cathyw

I'm a little uncertain about the fee exception in Rev Proc 2013-12 (as updated by Rev Proc 2015-27) Section 12.02(2). Does the reduced fee apply whether or not the plan sponsor requests a waiver of the 4974 excise tax? The language states that the reduction applies only if "...the failure would result in the impostiion of the excise tax". So I can read this to mean that if there's a waiver request and the IRS won't go after the participant to impose the fee then the reduction doesn't apply, and if there's no waiver request so the IRS can go after the participant to impose the fee then the reduction does apply. Am I reading this too narrowly? Thanks to all.

I have a similar issue but it involves the widow of a prior owner. I've calculated the RMDs year by year using the methodology you suggest. My question involves the request for waiver of excise tax against the recipient. The participant was a 33-1/3 owner up until 2 years before retirement when his stock was redeemed. He retired in 1994, received his first RMD for that year and then died in 1995. His widow has been receiving RMDs since, but they have not been calculated properly. The Schedule 8 requires an explanation if the plan sponsor is requesting a waiver of excise tax involving a 10% owner. I can't find any guidance on whether the widow should be considered a 10% owner -- does attribution apply in this instance and/or does the participant's redemption of ownership prior to RMDs commencing avoid the issue in its entirety? Can anyone point me in the direction of finding an answer? Thanks to all.

I've since found the reference I was looking for in the Treasury regulations under Section 72(p). The only way to exceed the usual 50% or $50,000 limitations is if the plan maintains a bona fide mortgage investment program, and that could not be limited to only plan participants. thanks.

Can the plan make a loan to a participant, secured by a mortgage, in excess of 50% of account or $50,000?

Within the past 2 months, I have gotten referrals from a couple of accountants regarding old "keogh" or small one person plans that were set up with Citibank many years ago. Citibank is trustee and the plan uses the Citibank prototype. Now, all of a sudden, Citibank is waking up and saying that they don't have a signed copy of the EGTRRA restatement and they have frozen these accounts until the matter is corrected through VCP. In at least two of these referrals, the client has nothing since the original establishment back in the 80s. Requests to Citibank to look for interim documents is not yielding any results. The standard VCP submission using Schedule 2 would require separate restatements and interim amendments, as well as the latest prior plan document. I probably couldn't even find some of these old document templates (such as TEFRA/DEFRA/REA). Will the IRS consider an application under these circumstances that just includes the EGTRRA document? Considering that Citibank probably has some culpability for not monitoring the continuing qualification of the plans for which they are trustee, it is pretty heavy handed to place full responsibility on the shoulders of these individuals who assumed that Citibank was taking care of this and who do not have the resources that Citibank has. Thanks for any input.

One follow-up. Since the FSA is funded solely by employee salary deferrals, am I understanding 105(h) to say that if there is at least one non-highly compensated employee who doesn't elect a salary deferral then the plan is discriminatory because the contributing HCEs will be entitled to a benefit that is not available to all other participants?

Thanks.

An employer maintains a 125 plan which includes pre-tax insurance premiums, health FSA (funded solely by salary reduction) and dependent FSA (funded solely by salary reduction). The plan passes the 25% concentration test and the utilization test when aggregating all benefits, and it also passes the separate DCAP tests. Is there separate testing required for the health FSA in addition to the aggregated tests? thanks.

A client currently maintains a 401(k) plan. Because of the changes in the Roth IRA rules for next year, many of the partners and other HCEs would like to take a distribution and roll over to a Roth IRA. I advised that distribution can only occur if the plan is terminated, and then they cannot establish a new plan for 12 months. The partners/HCEs would be okay with that, but they don't want the NHCEs to go without a plan. What if we spin-off the NHCEs to a new plan that excludes HCEs, and then terminate the original plan and distribute benefits to the HCEs. Does this work under the successor plan rules? The new plan is a successor plan with respect to the NHCEs, but is it a successor plan with respect to the HCEs who aren't eligible.

We resolved the issue with our client by amending the General Purpose FSA into a Limited Purpose FSA effective July 1, 2007 (the start date of the HDHP coverage) for all participants. It turned out that all participants chose the HDHP so the client avoided the problem of forcing non-HDHP participants into a Limited Purpose FSA. However, all participants were advised that they could only submit claims for limited purpose expenses through the end of the year (even though they could not change their FSA election amount) and therefore could wind up forfeiting some funds at the end of the grace period. But at least this way, they could set up HSAs and contribute for 2007. I agree that you can't give the participants the option, mid-year, of choosing which FSA to participate in. If you don't amend the General Purpose FSA, then the HDHP participants cannot contribute to the HSA for the balance of the calendar year. You can implement a Limited Purpose FSA for 2008, and operate both FSA plans for next year, giving the participants the choice before January 1.

jacmo - Thanks for the cite. The distinction between that example and what we were suggesting is that under the example, the participant was covered under the general fsa for the entire coverage period of the HSA. We were suggesting to amend the general purpose fsa into a limited purpose fsa (for those participants covered by an HDHP) so that the participant would not have general purpose coverage on and after July 1. There would be no new election by the participants...they would continue to contribute to the fsa based on their earlier election, but could only get reimbursement for limited purpose expenses. They would also be allowed to do a rollover to the HSA at 12/31/07. Of course, this could result in the participants forfeiting dollars under the fsa if their Sept. 2006 balance was smaller than their 12/31/07 balance (which is rolled over) and the remaining balance is not used up by the end of the grace period. The issue that now has me uncertain is that this amendment would be a curtailment of the fsa benefits. I'm still looking into that aspect of this redesign.

I too was not focusing on any cutback issues if the plan is amended to limit the allowable expenses. What concerns are there regarding cutback? I'm not aware of any anti-cutback rules re: FSAs similar to 411(d)(6) that applies to qualified retirement plans. Getting back to the FSA question, if changes in election are not allowed in conjunction with the "cutback" amendment, and going forward the participant can only be covered for limited purpose expenses, have we then protected the HSA deduction? If the amendment constitutes a change in coverage that would otherwise allow a change in election, would that undermine the HSA deductibility? The participants will be allowed to rollover at year end the lesser of their remaining balance or balance from September 2006. If there is no change in election, it is possible that participants will be leaving money behind if their Sept '06 balance was less than the 12/31/07 balance.

I agree with what you're quoting. But we're not talking about a mid-year rollover. The intent was to amend the FSA effective July 1 to only reimburse limited purpose expenses for anyone covered by the HSA. This presumably would make the FSA HSA-compatible. Then, at the end of the FSA's plan year (December 31) the participant could do a rollover to the HSA. My concern was whether the employer's amendment of the FSA was sufficient to render the participant an eligible individual for HSA deduction purposes, even though the participant had made an election under the FSA at the beginning of the year when it was not HSA-compatible.

We weren't planning on having the participants make new FSA elections as of July 1; we just wanted to amend the FSA to restrict the allowable reimbursements for those covered by the HDHP. That would probably result in participants having funds left over at year end, which is why we were adding the rollover provision. My understanding is that a rollover can be done as late as 2012. The HDHP, and the nonHDHP, run on a contract year ending June 30. The FSA runs on a calendar year. My original question was trying to determine whether the change in the FSA mid-year would be an effective method for treating the HDHP-covered participants as eligible individuals entitled to HSA deductions for the second half of the year. Or, since the participants had made 12-month elections under the FSA back in January, are they stuck with no HSA deduction this year?

If the employer has been maintaining a general purpose FSA on the calendar year, and then adds a HDHP with HSA account as a medical plan choice as of July 1, can the FSA be amended mid-year to limit allowable reimbursements to limited purpose expenses only for those participants who elected the HDHP/HSA coverage? Essentially, the employer wants to offer both a general purpose FSA and a limited purpose FSA. I would prefer if all of these changes were done as of January 1. But since it's mid-year, will the employer's unilateral change to the FSA plan affecting those participants who elect HDHP/HSA coverage be effective in protecting the tax deduction for HSA contributions? The FSA would also provide for rollover to the HSA and grace period, so that at December 31 the participant could choose to transfer the lesser of the remaining or Sept 2006 FSA balance to the HSA.

One of the reasons the result seemed inequitable to me was that since this is one plan, I don't believe the plan could have accepted any deferral from the Company B compensation. It's a different result if the employee was newly hired and made a deferral after maxing out under a separate plan. I believe that deferral would count for the ADP test, even though it would be refunded after the end of the year.

Yes, the 402(g) limit is individual. That's why the employee did not defer anything from Company B compensation.

Per IRC Section 413, the plan must apply the minimum service requirements of 410(a) as if the employers are a single employer. I believe that precludes the ability to disaggregate as an "otherwise excludable".

An employee in Company A also received some compensation late in 2006 from Company B. The companies are unrelated, but participate in the same 401(k) plan. The employee had made the maximum 402(g) contribution relating to Company A compensation before receiving the compensation from Company B, so did not defer based on B compensation. The employee is an HCE wrt Company A, but is a NHCE wrt Company B. Company B's ADP test fails due to the employee's zero deferral. Can the employee be treated as not eligible to make deferrals wrt Company B, and therefore be excluded from the ADP test? Seems only fair and logical to do that, but we know IRS rules don't operate on that basis. Thanks

An employer maintains a calendar year cafeteria plan with health FSAs, dependent FSAs and premium conversion. The employer is acquired and becomes part of a large controlled group. The parent of the controlled group establishes a group medical program and cafeteria plan (with health FSAs, dependent FSAs and premium conversion) effective 1-1-06. This employer decides to stay under it's existing group medical (and cafeteria) plan until at least renewal on 8-31-06. Now the employer wants to join the controlled group plans as of 9-1-06. The major difference in the cafeteria plans is that the health FSA limit is substantially greater in the controlled group plan. Can the employer terminate its cafeteria plan and join the controlled group plan for the remainder of the year? If yes, would the employees be able to make new FSA elections under the controlled group plan for the remainder of the year, and use up the existing FSA balances under the old plan? If the employer can't terminate the old plan and adopt the new plan mid-year, can the plans merge? Even if possible, I assume that the employees could not make a new election under the terms of the merged plan to take advantage of the increased FSA limit, so I don't really see any benefit to this option. Obviously, the old plan can continue until 12-31-06 and then be terminated, with the employer adopting the controlled group plan for 2007. Are there any other options?

Company A has maintained a SIMPLE IRA since 1999. In 2004, Company A acquires another company and the total employee count now exceeds 100. The transition period runs out 12/31/06 to convert to some other qualified plan. During 2005, a new entity is formed (Company B) which acquires the stock of Company A along with 5 other previously unrelated companies. Some of the employees of Company A will remain on that payroll, while the others will be moved to the payroll of Company B, the parent, during 2005. Company B expects to set up a 401(k) for the entire group effective 1/1/06. But, for the balance of 2005 Company B wants to continue the SIMPLE IRA for those employees moved from Company A to its payroll. Can Company B adopt a SIMPLE IRA now for the benefit of the transferred employees? Or, because Company B did not maintain a SIMPLE before the acquisition, is it precluded from establishing one now since there are more than 100 employees in the controlled group? If yes, how do they continue the SIMPLE benefits fro the transferred employees through 12/31/05? Can Company B just make contributions to the existing accounts without signing Form 5304-SIMPLE? TIA

I don't think that you can add spousal consent requirements to a profit sharing account that never had J&S. The regulations under 411(d)(6) indicate that election rights are a key element in defining optional forms of benefits; different election rights mean different optional forms of benefits. Therefore, if you add spousal consent as a requirement for distribution, that is a separate and different optional form of benefit. And if you no longer allow lump sum distributions without spousal consent, you have eliminated an optional form of benefit. And, as we know, you cannot eliminate an optional form of benefit (at least as to benefits already accrued), unless the IRS specifically allows the elimination. I think with the current popularity of merging MP and PS plans, the IRS should issue guidance on whether extending J&S to PS accounts will have a specific exemption from the cut back rules.

If the self-employed person has net Schedule C income of at least $185,000, then the full $35,000 can be contributed and deducted. The 401(a)(17) limit is applied after the reduction of the Schedule C income by the plan contribution and one-half of the self employment tax. For example, if net Schedule C income is $185,000, it is reduced by the $35,000 contribution and approximately $7,500 self-employment tax. This results in $142,500 as plan compensation, which would support the $35,000 allocation without a 415 violation.

An employer is looking to establish a group IRA plan under Code Section 408©. Does anyone know of an institution that is willing and able to act as trustee/custodian under such an arrangement? Preferrably located in the New York area, and with a prototype trust agreement, but any information is welcomed. Thank you.

There is a PT class exemption (75-1) which exempts a loan or extension of credit from a broker/dealer to a plan if the proceeds are used for the purchase of securities. However, notwithstanding that buying on margin is not a prohibited transaction, it still is not appropriate for a retirement account.