Carol V. Calhoun

I know we don't have to worry about the prohibited transaction rules when we're talking about the match rather than the deferrals. But my concern about the late contributions relates to the issue of not operating the plan in accordance with its terms. I'd like to say that the participants can have no legitimate expectation of having the match made by March 15, given that the employer could have gotten an automatic extension and that the plan would then have been able to make the contributions as late as the extended date. But if the plan itself says the match is to be made by the date of filing, including extensions, do you see a way we can avoid the argument that the plan was not operated in accordance with its terms? Not making the match is not an option, since this is a mandatory rather than discretionary match.

We have a client with 401(k) plan that provides for matching contributions. Under the terms of the plan, the matching contributions should be made by the time for filing of the employer's tax returns, including extensions. And of course, under Code section 404(a)(6), they have to be made by then in order to be deductible on the prior year's tax return. In this case, the calculation of the matching contributions for 2016 got bogged down, and still hasn't happened. But over in finance, they got very efficient and actually filed the corporate return on March 15, without ever requesting an extension. So, it would appear we may have two problems: The company may have to give people earnings on the late contributions. The company may not be able to take a tax deduction for 2016 for the contributions. Obviously, both of these problems could have been averted by requesting an extension (which would have been automatic). But is there anything we can do after the fact? It just seems silly that the company will be out a lot of money due to late contributions, when those contributions wouldn't even have been considered late had the company just requested the automatic extension on its tax return.

There are a number of bases on which the ex-wife could potentially challenge the designation: Forged signature. Undue influence. Fraud. Incompetence of the participant. And incompetence or undue influence are particularly likely to be an issue in the case of a form signed immediately before death. So in an instance in which we've already had an inquiry on behalf of the ex-wife, I wouldn't want to tell the PA just to determine whether the form is in order, without allowing the ex-wife a chance to respond. Best outcome is that the ex-wife just goes away on being told that there is a subsequent designation. But if she does not, the PA's determination is most likely to be upheld if there is a showing that it did its best to determine the validity of any competing claims.

I don't want to speculate ahead of time as to what arguments the ex-wife might make. I just think that when we've already got inquiries from two different parties, we should notify both of them of this fact and let them both submit claims. PA can adjudicate those claims if they materialize. And as to my original question, absent a plan provision, I'm thinking I've got confirmation that the mere fact that the beneficiary form wasn't filed until after the death isn't fatal. Now the task is to make sure that the PA follows all claims procedures, so that its determination is likely to be respected if the whole mess ends up in court.

Yeah, my sense is that having already received an inquiry from the ex-wife's new husband, we should at least provide some notice to the ex-wife, and allow her to contest the designation of the sister. If she doesn't, PA is in the clear. If she does, it can get evidence from both sides. The PA's determination is more likely to be respected if it can show that it notified everyone and allowed everyone to present their claims.

Ex-wife's new husband has already inquired about benefits (presumably being unaware of the beneficiary designation in favor of the sister). So, there isn't a second claim right now. But we're wary of paying the sister, then having a claim from the ex-wife come in. My instinct would be to tell the ex-wife that there is a later beneficiary designation in favor of the sister, and that if for any reason she wants to contest the validity of that, she needs to file her own claim. No, we wouldn't "tell" her to submit a claim. But with an inquiry having already been filed, I'm not sure we can simply ignore it and process the sister's claim.

@My 2 cents: I'm not sure how we'd ever get to the point of saying there is no valid beneficiary. We've got two potentially valid beneficiaries in this case. The designation of the ex-wife would be valid, unless it was revoked by the designation of the sister.

Yes, I already knew to check the plan document. But in the absence of anything useful in it, it looks like we'll have to tell both the ex-wife and the sister to submit formal claims, get as much evidence as we can, and hope that the facts end up being clear enough that this never gets to court. If it does, we may have to file that interpleader action.

I'm assuming you're talking about a nongovernmental 457(b)? In that case, since in theory both plans are unfunded, I can't see an issue with commingling the assets, provided that the plan documents do not forbid it. I'd be more concerned about this with a governmental plan, which has to fund a 457(b) plan.

We're dealing with a situation in which a participant named his spouse as his beneficiary of his 401(k) plan. He later divorced, but did not at that time change the beneficiary designation. (Under Egelhoff v. Egelhoff, 532 US 141 (2001), the divorce would not itself change the beneficiary designation.) However, after he died, his sister sent a signed beneficiary designation in favor of the sister. The plan is now asking us whether they can honor a beneficiary designation signed by the participant, but not received until after the participant's death. The plan document is silent on the issue. My gut reaction is that the plan should simply refuse to pay until this is straightened out, and file an interpleader action if one of the parties sues for benefits. But has anyone seen any guidance as to whether a beneficiary designation not received until after death can be honored?

More facts on this one: The TPA is an ERISA fiduciary with respect to claims. The care coordinator gets paid a flat fee for each participant who has a care plan. The way a participant becomes eligible for a care plan is to have multiple health conditions for which the plan is responsible for payment. Thus, if the TPA approves more claims, this would in theory result in more participants having care plans, and the care coordinator subsidiary getting paid more money. Now, as a practical matter, we think it highly unlikely that the TPA would approve extra claims just so its subsidiary could get the extra money. The money received by the subsidiary per participant would be far less than the amount of any claim that would cause a participant to receive a care plan. If the TPA were approving thousands of dollars in claims so that its subsidiary could get a few hundred dollars in fees, it would rapidly lose business from employers upset by the high number of claims being paid. However, we're wondering whether there is nevertheless a prohibited transaction, and if so, whether there is any kind of statutory or administrative exemption. And so far, I'm just not finding any discussion of prohibited transaction issues in a health plan. Is anyone aware of anything out there?

I still have the odd view that the workings of a statute or other authority should result in the intent of the statute or other authority being fulfilled. And that it makes no sense when this does not happen. It's like my view of VCP and governmental plans. It is clear that VCP does apply to governmental plans. But the whole point of VCP was to encourage employers to come forward, knowing that the penalties for doing so are less than the penalties if they get audited. For governmental plans, in which the penalties on the employer if they get audited are typically nonexistent (deductions aren't at issue, and the trust is tax-exempt even if disqualified), it makes no sense to apply penalties if they come forward. "Incongruous" might go into a formal memo to a client. But I'm allowed my occasional rant here.

Under Code section 413 and 26 CFR 1.413-2(d), all employers in a multiple employer plan are combined for purposes of section 411. But governmental plans are subject only to the pre-ERISA version of section 411. And section 413 was added with ERISA. Thus, standards for an exclusively governmental multiple employer plan should not require that vesting be combined.

That assumes it is a private 501(c)(3). If it's a public school or university, a 401(k) would be unavailable (unless grandfathered).

They would definitely have to allow them to defer. The exclusion based on job classification could apply only to the match.

Section 410(a)(1) sets forth the minimum age and service requirements. In general, a plan cannot require, as a condition of participation, that an employee complete a period of service with the employer extending beyond the later of: the date on which the employee attains age 21; or the date on which the employee completes one year of service. This is separate from the 410(b) requirements. So if an employee gets over 1,000 hours in a year, they cannot be excluded from the match, even if the 410(b) requirements would be satisfied even if they were excluded.

Rev. Rul. 69-545, 1969-2 C.B. 117, is the ruling that permits a municipal hospital to have 501(c)(3) status. If it does, it can have a 403(b) plan. However, that doesn't mean it loses its governmental status. And as a governmental plan, it is not subject to ERISA.

The other "cost" of being a 501(c)(3) is that some very old GCMs say that a governmental entity that obtains 501(c)(3) status becomes subject to UBIT.

Here's the situation. TPA wants to hire its own subsidiary as a care coordinator for the health plans it serves. I'm trying to figure out: Whether we have a prohibited transaction. Whether an exemption applies. Whether the arrangement needs to be mentioned in the TPA agreement. In other words, if the TPA agreement includes care coordination services, must it be separately disclosed that these services are provided through the subsidiary and what portion of the fees go to the subsidiary? It doesn't really seem to me that the prohibited transaction rules should apply in this case. After all, there is no more potential for abuse if the TPA uses a subsidiary for this than if it performs the services itself. However, I'm concerned about Information Letter 1998-02-19 and Prohibited Transaction Exemption 93-62, which treat the selection of health care services as a fiduciary function.

They may well be a non-ERISA plan, but that doesn't exempt them from the universal availability rule of Internal Revenue Code section 403(b)(12), which would preclude a plan that allows for deferrals and doesn't allow everyone to make such deferrals. The only way I can see this working is if everyone is allowed to make deferrals, but that only HCEs want to because those are the only people whose contributions are limited by the ADP test. Or if everyone other than the executives (including those who would normally be excludible from a 401(k) plan) is eligible for the 401(k) plan. That being said, I'm assuming from the fact that they have a 401(k) plan that they are not a governmental plan. In that situation, the only way they could have a non-ERISA plan would be pursuant to 29 CFR § 2510.3-2(f), which provides that certain deferral-only 403(b) plans with minimal employer involvement are exempt from ERISA.

Why would they want to cease that status? As a governmental plan, they don't need to file Forms 990, which is typically the most onerous part of being a 501(c)(3). Do they have potential UBIT issues?

How is a governmental hospital maintaining a 403(b) plan in the first place? The only employers permitted to have 403(b) plans are 501(c)(3) organizations and public schools. Rev. Rul. 69-545, 1969-2 C.B. 117 permits a municipal hospital to apply for 501(c)(3) status, but if it has not done so, it would be ineligible to maintain a 403(b) plan. If this is the case, you'll need to do a VCP submission to fix the situation. If the parent is eligible to maintain a 403(b) plan, but the written plan document is defective in not naming the related 501(c)(3), you might consider amending the plan to be a pre-approved plan. Rev. Proc. 2017–18 allows you to fix most problems, other than the complete absence of a written plan document, by adopting a pre-approved plan before March 31, 2020. As far as the related 501(c)(3) being an agency or instrumentality, that is certainly possible, depending on the relationship of the parties. You might check out the Advance Notice of Proposed Rulemaking on Determination of Governmental Plan Status to determine whether the 501(c)(3) is likely also to be treated as governmental.

Typically, the plans would be merged. The existing contracts (annuity or custodial account) are the property of the individual employees, so they would not be affected. To the extent that they are held under a group contract, the new employer could take over that contract. The old money could just stay where it is. The new money would be subject to whatever investment choices the combined employer plan specified.

Employer contributions are indeed added to employee contributions. The question is whether the employer contributions in this instance would be treated as 2016 contributions or 2017 contributions. The section 415 regulations call for treating required back contributions (e.g., pursuant to a back pay settlement) as relating to the year in which they should have been made, not the year in which they were made. By analogy, you could argue that the contributions here should be treated as 2016 contributions. The problem, of course, is that a) it's probably uneconomic to get a ruling on this, and b) getting a ruling on anything these days is becoming nigh on impossible. So the client would have to recognize that there is some risk.

Yes. Section 403(b)(12) does not include an exception for a plan without HCEs. That makes no sense, as you point out, but it's still there.