JJD

I think I've come to the conclusions that under the weeks-worked equivalency, you count 40 hours of service for each full or partial week in which an employee performs an hour of service, that this overstates an employee's service, and that it doesn't matter. Under the weeks-worked equivalency, 4 complete weeks of work equals 160 hours. What you do with stumps of weeks in such a month wouldn't matter--the employee would already by over full-time status. True, it's possible for a month to have fewer than 4 complete weeks. Even a 31 day month could have 5 days on either side of 3 full weeks. But counting 40 additional hours for each stump of a week (80, in this case of a 31 day month) would be unlikely to distort results for ALE determination purposes since the service performed on the additional days ought to well exceed another 10 hours of service. If the count is close, then the employer shouldn't be using the weeks-worked equivalency for determining ALE status. (This issue doesn't arise for full-time determinations for purposes of the offer of coverage since the weekly-rule can be applied in that case, and the weekly rule adjusts full-time employment determinations to a reasonable assessment of the number of weeks in a month and the number of hours of service that ought to be associated with that number of weeks to produce full-time status.) It is also true counting hours under this interpretation of the weeks-worked equivalency could turn every part-time employee into an FTE for ALE purposes. But if an employer is on the borderline of ALE status and has enough part-time employees for this to be an issue, then it shouldn't be using the weeks-worked equivalency in the first place. FWIW.

@Flyboyjohn: This is from TR 54.4980H-3©(1), Monthly measurement method (underlining added): "Under the monthly measurement method, an applicable large employer member determines each employee's status as a full-time employee by counting the employee's hours of service for each calendar month... This paragraph ©(1) (except with respect to the weekly rule) applies for purposes of the determination of status as an applicable large employer; paragraphs ©(2) through (4) of this section do not apply for purposes of the determination of status as an applicable large employer." The "weekly rule" is the one you're talking about, under which service for a month is counted in terms of 4 or 5 weekly periods. It's not just that the Regs don't specifically permit use of the weekly rule for determining ALE status--they exclude it.

@Registered: Doesn't work. Matching weeks to months in that way in the regs is restricted to the issue of determining who is a full-time employee for purposes of the offer of coverage, not for purposes of determining whether an employer is an ALE.

I have a question about how to apply the weeks-worked equivalence rule for purposes of determining an employer's status as an ALE in months which have only 3 full weeks. Under the ACA, an ALE is an employer which averaged at least 50 full-time employees per month in the preceding calendar year. "Full-time employee" is defined as one who is "employed an average of at least 30 hours per week" and 130 hours of service in a month is treated as the equivalent of at least 30 hours of service per week. For purposes of counting an employee's hours in a month, an employer is required to use the monthly measurement method. Under this method, an employer counts an employee's hours on a month-by-month basis (instead of, for example, averaging an employee's hours over a year and applying the average to each month). The employer may make its month-by-month count on the basis the actual number of hours to which an employee is entitled to payment (and in the case of hourly employees, is required to make the determination on that basis). However, in the case of non-hourly employees the employer is also permitted to use either of two equivalencies--the days-worked equivalency, under which an employee is credited with 8 hours of service for each day in which the employee performs an hour of service, and the weeks-worked equivalency, under which an employee is credited with 40 hours of service for each week in which the employee performs an hour of service. The "actual hours of service" method of determining an employee's hours is straightforward, if sometimes not useful in the case of non-hourly employees. Applying the days-worked equivalency within the context of the monthly measurement method is also straightforward enough. However, the weeks-worked equivalency cannot be applied directly where a month has fewer than 4 full weeks. Four full weeks would put the count under the weeks-worked equivalency at 160 hours, and would therefore qualify an employee as a full-time employee without regard to any partial weeks. But there are months which contain only 3 full weeks. For those weeks, the weeks-worked equivalency (considering only full weeks of work) would put an employee's hours worked at only 120 hours. For example, suppose a 30 day month began on the fifth day of the week. In that case, the month would end on the fifth day of the fourth week. In the case of a 31 day month, the month would end on the sixth day of the fourth week. In either case, an employee who worked an hour in each full week of the month would be credited with only 120 hrs. based upon the complete weeks contained by the month. In the above example, how are the days worked in the short first week of the month (the first four days of that week) and the short last week of the month (the first five or six days of that week) added to the number of hours worked determined under the weekly-equivalency method (120)? Does one count 40 hours for each of the short weeks or take into account some fewer number of hours proportionate to the lengths of the short weeks? The Treasury Regulations appear to be silent on the issue. There are rules for how to conform partial weeks to the monthly measurement method in the case of tabulating hours to determine full-time employee status for purposes of identifying the employee to whom an employer has a duty to offer health insurance coverage, but those rules specifically do not apply to ALE determinations. Further, the Treasury Regulations appear to rule out some easy fixes. For example, it does not appear to be permissible to mix-and-match the days-worked equivalency and the weeks-worked equivalency, and the selection of one or the other equivalency appears to be binding for a year (as does an employer's definition of "week" and "month"). Should 40 hours be counted for each partial week? Instead, should a percentage of the weekly equivalency amount be used? In the latter case, should the percentage take into account all 7 days in a week or just the work days? Your thoughts would be appreciated. If I have missed something in the regs that covers this, feel free to point it out.

I think I found my answer (underlining added): 1.401(k)-1(e)(2)(i) Cash Must Be Available. A cash or deferred arrangement satisfies this paragraph (e) only if the arrangement provides that the amount that each eligible employee may defer as an elective contribution is available to the employee in cash. Thus, for example, if an eligible employee is provided the option to receive a taxable benefit (other than cash) or to have the employer contribute on the employee's behalf to a profit-sharing plan an amount equal to the value of the taxable benefit, the arrangement is not a qualified cash or deferred arrangement. Similarly, if an employee has the option to receive a specified amount in cash or to have the employer contribute an amount in excess of the specified cash amount to a profit-sharing plan on the employee's behalf, any contribution made by the employer on the employee's behalf in excess of the specified cash amount is not treated as made pursuant to a qualified cash or deferred arrangement, but would be treated as a matching contribution. This cash availability requirement applies even if the cash or deferred arrangement is part of a cafeteria plan within the meaning of section 125. Thank you, John

An employer wants to contribute a sum certain to a 125 plan for each employee. The contribution may be used only for medical insurance but, if the employee has other coverage or meets certain other criteria for declining medical insurance coverage, may also be contributed to the company's 401(k) plan. The contribution is not otherwise available to employees. In other words, an employee may not take the contribution as additional wages. Where an employee contributes the sum to the 401(k) plan, are the contributions treated as elective deferrals or as nonelective contributions? In the latter case, may a 401(k) plan provide for alternative allocation rules for nonelective deferrals, namely, in proportion to compensation for "regular" profit sharing contributions but as flat amounts in the case of employer monies coming through the 125 plan? On the other hand, if the contributions to the 401(k) would be treated as elective deferrals notwithstanding their source, would an employee have constructive income if the employee failed to make any election? Thank you in advance.

I think I've got it--Labor Regs. 2510.3-2(f): For the purpose of title I of the Act and this chapter, a program for the purchase of an annuity contract or the establishment of a custodial account described in section 403(b) of the Internal Revenue Code of 1954 (the Code), pursuant to salary reduction agreements or agreements to forego an increase in salary, which meets the requirements of 26 CFR 1.403(b)–1(b)(3) shall not be “established or maintained by an employer” as that phrase is used in the definition of the terms “employee pension benefit plan” and “pension plan” if ... A plan, but not a plan. (the fictions we create, to reach the results we want to reach...) Thanks, John

Does anyone whether an employer that has established a plan requiring a one-time irrevocable election as a condition of employment may establish another plan providing for elective deferrals? If not, I don't understand the point of treating such an election as an election that isn't an elective deferral for 402(g) purposes (at least, in the case of public employers that can't establish 401(k)s). OTOH, if such a second plan can be established, then why not permit the elective deferrals under the mandatory plan? Or is that permissible? TIA, John

If employer maintains a VEBA to fund its insured retiree health plan, which includes a drug plan, is the retiree drug subsidy payable to the employer or to the VEBA? Is there an inurement issue if the subsidy is paid to the employer?

Suppose Joe has no accrued PTO, gets 2 weeks in a year from his employer, and decides he wants to donate this. Does Joe work for 52 weeks, get paid 52 weeks of comp., with the employer paying 54 weeks of comp. in all--52 to Joe and 2 to Katrina victims? Does Joe work for 50 weeks, get paid 50 weeks of comp., and take 2 wks. unpaid leave, with the employer paying its normal 52 weeks of comp., but with 2 of it now going to Katrina? Does it matter--will either scenario work? Are there other alternatives? Suppose Joe works for 51 weeks and takes one week of unpaid leave? Do the Katrina victims still get 2 wks. of comp. from Joe's employer? Thank you.

Thanks for your response. What you say reflects how I was also initially thinking about it--if there's no option to convert employer credits into cash, then there's no cash option. But I'm wondering whether an employee's decision to forego salary reduction is not itself a choice between cash and benefits. In effect, an employee foregoing salary reduction would have elected cash instead of benefits. Along that line, suppose, for example, that a cafeteria plan provided only for employee reduction of salary as the means for funding fsas, medical insurance, and other benefits. Wouldn't this still be a cafeteria plan?

Thank you for your responses. I agree that unused medical reimb. account monies could not be rolled over into a 401(k). The client's idea is for employer monies to default to a 401(k) or medical fsa to the extent not allocated at the time of enrollment (rather than at the end of the plan year). In reconsidering the situation, I am wondering whether the employee's own option to reduce salary would not by itself constitute a choice between nontaxable benefits and cash that would enable a plan providing for salary reduction to count as a cafeteria plan even if all employer provided credits under the plan had to be used for nontaxable benefits? Any thoughts?

I have a client that has a 125 plan providing for purchase of benefits through employer provided credits and pre-tax salary reduction by employees. The client wants to increase employer provided credits under the plan but to default unused credits into elections under a 401(k) plan or health care reimbursement plan. The effect, in other words, would be to take cash out of the choices. Is there anything that would prevent this (considering the matter primarily from the 125 angle)? If the matter were just one of an employee's making choices among employer provided, nontaxable benefits, I don't know that there would be. My main concern, I guess, is whether pre-tax contributions by employees would be permitted to such a plan. May cash be taken out of the options under a 125 plan? Would such a plan, though not a 125 plan, be permissible? Anyone have any thoughts? Thank you, John.

A client is a large company that has recently put some of its salespeople on a commission basis. Commissions are not included in the definition of compensation for purposes of the client's defined benefit plan. One of the execs of the client who has worked in the insurance industry has said that at a former employer, salespeople who were paid on a commission basis were given "fictitious salaries" for purposes of the defined benefit plan. This exec also said that it is common practice in the insurance industry to do this. I have never heard of this and am doubtful about how and whether such a thing could work. Does anybody have any knowledge of "fictitious salaries" or any similar practice through which commissioned participants are deemed to have earned some sort of surrogate for commissions? For those of you who work with defined benefit plans in which some participants earn commissions, how do you handle the definition of compensation? Are all commissions included? Some commissions to a ceiling? TIA

You're right. See Treas. Reg. Sec. 1.105-11(g) Exception for medical diagnostic procedures. "[A]n employee's annual physical examination ... is not considered a part of the medical reimbursement plan and therefore is not subject to the nondiscrimination requirements." Thanks. John

Here are my own conclusions to my questions. If you have different conclusions, please let me know. 1) Does this arrangement for executive physicals constitute a self-insured medical reimbursement plan within the meaning of Code Sec. 105(h)(6)? Yes. 2) Is it per se discriminatory? Yes (Code Sec. 105(h)(2)). 3) Could the cost of the physical be justified as an ordinary and necessary business expense and therefore beyond the scope of Code Secs. 105/106? No. The cost of the physicals are includible in the income of executives under Code Sec. 105(h)(1). 4) If the arrangement is a self-insured medical reimbursement plan and is discriminatory, is the consequence merely that the cost of the physicals would be includible in compensation for the executives? Probably, yes. Presumably, the cost of the physicals would be helpful to the purpose of the employer, an ordinary cost of employment, and therefore deductible to the employer under Code Sec. 162(a)(1). However, it is conceivable that the IRS could take the position that a completely voluntary physical is not a necessary cost of business and deny the deduction. *** Again, thank you for considering these issues, and please let me know if you have a different take. John

A company provides a group health plan to its employees through a cafeteria plan. The benefits of the group health plan are fully insured. Both the group health plan and the cafeteria plan pass applicable nondiscrimination tests. The company wants to give its executives (all of whom are HCEs) the opportunity to take an annual physical on a strictly voluntary basis. This physical is not provided by the medical insurance purchased by the company for purposes of its group health plan. Instead, executives will take physicals at a hospital, and the company will pay the cost of the physicals to the hospital. The company will not receive any information regarding the physicals except that they have been taken. No employees other than executives will be given the opportunity to take the annual physical at company expense. 1) Does this arrangement for executive physicals constitute a self-insured medical reimbursement plan within the meaning of Code Sec. 105(h)(6)? 2) Is it per se discriminatory? 3) Could the cost of the physical be justified as an ordinary and necessary business expense and therefore beyond the scope of Code Secs. 105/106? 4) If the arrangement is a self-insured medical reimbursement plan and is discriminatory, is the consequence merely that the cost of the physicals would be includible in compensation for the executives? Thank you. John

HIPAA didn't change the 125 family status rules but did impose new requirements with respect to group health plans. With respect to new family members, I think you'll find the following required by HIPAA: --upon the birth or adoption of a child, a participant may add himself or herself and his or her spouse to group health plan coverage together with the newly born or adopted child (but not existing, uncovered dependent children); --upon a new marriage, a participant may add himself or herself to coverage together with the new spouse and the spouse's dependent children, whether adopted by or step-children to the participant (but not existing, uncovered dependent children of the participant). A cafeteria plan is not *required* to allow participants to make changes to their 125 elections to conform to their exercise of HIPAA, ghp rights. In other words, you could have a situation where the employer's ghp makes the above special enrollment rights available (as required) but the employer's cafeteria plan does not. However, the 125 regs. do provide that cafeteria plans *may* allow participants to change their elections so that the elections conform with an exercise of HIPAA rights. [This message has been edited by JJD (edited 10-09-1999).]