Bob R

I could be wrong on this...but my recollection is that the "employer" must be engaged in a trade or business to establish the plan. Thus, the family that employes the nanny can't establish a plan. There are no oridnary and necessary "business expenses." However, the nanny is a self-employed individual - but that leads into the issue that has been covered in numerous other threads about sole propoprietors being unable to have a plan.

More than likely you'd be able to do what is being proposed - but the depends on a few items. First, if you're only referring to insurance then there's no problem at all. Since the repeal of Section 89 many moons ago, there are no federal nondiscrimination rules when it comes to insured benefits. There might be some state law issues here, but I doubt that is the case in this situation because presumably everyone has the same benefit - it's just the employer subsidy that is varying. Second, if the employee paid portion is being pre-taxed through a cafe plan, then you have 125 nondiscrimination to worry about. Other than the 25% concentration test, there's really no concrete tests to determine whether one group making a larger contribution than another group is discriminatory. I think you'll find that using the 410(b) coverage type tests will help (the ratio % or the nondiscriminatory classification test component of the average benefits test). There are enough references in 125 to 410(b) or the nondiscrim classification test that I'm comfortable using those rules when testing whether different benefits or rights under the cafe plan are nondiscriminatory. One note -- if it's only NHCEs who have the lower employer paid insurance and thus the higher cafe contributions, then I don't think there's any concern (other than passing the 25% concentration test).

And, I believe that if it is a for-profit business and the contribution is made more than 30 days after the due date of the tax return, then it is annual addition under 415 for the year of the contribution, not the year to which it relates. It's safe to say that you generally want to make the contribution by the due date of the tax return.

Just to clarify - 125 doesn't actually "provide" for any benefits other than a tax benefit. In general terms, it allows you to "buy" certain benefits on a tax free basis. It's the other code sections that allow the "purchased" benefits to be paid tax free. Section 105 is for health benefits. In essence, it permits payments from a health plan to be excluded from income. The health benefit could be a typical insurance policy or a self-funded health plan -- which is where a health FSA comes in. You use 125 to reduce your comp pre-tax and you are purchasing coverage under a health FSA (even though it's generally buried in the same plan document that includes the 125 feature). When the health FSA provides a reimbursement, that reimbursement is excludible from your gross income due to code section 105 (and I'll admit, I generally mix up section 105 and 106 - one section permits an employer to provide health coverage without an inclusion in income of the value of the coverage and the other allows actual payments from the coverage to be excluded from income).

I'll throw in a few comments - What we don't know is whether the IRS would give us a free pass on the 25% concentration test if there are no non-key employees. In the 401(k) arena, if there are no nonexcludible NHCEs (e.g., if no HCES because all are excluded under the union exclusion), then you get a free pass on the ADP test. Yet, if you ran the math for the ADP test you'd fail. Same situation here - we just don't have anything formal or informal from the IRS on this so it's open to a reasonable interpretation of the rules. For the underlying benefit (the health FSA or if you over a self-funded health plan outside of a cafe plan), then I think you pass nondiscrimination if there are no HCEs.

I've seen this done in many plans. You won't find anything specifically permitting it. But, there is nothing prohibiting it and I therefore think you can do it. While there is no guidance on how to test nondiscrimination as to eligiblity under the cafe plan when there are 2 conditions, I'd apply the same rule we use for retirement plans, i.e., permissive disaggregation where each benefit is treated like a separate plan. Arguably, because there are no aggregation rules for cafe plans, it seems reasonable that if you can do this with 2 separate cafe plans, you ought to be able to do it under 1 plan.

I agree - all the service counts. There is nothing permitting you to exclude the service with a foreign subsidiary.

I'm not sure what voluntary life is, but the only type of life insurance (other than AD &D) is group-term life under Section 79. The key is that a cafeteria plan can generally only include benefits that could be provided by an employer on a tax free basis. Section 79 excludes employer provided group-term life up to $50K. AD & D is allowed because the IRS considers it to be accident and health coverage.

It depends on the provisions of the cafeteria plan. Offhand, I can only think of 2 possible provisions in GUST that would affect a cafeteria plan - the definition of a leased employee and a highly compensated employee. Some cafeteria plans include these definitions and others don't. If a plan includes them, then an amendment would be appropriate (but those were effective in 1997, not 2002). In 2002, you might have an issue under EGTRRA with respect to the definition of key employee. That is effective in 2002 and should be amended -- if the plan includes the definition of key employee.

I'm a little confused by your suggested correction method. First, if you perform the test at the end of the year and fail, then it appears (based on the statute) that the key employee must include all amounts in income -- not just the excess. That's why correction mid-year is the safest approach, even if you end up overcorrecting. Second, based on your approach, regardless of whether it's the full amount or just the excess that's included in income, you stated that there are no amounts left in the year to correct. But, you then state that you adjust FICA withholding in the last pay check. It seems to me both of those statements are inconsistent. The correction must relate to the year the test is failed and if you wait to the end of the year to test, it will be too late to adjust the last paycheck for that year. Unfortunately, I haven't that even addresses the situation of how to handle a failed test. I guess that means any reasonable interpretation will work.

Unfortunately, there isn't much out there on individual policies being run through a cafeteria plan. I think the issue you are getting it has to do with a general cafeteria plan requirement. A cafeteria plan must be for employees although it's possible for others to benefit from coverage obtained through a cafeteria plan. The distinction is that it's probably not O.K. to have an individual policy that only covers a dependent. But it is O.K. to have an individual policy that covers both the employee and the dependent. Of course there are other issues that come up by paying for individual policies through a cafeteria plan. One of the tougher issues is the application of HIPAA. If 2 employees elect the same individual coveage and pay for it through the cafeteria plan, it's now employer provided coverage. And, under HIPAA the insurance company wouldn't be able to deny a third employee who wants the coverage (e.g., even if the employee had cancer). That's why some Blue Cross companies won't issue individual policies where the premium is being paid through the employer.

The IRS doesn't care what the effective date of the GUST restatement is as long as all of the GUST required provisions are retroactively effective. (This is mentioned in one of the FAQs on the IRS web site at: www.irs.gov/ep.) Also, some plans have the elimination of the QJSA built into the document. The language provides that if this an amendment eliminating QJSA's, then the amendment will generally be effective as of the later of the stated effective date or 90 days after the notice is given to participants. One final point. When eliminating QJSAs, be careful with the impact on the death benefit. Some plans provide a QPRSA equal to the minimum 50% so that the participant can designate any other beneficiary for the remaining 50% w/out spousal consent. By eliminating the QJSA, 100% must go to the spouse unless the spouse consents. So, the participant would need to get a new beneficiary designation form if the death benefit in excess of the minimum QPRSA was designated to go to someone other than the spouse and the participant still wants that beneficiary to receive a death benefit.

For whatever it's worth, I agree with Chip Brown's comment. Rev. Proc. 2000-20 makes it clear that your client will be entitled to the extended deadline that applies to the Kemper prototype. This is true even though Kemper said you can't continue using the document and even though you aren't going to update using the Kemper plan. So, you don't need the certification.

In the past, the NIP was required for all plans (including standardized plans where no DL filing was being made). But, as pointed out, in 1995 the rule was modified so that the NIP is only needed when a DL is being requested.

Issuing a new 402(f) notice to take into account EGTRRA is a priority item for the IRS. But, I haven't heard any rumors as to when they expect to have it issued. My guess is that it will be out before the end of the year.

For d/c plans it's not an issue because participants in a d/c plan aren't entitled to top-heavy minimums unless employed at the end of the year. So, you'd have until the end of the 2002 plan year to adopt the EGTRRA amendment w/out there being an imperissible cut-back.

I don't see any problem with your approach. I've heard some people argue that you aren't really modifying the VS just be inserting special effective dates. The theory is that you are still using VS language and you should be able to do in one plan what you can do in two plans. But, it would be nice if the IRS were to address the issue. And, until they do, you're approach is the safe way to go. You might want to also make sure the VS you are using requires a retroactive restatent date. While the GUST provisions must be retroactive, the IRS doesn't mandate that the entire restatement be retroactively effective (see the FAQs at www.irs.gov/ep).

As PLOSKY pointed out, IRS Revenue Ruling 61-146 is the authority. That Rev. Rul. allows an employer to provide individual coverage on a tax free basis. Issues that need to be considered is whether providing individual policies though a cafeteria plan subject the policies to ERISA or HIPAA. The problem is that once the premium is paid through the cafeteria plan, it's an employer provided benefit for purposes of the code. That doesn't necessarily mean it's an employer provided benefit for purposes of ERISA or HIPAA. But, I had heard that some Blue Cross Co.s won't issue individual policies if the premium is paid by the employer (e.g., through a cafeteria plan) because of HIPAA. If 2 employees obtain the same policy, then oher employees can't be denied coverage.

There are no IRS "model amendments" for all of the GUST provisions. However, for terminating plans the Cincinnatti key district office sent language to practitioners that could be used to update a plan for GUST. While not model language issued by the IRS National Office, it worked at the key district level and this is probably what you are thinking of.

The answer depends on who you ask. To be safe, have the employer sign a certification of intention to adopt the GUST prototype. At ASPA, Dick Wickersham stated that he thinks the employer should have at least adopted the plan as a prototype before making the amendments. But, the language you cited doesn't exactly say that. And, what if you were establishing a new d/b plan using a prototype. GATT amendments would be needed to the TRA '86 prototype so that you could take it into account for funding. So, from day 1 you could have an individually designed plan. And, I think the language in Rev. Proc. 2000-20 was added for this type of situation. But you can't go wrong by using the certification.

For non-governmental plans, it's the last day of the first plan year that begins in 2001. Unless you have a short plan year in 2001, the deadline will be 12/31/01 for a calendar year plan and will be in 2002 for non-calendar year plans. But .... watch the news for an extension of this general deadline. It's expected that the IRS will issue an extension due to the Sept. 11 events. That extension might only be for another month or so for entities that aren't in Manhattan.

I think it's still permitted for any plan -- prototype or individually designed -- subjec to the conditions in the Rev. Proc. So, if you had used safe harbor ADP/ACP provisions, the tack-on probably wouldn't work. If you are filing Form 5310 you don't have much to lose by trying the tack-on amendment. If you aren't filing the form, you'd be better off using a recently approved protoype or volume submitter plan because that language has been approved. The tack-on amendment is technically not IRS approved - and you need to make sure you add the IRS model amendments for the addition of transportation fringes to compensation and the RMD regs (assuming you used the new rules).

I respectfully disagree. Just because someone has become a participant doesn't mean you can't change the eligibility conditions and exclude them from the plan. Of course any interest they have in the plan continues to vest and the amendment to change eligibility does not cause a distributable event. Many plans state that once someone has become a participant, they will remain a participant even if the eligibility conditions are amended. But, that's a plan design issue -- there is nothing in the IRC that states once a participant always a participant. The same could occur due to the addition of an excluded class of employees. As far as you question, what do you want the answer to be? The amendment should be specific so that the desired result can be acheived In most cases the actual amendment will provide that for employees hired after X date, the new condition are Y. That makes it clear. But, you could state that effective as of X the new conditions are Y. In my opinion that would impose the new conditions on all employees -- even those who had already become participants unless there is something in the plan stating that once you are a participant you remain a participant.

Arguing multiple discretionary contributions might work. But, you never know for sure. And, I suspect that when people update for EGTRRA at the end of 2002 that they won't include language pemitting an additional discretionary contribution. As far as vesting, you have to go back to TRA '86. Many people operationally applied the more restrictive TRA '86 schedules. I don't recall the specific cite, but around the time that updates were being made in '93 to '94 the IRS issued something stating that there was no authority to apply the new vesting schedule without a plan amendment. But, because there was so much non-compliance, they weren't going to enforce the rule. The issue now is whether that puts eveyone on notice or whether there will be non-enforcement policy.

The problem is that there is no definitive answer -- and it's unlikely the IRS will issue anything further on this. First of all, while I agree you can operationally apply the liberalizing (for lack of a better word) provisions of EGTRRA, I disagree with the comment that you can operationally increase a plan limit on how much someone can defer. If a plan limits deferrals to say 6%, nothing in EGTRRA changed that. There was no 6% limit under prior law -- that was just a plan design. So I find it to be a stretch to state that because the 415 limit has been increased to 100% that people can start deferring in 2002 up to almost 100% with a retroactive plan amendment made at the end of 2002. Now the tougher issue -- 411(d)(6) cutbacks. Presume you have a standardized plan so that anyone who terminates with more than 500 hours shares in allocations of p/s or forfeiture allocations. Does a retroactive plan amendment made at the end of 2002 cause a cutback? The IRS made it clear that for a d/c plan, you don't have to worry about the top-heavy rules because you don't accrue the top-heavy minimum until the last day of the year. But, how about the increase in the comp limit to $200,000 or the change in vesting for matching contributions? By increasing compensation, you are reducing the share that is allocated to those who earn less than $200,000. Many people have heard the IRS state that in a similar circumstance (i.e., once someone has 500 hours in a standardized plan) you can't change an allocation formula, such as a non-integrated plan to an integrated plan --- even where it's a discretionary p/s contribution and no one is entitled to anything unless a contribution is made. This is what some people at the IRS have said informally so there isn't anything concrete on this. But, those who follow the IRS position would have the same problem by increasing compensation. Take a look at vesting. If a schedule for matching contributions is reduced from a 7 year graded schedule to a 6 year graded schedule, you've reduce the amount of forfeitures to be allocated. So, those with over 500 hours have now had a reduction in the amount of forfeitures that would have been allocated because of a retroactive amendment to the vesting schedule. While this looks like a reduction, at least here you can argue that the change to the vesting schedule is required under the law (the compensation is not required). But, even though it's required to be changed, an employer has some flexibility in electing a new EGTRRA schedule. So it's possible there could still be a cutback issue for vesting as well. Again, there is nothing definitive from the IRS on this. But, some people are being cautious and trying to have EGTRRA amendments done sooner than the end of 2002. All we do know is that if you do it sooner, you can't go wrong.