Jeff Kirtner

Plan uses prior year testing. Plan is passing ADP but failing ACP. Plan can pass ACP if it shifts some HCE matching contributions satisfying the definition of QMACs (i.e., 100% vested, subject to distribution restrictions), to the ADP test. Normally, the shift of QMACs is made to correct ADP problems, but here the shift would be used to fix ACP problems. Is that a problem? Is it a problem shifting only HCE QMACs? The regs (specifically 1.401(k)-1(b)(5)), appear to allow shifting HCE QMACs into the ADP test for any reason, without needing to pass any nondiscrimination requirements. I would appreciate any insights you can give me on shifting HCE QMACs to the ADP to correct ACP problems.

In light of Field Assistance Bulletin 2003-3, Plan Sponsor would like to charge applicable plan expenses to severed, vested participants who leave their money in the plan, but pay all other plan expenses itself. For administrative convenience, Plan Sponsor would like to pay plan expenses as follows: (a) Plan Sponsor would pay all plan expenses throughout the year; (b) at year end, accounts of severed, vested participants would be charged a pro-rata share of expenses; © the plan would reimburse the Plan Sponsor for the amount in (b) by writing a check to the Plan Sponsor. I am concerned about step ©, and specifically concerned that it is a prohibited transaction for which no exemption exists. For example, one could characterize the Plan Sponsor's advance payment of expenses as a loan to the Plan. Furthermore, while there is a prohibited transaction exemption for reimbursement of direct expenses incurred by a fiduciary in providing services to the plan, in the situation outlined above the Plan Sponsor is not providing services, it's just paying plan expenses, so I'm not sure the exemption applies. Does anyone have authority indicating whether the above method of paying plan expenses is or is not acceptable?

Under the minimum contribution gateway test in the final regulations, NHCEs must receive a 5% minimum allocation if the plan is to be allowed to cross test. The preamble makes clear that an NHCE is a kind of "employee," and that an individual is an "employee" only if, among other things, the individual is "benefiting" under the plan. Are employees who get a top heavy contribution of 3%, but no other contribution (because, for example, they do not have 1000 hours of service during the plan year) considered to be "benefiting," and thus must receive a 5% contribution in order for the plan to cross test?

Employer adopts a restated Plan containing all GUST admendments in 2001. The plan year is the calendar year, as is the Employer's tax year. The last day of the GUST remedial amendment period (RAP) applicable to the plan is December 31, 2001 (per Announcement 2001-12). I need the answer to the following two questions: 1) What is the latest date Employer can file for a determination letter that covers all of the GUST RAP? Is it: a) December 31, 2001; b) the time prescribed by law, including extensions, for filing the income tax return for 2001; or c) some other date. 2) What is the latest date Employer can file for a determination letter so that, if the IRS requires changes to the plan, those changes will relate back to the entire GUST RAP? Is it: a) December 31, 2001; b) the time prescribed by law, including extensions, for filing the income tax return for 2001; or c) some other date. Do the answers above change if the restated plan was adopted in 2000 rather than in 2001? Thanks for any cites and advice you can give me.

Does anyone have authority for the proposition that the February 1999 COBRA regulations apply to state and local governments subject to the PHSA? I know this question was asked last year and answered in the affirmative, but with no authority cited. Are the tax regs a binding interpretation of the PHSA or just persuasive? Thanks for any help.

Employer maintains a medical expense reimbursement plan. Under the plan, Employer contributes money each year to each employee's account, and the employee can get reimbursements for medical expenses incurred by the employee and the employee's spouse and dependents. Question: Are spouses and dependents Qualified Beneficiaries under the plan, and thus entitled to elect to have an account set up on their behalf if there is a qualfication event?

nb, The term "employees" under § 125 includes present and former employees. Prop. Reg. § 125-1, A-4.

Joe, Thank you for your response. I have a concern about the COBRA part of the analysis, however. The proposed regs state that in the FSA context there are circumstances when an employer is required to provide COBRA coverage for the remainder of the plan year in which the termination occurs. Under my proposed scheme, by forcing the terminated employee to remain in the plan for the remainder of the plan year, coverage would not be lost, so COBRA coverage would not need to be offered. I am concerned about the interaction of this rule with §54.4980B-7, A-7(B), which says COBRA coverage must be offered if the alternative coverage provided by the employer after a qualifying event (i.e. termination) "does not satisfy all the requirements for COBRA continuation coverage or if the amount that the group health plan requires to be paid for the alternative coverage is greater than the amount required to be paid to similarly situated nonCOBRA beneficiaries..." Under my scheme, there is a forced "lump sum" payment of premiums on termination, while nonCOBRA beneficiaries pay premiums monthly. Does that difference mean that COBRA must be offered? I'd appreciate any thoughts.

Any problems forcing a terminated employee to remain in a § 125 health FSA through the end of the plan year in which the termination occurs, and requiring premiums for that period to be taken from the employee's last paycheck(s)? Assuming no problems, if such a plan is established, does that mean COBRA would never become available under Prop. § 54.4980B-2, A-8, so that no COBRA notices or elections would ever need to be provided? (Assume the FSA is funded solely through salary reductions and other group health coverage was available).

I'm not sure I agree that 415 limits are prorated. Section 415 limits annual additions to $30,000 or 25% of the "participant's compensation", defined (ambiguosly) as "the compensation of the participant from the employer for the year." The regs, however, state that the compensation to be applied for 415 purposes is "[t]he compensation . . . actually paid or made available to an employee within the limitation year." 1.415-2(d)(4). The regs also make clear that the limitation year is a 12-month period. Accordingly, assuming in my case that the limitation year is the 12-month period ending the last day of the initial plan year, then 415 compensation should be based on that entire limitation year, and the 415 limits should not be prorated, even if the initial plan year is a short year and the limitation year predates the beginning of the initial plan year. The regulation you cite relates to a short limitation year resulting from a change to the limitation year, not to a short initial plan year. Is my analysis flawed?

Are 415 limits on annual additions prorated for a short initial plan year? Situation: Employer is on a fiscal year from 4/1-3/31. Employer wants to establish a profit sharing plan with an initial plan year from 1/1/2000-3/31/2000. If the limitation year is defined as the 12-month period ending on 3/31, then is the full 415 limit available for the initial plan year, or are those limits reduced because of the short initial plan year?

Employer has a Simple IRA plan in effect for 1999 (a calendar year plan). Employer is on a fiscal year of 4/1 - 3/31. Employer would like to terminate the simple and establish a profit sharing plan on 1/1/2000, with a short initial plan year from 1/1/2000 - 3/31/2000. Employer would like to make the maximum contributions possible to the PS plan. ISSUES: (1) § 415: (a) Are the 415 limits prorated for the short initial PS plan year, if the limitation year is defined as the 12-month period ending on 3/31 (i.e. does the short initial plan year affect 415 limits)? (b) Do any of the contributions to the Simple during the 1999 calendar year count as annual additions for purposes of applying 415 to the PS plan? (2) § 404: (a) For purposes of applying 404 to the PS plan, is the compensation used to calculate the 15% deduction limit based on the period from 4/1/99 through 3/31/2000 (i.e. Employer's taxable year), or from 1/1/2000 through 3/31/2000 (the part of the taxable year the PS plan is in effect)? (b) Do the contributions to the Simple during the period from 4/1/99 through 12/31/99 constitute compensation for purposes of calculating the deduction under 404? © Do deductions taken for Simple contributions between 4/1/99 through 3/31/2000 count against the 15% deduction limit for the PS plan (i.e. could Employer deduct both the Simple contributions and contributions equal to 15% of compensation made to the PS plan?). Any help you can give me on some or all of these questions is greatly appreciated.