant litigation.

One thing to remember is that because the Treasury Department and Internal Revenue Service recognize marriages that are legal where performed (as opposed to where the couple lives), a couple in Colorado that has a civil union can go to any of the 15 (soon to be 16) states or the District of Columbia that allows same-sex marriage, or to any of the Indian tribal governments that does, and get married there. By so doing, the couple would secure numerous rights beyond those granted by an employer's plans. Under the circumstances, it would seem to me unlikely that a couple would undertake the expense of litigation in order to secure coverage under an employee health plan rather than just going to another state and getting married there. Litigation would be far more likely in the case of a retirement plan or retiree health plan, as the couple might need to prove a marriage for past years (rather than just a current marriage) in order to secure benefits. Also, you have to think about what cause of action a couple could assert. Federal law does not require spousal coverage under a health plan (and will not, even when the Affordable Care Act is fully effective). And it does not contain any prohibition on discrimination based on sexual orientation. Thus, it is hard to think of a federal cause of action even if an employer simply said that it would not extend health benefits to same-sex spouses at all. Excluding "spouses in everything but name" should carry even less risk. Some state laws do prohibit discrimination based on sexual orientation. (Obviously, an employer would have to be concerned about such laws only if it had operations in one of those states.) However, if the plan is covered by ERISA, there could be an issue as to whether ERISA preempts such laws as applied to employee benefit plans. In effect, the couple could not force the employer to cover them under the health plan, but would have to argue that the discrimination consisted in providing lower total compensation (counting wages plus benefits) than would have been provided to a similarly situated opposite-sex couple. And again, such an argument would be weakened if they have the option of securing benefits by getting married in another state.