Dave Baker

Unless you keep some kind of separate accounting, you'll need to have the joint-and-survivor annuity rules apply to the existing 401(k) balances. That might make some participants mad, when it comes time to make an in-service withdrawal (e.g., hardship) or at termination of employment - a participant who is married at that time will need to get his or her spouse's permission to take the 401(k) funds out in a non-annuity form of payment (even the 401(k) funds accumulated before the money purchase plan assets were merged in). Becomes especially unpleasant if one or more of your married participants already is separated but not legally divorced.

I think most states provide by statute that a trust does not "fail" merely because it does not have a corpus, if the terms of the trust agreement otherwise include the elements required to form a trust under state law. At one time the IRS was willing to allow an accrual basis taxpayer to wait to contribute anything to the trust fund until the due date for making the first plan year's contributions (which would be after the end of the first plan year), but was unwilling to allow a cash basis taxpayer to make the first plan year's contribution some time after the end of the first plan year. But I think the IRS lost that argument in court and later acquiesced. See Dejay Stores v. Ryan, 229 F.2d 867 (2d Cir. 1956) and Tallman Tool & Machine Corp. v. Commissioner, 27 T.C. 372 (1956), acq. 1957-2 C.B. 7 (were those cash basis taxpayers?). Anyway, Revenue Ruling 81-114, 1981-15 IRB 7, makes it clear that for both cash basis and accrual basis taxpayers, "deductions are allowable under section 404(a) of the Code for contributions paid after the close of the taxable year, but within the time prescribed for filing the employer's income tax return for the preceding year, even though the employees' trust did not have a corpus at the close of the preceding taxable year." It is true that the IRS requires that the trust be valid under local law, and maybe there's a state in which the failure to have a corpus will cause the written trust agreement to fail, but I'd be surprised. Some practitioners insist on the $100 by year-end as a precautionary matter, for purposes of proving to the IRS, if it's ever questioned, that the plan was timely adopted. Once there is an account established at some financial institution in the name of a trust, that's awfully strong evidence that the employer did in fact decide to adopt a plan and that the trust agreement that purports to be dated and signed before the end of the first plan year was in fact signed on the date it says it was. But I wouldn't be worried about the IRS attacking the qualified status of a new plan merely because the trust didn't have any corpus by the end of its first year.

Note to pax - your reply in this topic was accidentally deleted, while I was trying to fix some wierdness in the message board script - please repost. I apologize! Thanks.

(HHS Press Release 10/29/99) - HHS Secretary Donna E. Shalala proposed today the first-ever set of national standards to protect the privacy of Americans' personal health records. The standards will apply to medical records created by health care providers, hospitals, health plans and health care clearinghouses that are either transmitted or maintained electronically, and the paper printouts created from these records. "The privacy of Americans is protected in their bank transactions, their credit card statements, and even their video rentals. Yet, until today, Americans had no federal privacy protections for their medical records," Secretary Shalala said. "These proposed standards are an important step forward in protecting the privacy of some of our most personal information." Shalala noted that Americans are increasingly worried that the privacy of their medical information will be violated. Some have even taken action to avoid creating a medical record, including withholding information from their doctors, changing doctors, or even avoiding care altogether. "We cannot allow the absence of privacy protections to compromise the quality of care in our nation," Secretary Shalala said. "Our proposals will provide Americans with greater peace of mind as they seek care, yet they are balanced with the need to protect public health, conduct medical research and improve the quality of health care for the nation." The bipartisan Health Insurance Portability and Accountability Act of 1996 (HIPAA) -- also known as the Kassebaum-Kennedy law -- called on Congress to enact comprehensive national medical record privacy standards by Aug. 21, 1999. If Congress was unable to meet that deadline, HIPAA required the Secretary of HHS to issue final regulations by Feb. 21, 2000. Today's proposal marks the beginning of that regulatory process. The proposal reflects the five principles outlined by Secretary Shalala in September 1997 as part of her Recommendations for Protecting the Confidentiality of Individually Identifiable Health Information: Consumer Control. The standards provide consumers with important new rights including, the right to see a copy of their medical records; the right to request a correction to their medical records; and the right to obtain documentation of disclosures of their health information. Accountability. The statute includes new penalties for violations of a patient's right to privacy. These penalties include, for violations of the privacy standards by the persons subject to them, civil monetary penalties of up to $25,000 per person, per year, per standard. There are also substantial criminal penalties applicable to certain types of violations of the statute that are done knowingly: up to $50,000 and one year in prison for obtaining or disclosing protected health information; up to $100,000 and up to five years in prison for obtaining protected health information under "false pretenses"; and up to $250,000 and up to 10 years in prison for obtaining protected health information with the intent to sell, transfer or use it for commercial advantage, personal gain or malicious harm. Public Responsibility. Privacy protections must be balanced with the public responsibility to support such national priorities as protecting public health, conducting medical research, improving the quality of care, and fighting health care fraud and abuse. For example, public health agencies routinely use health records in their efforts to protect the public from outbreaks of infectious diseases. The new standards put in place how such information should be released. Boundaries. With few exceptions, an individual's health care information should be used for health purposes only, including treatment and payment. For example, a hospital could use personal health information to provide care, teach, train and conduct research and ensure quality. However, employers who also function as health care providers or health plans would be barred from using information for non-health purposes like hiring, firing or determining promotions. Similarly, insurers could not use such information to underwrite other products, such as life insurance. Security. Organizations that are entrusted with health information must protect it against deliberate or inadvertent misuse or disclosure. The proposed standards would require each covered organization to establish clear procedures to protect patients' privacy, designate an official to monitor that system and notify their patients about their privacy protection practices. In addition, those who get information and misuse it would be subject to the penalties outlined in the proposal. The proposed standards would enhance the protections afforded by many existing state laws. In circumstances where the federal rules and state laws are in conflict, the stronger privacy protection would prevail. The proposed privacy standards would apply to consumers whether they are privately insured, uninsured or participants in public programs such as Medicare or Medicaid. While the privacy standards proposed today are a significant step toward protecting patients' confidentiality, HHS does not currently have the authority to protect all medical records. Under HIPAA, HHS does not have the authority to protect records that are maintained in paper form only. HIPAA also does not allow HHS to issue standards for records that are maintained by other insurers, or by employers for worker's compensation purposes. The proposed rule does not establish appropriate restrictions on the use or redisclosure of such information by likely recipients, such as researchers, life insurance issuers, marketing firms, or administrative, legal and accounting services. HHS also lacks the authority to provide Americans with the right to take action in court when their medical information is used inappropriately -- a critical consumer protection that only Congress can provide. The Clinton Administration has called upon Congress to close these important gaps and enact comprehensive national legislation to ensure that all medical records are protected. The proposed rule will be open for comment from the public for 60 days. [This message has been edited by Dave Baker (edited 10-29-1999).]

News Release 99-80 is online at http://www.benefitslink.com/IRS/ir99-80.shtml

Test - please ignore

An employer client of mine has asked me to bless a proposed recordkeeping services agreement with BISYS, in connection with the client's decision to use the American Funds Group for participant-directed investments. Is it industry practice for BISYS-type service-providers to have language like this in the agreement for services -- "The Plan Administrator's remedy and BISYS' sole liability for any claims, notwithstanding the form of such claims (e.g., contract, negligence or otherwise), arising out of errors or omissions in the services provided by BISYS shall be for BISYS to use reasonable efforts to correct any resulting error in its own records or in any reports BISYS has prepared for the Plan Administrator." That language is in a section describing the employer's duty to serve as Plan Administrator. (Don't have any problem with that.) Later, in a section entitled "Limitation of Liability," the contract states "BISYS' sole liability and the Employer's sole remedy for those errors resulting solely from BISYS' negligence in the performance of its services hereunder, shall be at BISYS' own expense to use its reasonable efforts to correct such error." I can appreciate that a service-provider would be able to provide services at lower cost if its exposure for damages arising from negligent performance is expressly limited. There's no free lunch. But I'm wondering if other service-providers provide services for similar fees without this kind of limitation on liability for negligence. And, if this is an industry standard, whether an employer/plan administrator needs to have some other firm checking the recordkeeper's work (e.g., ADP tests) in order to be able to fulfill its fiduciary obligation to operate the plan according to the plan's terms.

Thanks, Greg! Sal's revised description of the way the lookback rule and the new $85,000 limit applies now lines up with the earlier Dick Wickersham comments, as noted at Sal's "what's new" page ( http://cyberisa.com/erisa_new.htm )

Sal Tripodi's TRI Services web site (http://www.cyberisa.com) explains that the new $85,000 number (up from $80,000) would apply in 2000 to a calendar year using a prior-plan-year lookback definition such that, for a plan year which begins January 1, 2000, the $85,000 compensation limit will be applied to compensation for the period January 1, 1999, through December 31, 1999. Has anybody heard anything different?

There is a parallel 1,000 hour rule in ERISA: http://www4.law.cornell.edu/uscode/29/1052.html It seems to be the same in all material respects as the 1,000 hour rule in section 410(a) of the Code: http://www4.law.cornell.edu/uscode/26/410.html Boy, the more you read these provisions the more of a stretch the IRS' position seems to me to be. They don't literally say that the only age and service rules a plan can apply are the age 21/1,000 hour of service rules ... they say that an employee can't be made to wait to enter a plan any longer than certain entry dates that follow age 21 and 1 year of service. They don't address minimum coverage requirements for a plan as a whole (whether classes of employees can be excluded even though those age and service requirements might be met). Classes can be excluded, of course, if the plan as a whole meets the minimum coverage rules of section 410(B) of the Code. Arguably part-timers are a "class" that can be excluded ... not because they haven't met the 1 year-of-service rule (some will, if they work more than about 20 hours per week for a while), but because their current RATE of service is not at a certain pace (e.g. at least 30 hours per week). The IRS' position makes sense if it's right that classifying people based on their current rate of performing service is a "service"-related restriction and if the age/21 and 1 year-of-service rules are the ONLY age and "service" requirements allowed by law. But that interpretation of the 410(a) "service" requirement does not seem compelling to me ... one could just as easily argue that whether one works for a particular division of the employer is a "service"-based classification (who are you providing service for?) and yet such a service requirement is of course permitted if the plan as a whole is still able to meet the minimum coverage rules of section 410(B). The IRS seems to figure that 410(a) restricts "how much" service a plan can require - whether in terms of duration OR RATE of service - but that it does not restrict "what kind" of service one can require, such as service for a particular division or subsidiary whose employees are covered by the plan. [This message has been edited by Dave Baker (edited 10-24-1999).]

Here's the TAM: http://www.benefitslink.com/IRS/9635002.shtml Strangely, I'm having very little luck finding out more about it, by searching these message boards or by searching BenefitsLink (http://www.benefitslink.com/search) ... as I recall, the consensus was that discrimination-in-favor-of-highly-compensated-employees problems were likely to cause difficulty.

Kewl. Keep us posted here!

Most prototypes will have language allowing a related employer to sign on as a "participating employer." Most (maybe all) IRS-approved prototypes limit "related employers" to those entities that are part of a 414 group with the sponsoring employer. You might pose this question to the Corbel folks over on the BenefitsLink Prototypes Q&A column -- http://www.benefitslink.com/qa_columns/pro...pes/index.shtml

But if the plan is terminating, I think one probably needs to have the paperwork amended to add the $5,000 cash-out rule before all the funds leave the trust.

None that I know of, though isn't that rule only important if one wants to come under a "safe harbor" automatic approval situation? Such that a change after plan year-end might be approved, depending on facts and circumstances, if it is submitted to IRS? There's some helpful information on the printed instructions to whatever form the IRS provides for this purpose -- I forget the form's number right this minute, though. [This message has been edited by Dave Baker (edited 10-12-1999).]

See also the Mergers and Acquisitions Q&A column on BenefitsLink at http://www.benefitslink.com/qa_columns/mer...ons/index.shtml (click)

As a general rule, yes. But you can run into trouble quickly, if the parent company has a disproportionate number of "highly compensated employees," due to various "nondiscrimination" requirements in the Internal Revenue Code. Which benefit programs would the parent company be providing that are not provided on the same terms to employees of the subsidiary?

Kirk, are you basing your conclusion on the term "disqualifying provision" meaning something other than any provision that causes the plan to fail the qualification rules?

Filing for a letter is optional, of course. You'd want to get it in before the end of the "remedial amendment period" per the Treasury regs under Code section 401(B), if you want to be sure the amendment doesn't cause the loss of the plan's tax-qualified status. By filing before the end of the RAP, you get the ability to retroactively fix anything that's wrong with the amendment. (Please excuse me if I'm preaching to the choir here <g>.) Currently the RAP hasn't ended for amendments made in the past couple of years, though -- a revenue procedure says that even amendments that have nothing to do with the GUST amendments can be fixed retroactively, if the plan is submitted by the end of the deadline for GUST amendments. See Revenue Procedure 99-23 (click): "This revenue procedure provides that the extension of the remedial amendment period also applies ... to all disqualifying provisions of new plans adopted or effective after December 7, 1994, and all disqualifying provisions of existing plans arising from a plan amendment adopted after December 7, 1994." So basically I think you're good to go until the end of 2000.

What if an employer decides to pay bonuses to cafeteria plan participants, in amounts equal to the unspent part of their medical expense reimbursement accounts? Assuming income and FICA taxes are paid on these bonuses, and there is no written or oral promise on the part of the employer to make these bonuses in the first place or ever again, would the "use it or lose it" rule be violated?

Thanks, Jerry -- it's sure hard to find on the NBCH site -- finally found it on the "Employer's Information" page at http://www.nbch.org/nbchemp.htm

Is an annual 5500 needed for a 403(B)(7) program of church employer? The employer is putting in 5% of pay for a couple of officers of an organization, one of whom is using a 403(B)(7) custodial account rather than a 403(B)(1) insurance company annuity contract, and I'm sure the arrangement is a "church plan" as defined in ERISA. I think no 5500 is required, even though some of the money is going into a custodial account -- the 1998 Form 5500 instructions say "Do not file a return/report for an employee benefit plan that is any of the following ... A church plan not electing coverage under Code section 410(d)." But the Tax Management Portfolio (388-4th) author (Tax Deferred Annuities--Section 403(B)) says church (and governmental) sponsors must make the filings "if funded through tax-deferred custodial accounts," citing a provision in a Treasury reg under Code section 6058(a) (the 5500 statute). The reg specifically includes 403(B)(7) custodial accounts in the definition of "funded plan of deferred compensation," for purposes of the reg's requirement that each funded plan of deferred compensation file an annual information report with the IRS. (Treas. Reg. 301.6058-1.) But the reg goes on to enable the IRS Commissioner to relieve, in his disretion, an employer from filing information on the forms prescribed by section 6058(a). This seems to be the basis for the Form 5500 instructions' language specifically excluding governmental and church plans from filing, whatever the kind of plan being sponsored (but with a specific exception to the exception in the instructions for "statutory fringe benefit plans" such as cafeteria plans). [This message has been edited by Dave Baker (edited 09-23-1999).]

Know of any? If so, maybe we should work up a list of them in the BenefitsLink "library" -- http://www.benefitsattorney.com/links/Bene...d_Associations/

Are the employers in a group almost always in the same geographical area?

What's a health care coalition?