Jeff Kirtner

An ASG has two entities, one very large with few HCEs and many NHCEs, the other very small with a high percentage of HCEs. Each entity sponsors its own 401(k)/401(m) plan (no non-elective contributions). The plans have different testing methods (one prior year, one current year). The high percentage of HCEs means the small plan can’t pass coverage alone, it must be aggregated with the large plan. But aggregation is precluded because the plans have different testing methods. My thought is to file a VCP asking to change the testing year of the small plan to allow aggregation (SECURE 2.0 doesn't allow this demographic failure to be corrected through SCP). If we do that, each plan on its own, and in the aggregate, passes ADP/ACP. Under those circumstances: Does anyone have any experience with such a correction through VCP? Anything I should be aware of that might come up? Does the IRS readily grant corrections in that manner? Is there any risk the IRS will require QNECs to be made to NHCEs in the large company? (QNECs are the usual way to correct coverage failures. Here, QNECs don't do any good, because even if QNECs are made to NHCEs in the large company, the plans still can't be aggregated unless they have the same testing methods. So it doesn't seem like the IRS would require QNECs as a solution. But given the large number of NHCEs, possibly having to make a QNEC is concerning. Under the circumstances, does it seem unlikely the IRS would require QNECs?) Assuming the IRS allows the testing year to be changed and the plans are tested on an aggregated basis, will the IRS require the plans to pass a benefits, rights, and features test?

A construction company subject to prevailing wage laws sponsors an HRA funded via a trust. Contributions are made to the trust for each hour worked, and the trust reimburses participants when they incur medical expenses. The trust also pays Plan audit fees and legal expenses. The question is whether the company can take full prevailing wage credit for all contributions to the trust if a portion of those contributions are used to pay Plan audit fees and legal expenses rather than provide direct reimbursement benefits. Thanks for any help.

A plan had numerous prohibited transactions over a number of years, with very large excise taxes due. The PTs were only recently discovered. We are now filing 5330s. I believe there is reasonable cause and would like to request the IRS to waive interest and penalties on the late filing of 5330s. I am unsure how and when to request the waiver. Does anyone have experience with that? If so, please let me know. Feel free to reply by private email: jkirtner@hershnerhunter.com. Thanks for any help.

In reliance on advice of prior counsel, a client engaged in what has turned out to be multiple prohibited transactions, with a 4975(a) tax due of around $200,000. Client has corrected the prohibited transactions, so no second-tier tax is involved. First Question: Does the IRS have any discretion to not assess the full 4975(a) tax? I know the IRS has discretion not to assess a second-tier tax, and discretion not to assess penalties for failing to file 5330s under IRC 6651(a). I know the client can apply for an individual exemption with the DOL, and that the DOL has the discretion to reduce penalties under ERISA Section 502(l)(3) for reasonable cause. Second question: Is there any IRS discretion or other statutory or regulatory basis to reduce the 4975(a) tax? What are the client's options if the $200,000 tax would be an extreme hardship on the taxpayer by using up essentially all of their savings and other assets? Thanks for any help. Feel free to email separately if you prefer: jkirtner@hershnerhunter.com

Company would like a deferred comp plan to pay an executive 10% of the value of the company in 5 equal annual payments beginning 60 days after separation of service, where the value of the company would be determined as of the date of separation by an independent appraiser. Does this proposal violate 1.409A-3(i)(1), which requires that "objectively determinable amounts" be payable on the payment dates, and says an amount is objectively determinable if it is "specifically identified," or if the amount may be determined "pursuant to an objective, nondiscretionary formula . . . (for example, 50% of an account balance)?" The regulations don't define "specifically identified." Is it broad enough to include the appraised value, or does it need to be an exact number or something close to it? It wouldn't seem that the appraised value would satisfy the objective, nondiscretionary formula, unless the plan specifies how the appraiser is to come up with the value, which isn't the intent. If the proposed plan doesn't satisfy 1.409A-3(i)(1), is there any way to argue that provision doesn't apply to payments based on separation from service?

A government 457(b) plan defines NRA as age 55. I am trying to figure out if that age is allowed under the facts. The employer does not sponsor a defined benefit plan, but does sponsor a Money Purchase Plan. Under the applicable 457(b) regulations, an NRA of 55 is only allowed if age 55 is an age at which MPP participants "have the right to retire and receive, under . . . a money purchase pension plan in which the participant also participates . . . immediate retirement benefits without actuarial or similar reduction because of retirement before some later specified age." See 1.457-4(c)(3)(v)(A). The MPP never has actuarial reductions. The MPP has cliff vesting after 5 years of service. The MPP allows distributions of the non-forfeitable account balance at age 45 after termination of employment. The MPP allows in-service distributions of the non-forfeitable account at age 62. The MPP provides for full vesting at age 65, even without 5 years of service (thus age 65 is the earliest age at which every participant is guaranteed not to have a forfeiture). Under those facts, what is the earliest NRA allowed under the regulation cited above? There is never an actuarial reduction in the MPP, but there can be forfeiture reductions before age 65. Is a forfeiture a "similar reduction" to an actuarial reduction making 65 the earliest allowed NRA? Or is age 45 the earliest allowed NRA, because forfeiture is not a "similar reduction" to an actuarial reduction, and the participant can get their full non-forfeitable balance at age 45?

Plan document included an auto-enrollment feature of 2% starting 7/1/2018, no matching contributions. Employer never implemented the auto-enrollment feature. Now the employer intends to terminate the auto-enrollment feature effective 7/1/2019. Under EPCRS, the Employer can fix the errors under the special safe harbor correction method (no QNEC required, but correct deferrals must begin). Are the "correct deferrals" the amount that is in effect at the time of correction (now 0% because the ACA was eliminated), or 2% (because that's the deferral that would have been in effect at time of correction if the error had not occurred)?

Thanks for your responses, much appreciated. The Plan is not a governmental plan. I should have included that information. If you have authority for a pension plan being subject to the "once ERISA, always ERISA" rule I would love to hear it. I've seen that rule for welfare plans but not pension plans. See, e.g., In re Stern, 346 F.3d 1036 (9th Cir. 2003). In Stern, a pension plan was originally subject to ERISA, but once only owners were covered, ERISA ceased to apply. Of course, that's different than whether a plan that was once "maintained" by an ERISA plan ceases to be maintained because participation is completely voluntary. I haven't seen a case in that context rule that ERISA ceases to apply.

A non-ERISA 403(b) plan was amended to include an automatic contribution arrangement. 1. Does that amendment make the plan subject to ERISA? 2. If so, if the plan is amended to terminate the ACA, does the plan again become a non-ERISA plan?

Sorry if I wasn't clear. The employees would get individual HDHP coverage on the exchange. They would also have MEC coverage. My first question is whether the MEC coverage would disqualify them from getting HSA contributions, given their HDHP exchange coverage. As to my second question, an "EPP" is an "Employer Payment Plan" as defined in Notice 2013-54 and subsequent IRS guidance. Simplifying somewhat, under that guidance, a large employer cannot contribute to an HRA, for example, unless the HRA is "integrated" with non-HRA group coverage. An HRA cannot be "integrated" with an individual policy on the exchange. Thus, Notice 2013-54 would prevent the employer from contributing to the HRA of an employee who has individual coverage on the exchange. My question is whether Notice 2013-54 or any other guidance prohibits the employer from using a cafeteria plan to make HSA contributions to an employee who has individual HDHP coverage on the exchange.

Employer wants to offer a MEC/skinny plan to get out of the "A" penalty, and make HSA contributions through a cafeteria plan to employees who get individual HDHP coverage on the exchange. Questions: 1. Does a skinny plan disqualify the individual from making HSA contributions (assume it's the minimum MEC to get out of the "A" penalty)? 2. If not, can the employer make HSA contributions through a cafeteria plan for employees who have HDHP coverage through the exchange? Would this violate any EPP rule (Notice 2013-54 et al) or other rule?

The basic questions are: are exhaustion of remedies and arbitration provisions in local government plans enforceable, and if so, what law requires enforcement? Anyone have cases directly on point? Here are the facts: A local government plan provides a disability benefit to participants who establish a disability. The plan has a claims procedure that requires claimants to file appeals of benefit denials within 60 days. The plan requires all disputes to be arbitrated, and expressly requires claimants to exhaust their appeal rights before filing arbitration. In the case at hand, a claimant filed for disability and was denied. The plan complied with all the technicalities in the claims procedure. Well after expiration of the 60-day appeal period, the claimant submitted new materials. On what body of law or other authority can the plan rely to deny consideration of the new materials and cause any arbitration or court action the claimant might file to be dismissed? Conversely, on what body of law or other authority can the claimant rely to require consideration of the new materials and/or file an arbitration or judicial action? I know the answer under ERISA, but here those rules don't apply.

A tax exempt's employment agreement entered into years ago provides for a payment to an employee on August 31, 2017 if the employee is employed on that date. Thus the agreement is within the short term deferral rules under 457f proposed regs and 409A. The employee would like to be paid and taxed in 2018 rather than 2017. Under the STD rule, agreements can now be drafted to provide for vesting in one year and payment and tax by March 15th of the next year. But can an agreement providing for payment in 2017 be amended to move the payment date to early in 2018? Issues include: 1. If an agreement extending the payment date is entered into, does that agreement violate 457f or 409A (e.g., the subsequent deferral rules), assuming the extension still requires payment by March 15, 2018? 2. If no agreement extending the payment date is entered into, can payment be made in 2018 without violating 457f or 409A, on the theory that there is no deferral of compensation, even though payment in 2018 violates the terms of the agreement?

A top hat plan credits participants with deferred comp each year until age 60. At age 60, participants vest, but further credits stop. Payout is on separation from service at any time after attaining age 60. Questions: Does the ADEA apply to top hat plans? If so, does this plan violate the ADEA? If so, does that have any consequence under 409A (e.g., does an ADEA violation cause a violation of 409A, if the plan otherwise complies with 409A)? Thanks for any help.

Question: Can an employer reimburse an employee's Part C (Medicare Advantage) premiums under the rule in IRS Notice 2015-17 or otherwise? In IRS Notice 2015-17, the IRS allows an employer to reimburse an employee's Medicare Part B and D premiums under certain circumstances (i.e., the employer offers another group health plan, the actually enrolls in Medicare Part A and B/D instead, and the reimbursement is limited to reimbursement of Part B/D and Medigap premiums). By its terms, 2015-17 is limited to Part B/D, not Part C. Is there any guidance about reimbursing Part C premiums pre-tax? Is it clear that 2015-17 does, or does NOT, apply to Part C premiums? Any help would be much appreciated.

Background: A davis bacon/prevailing wage employer has for some years mades contributions to an HRA/VEBA and has taken prevailing wage credit for those contributions. Along comes Notice 2013-54. With exeptions not relevant in my situation, 2013-54 requires HRAs to be integrated with an insurance plan to avoid ACA annual limit prohibitions. To be integrated, 2013-54 requires the HRA to give participants the option to permanently waive future reimbursements (essentially forfeiting their account) each year and on termination of employment. I have questions about how the waiver/forfeiture interacts with davis bacon and similar prevailing wage laws. Issue: Whether an employer can take prevailing wage credit for contributions it made to an HRA on behalf of an employee, if the employee voluntarily waives all future reimbursements (essentially voluntarily forfeiting those contributions)? Does anyone have thoughts or guidance on this? Are there other examples where an employer can take prevailing wage credit for waived/forfeited amounts?

Section 1.409A-1(h)(4) contains a 409A "same desk rule" under which, in an asset sale, buyer and seller can agree that the asset sale does not result in a separation from service for participants in the NQDCP of seller. However, the regs say nothing about how to implement the same desk rule. Would the buyer adopt a plan that essentially mirrors the seller's plan (except for the definition of "employer," which would now refer to buyer rather than seller), with a transfer of assets, liabilities and participation to the buyer's mirror plan? Or would the employees remain participants in the seller's plan, with separation from service from buyer serving as the payment event from seller's plan. In that case, it's not clear how the seller's plan can authorize payment upon separation from service from an unrelated employer. In short, I'm not sure how to implement the 409A same desk rule, and any ideas would be appreciated.

Employer contributes the same amount to the HSA account of all eligible employees. In addition, Employer pays the premium for the underlying HDHP for officers of the corporation only. Any discrimination problem under 105 or 223/4980E?

How can the employer require payment of the full $2,000 on January 1, given that the statute and regs state that qualified beneficiaries must be given the option of paying COBRA premiums on a monthly basis? See ERISA 602(3)(B); Treas Reg 54.4980B-8, Q&A-3. There seems to be a disconnect between the annual amount being contributed on the first day of the plan year, and the requirement to allow monthly premiums. I like your answer, vebaguru, but am concerned without supporting authority.

Employer has an HRA in which participants' HRA Accounts are credited with $2000 on the first day of each plan year. Suppose a participant terminates employment and elects COBRA. On the first day of the next plan year, is the Employer obligated to credit the account with $2,000, as it does all other participants? Is there a legal basis to argue that the employer instead is only obligated to credit the account each month with the monthly COBRA premium paid by the employee for coverage under the HRA (i.e., $166, which equals 1/12th of $2,000)?

A physician group (a C corporation) wants to establish a health reimbursement arrangement (HRA). Like many other physician groups, the group initially pays expenses incurred by physicians, but then allocates the expenses directly to the physician who incurred the expense, and reduces that physician's compensation by the amount of expenses incurred by the physician. Thus, for example, if a physician incurs CME expenses of $3,000, the group pays the $3,000, but the physician's compensation is later reduced by $3,000. The group would like to apply the same method to an HRA they want to establish. Under the HRA, each employee would receive monthly credits of, say, $500, to an HRA Account, subject to a maximum balance of $4,000. The HRA would reimburse the physician from the physician's HRA Account for receipts turned in by the physician, but the group would then reduce the physician's compensation by the amount of reimbursements received by the physician under the HRA. Would such a plan violate the rules applicable to HRAs? Is the arrangement a cafeteria plan, even though there are no elections?

A participant severed employment some years before attaining the NRA of 65. The 401k plan requires lump sum distribution of all accounts at NRA if the accounts haven't been distributed earlier. Participant is now 71 but no distribution has been made. There has now been an additional failure to make an RMD. The issue is how to correct the failures. It is clear the participant needs to receive a distribution of the entire account, some of which will be an RMD. But I have the following questions: (a) is participant entitled to any deemed earnings on the account balance as it was at 65 (when it should have been distributed to him); (b) assuming the value of the account is less now than it was at 65, is the employer required to make up the difference (if relevant, at all times the participant self-directed investment of the participant's accounts); and © given that this was one participant out of many, any reason not to consider the operational failure "insignficant" and thus correctable years later through SCP?

Plan has already been amended for GUST and has received a determination letter. The Plan needs to change the ADP/ACP testing for 2002 (from prior to current). If the plan had not already been amended, the GUST RAP would have extended through 9/30/03. Issue: If the amendment is done today, is the amendment timely? i.e., does the GUST RAP end on 9/30/03 even though the plan has already been amended for GUST and a determination on the GUST-amended plan has already been issued? Or does amending the plan for GUST and/or submitting or receiving a determination letter end the GUST RAP as of such date? Any guidance (and cites to IRS rules) is greatly appreciated.

A particular participant (an NHCE) is experiencing a financial hardship. The 401(k) plan does not allow hardship distributions. Can the employer amend the plan to allow only this single participant to receive a hardship distribution?

When you make QNECs, all non-elective contributions (including the QNECs), and the non-elective contributions excluding the QNECs, must each pass 401(a)(4) separately. I see no similar rule applying to QMACs, and do not find any rule requiring the ACP to be passed before shifting is allowed. Do you have a cite? Anyone else?