Christine Roberts

As you no doubt know the employer extension of coverage is alternative coverage, and if a new qualifying event during the period of alternate coverage causes a spouse or dependent to lose the right to the alternate coverage, it is treated as a brand new qualifying event, whenever it occurs. There is a good discussion of the topic in the Thompson Guide to Mandated Health Benefits (COBRA) by Paul Hamburger, which states that, to understand the regulations on this issue, which are incomplete, one must incorporate relevant sections of the preamble, into the regs. Let me know if you need a copy of the relevant sections, - but don't tell Paul or Thompson Publishing. I am also working on a simlar arrangement for a client so would be interested in exchanging further information.

Is it possible to satisfy the 50% participation rule for SARSEPs at any point during the plan year (e.g., the last quarter or last two months of the year), or is it necessary that the threshold be met at all times during the plan year??

Presume a SARSEP fails the 50% minimum participation test two years in a row - 1999 and 2000. Upon discovery of the problem late in 2000, all deferrals are stopped. If I understand correctly, presuming timely notification to employees, and timely withdrawal of disallowed deferrals, the only tax consequences of unwinding are the additional income tax to employees - and, I am guessing, the additional employment taxes the employer must pay on the re-included income. But for the prior year, the employees must ALSO potentially pay excise taxes on disallowed deferrals and earnings under IRC Secs. 4973 and 72(t), respectively, and the employer must potentially pay a 10% excise tax for untimely notification of excess SEP contributions. Is that correct? And, in either year the SARSEP failed the 50% test, can the employees "keep back" $2,000 as a deductible IRA contribution for each year, or must all deferrals be withdrawn?

What is the current status of the Section 127 educational assistance exclusion? My understanding was that HR 1180 was going to extend it through December 31, 2001. Did this happen? Is the extension applicable to courses begun any time before the cutoff, or did they have to be in existence at any particular time?

Gary, thanks for your response, however I am not sure I fully understand what you mean by the statement "PROVIDED the prohibited group members could have met the plan's eligibility requirment (after the amendment) at the time the plan was originally established." Shouldn't it be "provided the prohibited group members could NOT have met" the plan's post-amendment eligibility requirements at the time the plan was originally established? Or perhaps I misunderstand who you mean by "prohibited group members." Please provide clarification for me and other SARSEP-challenged individuals. Thanks.

If a SARSEP is nearing the 25 eligible employee threshold, can it PROSPECTIVELY amend its eligibility requirements to exclude more employees (e.g., require service in 3 of previous 5 years, instead of only 1 year), and thus sidestep ineligibility for at least a few years?

How are people handling plan document updates for the final and proposed Sec. 125 regulations? Is there any point in amending for compliance with the final regulations (e.g., change in status for group health/accident/long term life insurance), and then restating when the proposed regulations are final? Or restating for everything now and doing a "tune up" amendment if needed after proposed regs are finalized? How about operating the plan in accordance with final and proposed regulations, before plan is amended/restated (then making amendment/restatement retroactively effective as of date procedures changed). Finally, what are the prototype document providers out ther doing??

Can anyone hazard a guess as to the level of IRS enforcement activity, if any, that there is in this area (i.e., constructive receipt of accrued, unused PTO)? I would appreciate hearing from you.

Would ERISA 502(l) penalties be likely to apply, and if so, how would the "applicable recovery amount" be calculated??

If an employer-contributory 403(B) arrangement (hence subject to ERISA) does not update its plan document for SBJPA et seq. (presume underlying annuity contracts/custodial accounts ARE legally up to date) but is operated in conformance with SBJPA et seq. changes (e.g., multiple salary deferrals OK), are the Plan fiduciaries in breach of ERISA for failing to operate the Plan in accordance with its written terms??

Kirk, I agree that a plan year change would probably work - but need to know if it would be workable absent a plan year change. I note, pessimistically, that the proposed cafeteria plan regulations permit mid year election changes due to a change in coverage under or cost of group health and (I think) life insurance benefits, but that this exception does NOT apply to elections under flexible spending arrangements, which is what was at issue in my situation.

The IRS did address this issue in PLR 9009052. It contains a good discussion of what type of plan features give rise to "substantial limitations or restrictions" preventing constructive receipt, and what type of plan features do NOT provide such protection.

AMP - when you say "reform" these PTO programs, do you mean rewriting and obtaining a PLR on the revised arrangement? Or some other process?

Can an employer that sponsors a Sec. 125 plan (including medical expense and dependent care expense reimbursement features) increase the maximum deferral amount mid-year, and permit participants to increase deferrals, without running afoul of the prohibition on mid-year election changes? I would think the answer is "no" but since the mid year election change prohibition is generally geared to employee changes am wondering if there's an exception for this kind of case.

In response to Dave's post, the IRS did do a new version for 1999 terminations that is different from the 1998 version. I can't cite the differences as I have not had time for a side-by-side comparison. Dave, if you would like me to fax the 1999 version to you so you can get it on the system, let me know.

The latest word I have on this one is that the 1999 tack on amendment is the most recent available from the IRS, and may continue to be used with the following provisos: 1) it does not contain 415(e) repeal; and 2) it does not contain safe harbor language under 401(k) or (m) so such language must be added if the plan sponsor took advantage of the safe harbors prior to termination of the plan. The IRS tack on amendment can be obtained by calling (877) 829-5500.

Would a terminating profit sharing plan that contains accounts rolled over from a money purchase pension plan formerly sponsored by the same employer (the plans were merged) be subject to notice requirements under ERISA Section 204(h)? I am thinking the answer is "no" because benefits aren't accruing under the PSP. Any comments welcome.

PLR 9009052 states that accrued paid time off is includible in an employee's income when not subject to substantial limitations or restrictions. "Limitations & restrictions" include maintaining a minimum number of accrued hours, a maximum number of accrued hours (above which hours are automatically converted to cash & distributed to employee) and the requirement that hours be cashed in in blocks of, for instance, 40 or more. What is not clear is whether a 40 hour block of time that can be cashed out, but is not cashed out, is taxed twice: once when it is "included in income" because not cashed out, and again when it is actually converted to cash and distributed to the employee. Any comments on or experience with this issue? What is the status of IRS enforcement in this area, if any?

PLR 9009052 states that accrued paid time off is includible in an employee's income when not subject to substantial limitations or restrictions. "Limitations & restrictions" include maintaining a minimum number of accrued hours, a maximum number of accrued hours (above which hours are automatically converted to cash & distributed to employee) and the requirement that hours be cashed in in blocks of, for instance, 40 or more. What is not clear is whether a 40 hour block of time that can be cashed out, but is not cashed out, is taxed twice: once when it is "included in income" because not cashed out, and again when it is actually converted to cash and distributed to the employee. Any comments on or experience with this issue?

A case from the Northern District of California (Coble v. Bonita House, 789 F. Supp. 320) (1992) seems to suggest that if the employer changes coverage AFTER the COBRA recipient relocates, the employer must provide comparable coverage even if it does not provide coverage to employees or COBRA recipients outside their service are.

Employer changes group health insurance carrier in California - new carrier does not offer coverage in Illinois, where former employees enjoy COBRA coverage with affiliate of prior carrier. My understanding is that, under Cobel v. Bonita House, 789 F.Supp. 320 (N.D.Ca. 1992), the employer must find "meaningful coverage" in Illinois, comparable to the California coverage, but that under the final COBRA regs there is no such obligation if the only coverage made available to active employees is not extendable to the relocated COBRA recipients. It is relevant if the COBRA recipient relocates before or after the change in coverage? Do any of you have experience w/a comparable situation?

Pursuant to a sale of assets (no assumption of liabilities, etc.), buyer hires seller's employees and assumes sponsorship of seller's 401(k) plan, effective as of the first day of the last quarter of the calendar/plan year. Buyer maintains no other qualified plans and has no employees of its own, pre-sale. If the IRS audits that particular plan year, can both entities ultimately be responsible for responding to the audit?

The plan does not limit definition of compensation to W-2, however only shareholder-employees receive disability coverage and salary continuation benefits, so it appears that basing contributions on the salary continuation benefits would raise the discrimination issue Dave mentioned.

Organization that sponsors 403(B) arrangement with no employer involvement establishes separate 401(a) plan for purposes of making "matching" contributions based on deferrals under non-ERISA 403(B) plan. Does establishment of parallel 401(a) plan constitute "employer involvement" such that the underlying 403(B) arrangement becomes subject to ERISA?

Can "compensation" for purposes of qualified plan contributions include compensation received from an employer during a period of disability, where employer provides full salary for first 90 days of disability, and provides difference between salary and disability benefits thereafter? Applicable def. of comp. refers only to all earned income, wages, salary etc. rec'd. for personal services actually rendered in course of employment. Does it matter that disiability is expected to last less than 6 months?