Bob R

For whatever it's worth, here's my opinion. I can't think of any compelling reason to submit. The Announcement gives reliance as to the "form" of the plan if all of the conditions in the Announcement are satisfied. In addition, in some cases you have reliance as to the operational coverage and nondiscrimination issues. In those situations where you don't have reliance as to coverage or nondiscrimination (e.g., w/cross-tested plans), some people will submit. But, those are the same ones who were submitting for a full scope determination letter before the Announcement -- and a growing number of people really don't think a ruling on the average benefits test or a general nondiscrim test is worth obtaining. There are also some people (primarily attorneys) who just like to have a determination letter, even if it's really not necessary. Also, some are concerned about potential bankruptcy issues, especially in jurisdictions that hold an ERISA qualified plan is a tax qualified plan. And, some people want a determination letter before plans are merged, such as when there has been a business acquisition. Again, I don't think any of these are compelling reasons to submit. Sure, there are limited situations where a determination letter should be obtained. But I think those are the exception, not the general rule. Two final points -- (1) It's not clear what impact EGTRRA will have. For certain small employers w/new plans, there are no user fees. The only cost is for preparing the submission package, which could still be expensive. But, w/out user fees some practitioners may recommend that a determination letter be obtained. (2) Will standardized prototypes become less popular? The only advantage of a standardized prototype is that if 2 paired standardized plans are maintained, you have reliance as to the coordinating language for 415 and 416. If the plans are not paired (which is the case with nonstandardized plans), then you still have reliance as to the form of the plan other than the 415 and 416 coordinating language. With the nonstandardized you could still have reliance as to the coverage and nondiscrimination requirements if you select safe harbor options (e.g., you only exlcude union ees and nonresident aliens).

Below is Question 31 from the "Who's the Employer" Q & A column on Benefitslink.com written by Derrin Watson: Overlapping groups (Posted 29 October 1999) Question 31: Employer A and Employer B are a controlled group. Employer C is not part of the controlled group. Employer C is part of an affiliated service group with Employer B. Employer A is not part of an affiliated service group. For qualified plan purposes, are employees from A,B and C considered to be employed by the same employer? Or are the groups considered separately for testing and other qualified plan purposes (i.e., A and B are tested together, and B and C are tested together, but A,B and C are not tested together)? Answer: It depends on who you listen to, the Code or the IRS! The following is drawn from Q 9:9 of my book, Who's the Employer? It deals with controlled groups, but the logic would apply equal well to overlapping controlled and affiliated service groups: IRC §414(B) provides that for most qualified plan purposes, all employees of corporations that are part of a controlled group (whether or not they are component members of that group) are deemed to be employed by a single employer. Logically, this means that when you have overlapping groups, you end up with what amounts to one big group for qualified plan purposes. This is illustrated by the following example. Three Corporations, Two Groups, One Employer. Corporations X and Y are members of a controlled group. Y and Z are members of a different controlled group. For income tax purposes, Y has filed an election to be treated as part of the group with X and not with Z. That election is ignored for qualified plan purposes. All employees of X and Y are deemed to be employed by a single employer for plan purposes. All employees of Y and Z are deemed to be employed by a single employer. By the normal rules of logic, this means that all employees of X, Y, and Z are employed by a single employer. Think of it this way. Suppose X wishes to sponsor a plan covering all its employees as defined in the Internal Revenue Code. Who are its employees? Because of IRC §414(B), its employees are everyone on its payroll and everyone who is an employee of Y. Who are the employees of Y? Because of IRC §414(B), the employees of Y include everyone on its payroll, all employees of X, and all employees of Z. Hence, if X sponsors a plan covering all its employees, it brings in the employees of Y and Z automatically. At a recent conference, IRS representatives took a different approach, saying that overlapping groups must be tested twice to demonstrate compliance, once for each group. So, in the above example, a plan that included employees of Y would have to be tested against the XY controlled group and against the YZ controlled group. The author disagrees with this approach, based on the literal wording of the statute. There is no regulatory or other official sanction for this approach. The facts cited in this example are the same as those in the author’s first controlled group case in the late 1970’s. The profit-sharing plan sponsor was X, who had reluctantly included the employees of Y, but had never included the employees of Z in his plan. Z, as fortune had it, had ten times as many employees as the other two corporations put together. We had asked for a favorable determination letter for X’s plan. The IRS threatened to give us an adverse letter instead, using exactly the reasoning shown above. All three corporations, they held, were effectively a single employer. In desperation, we examined the plan language and found it automatically brought in the employees of Z if Z was treated as being in a controlled group with X. We argued that IRC §410(B) was therefore satisfied, and we simply needed to redo the allocations for the last several years to include all the eligible employees of all three. The IRS agreed, relieved in those simpler days not to have to issue an adverse letter.

The position taken at the Cincinnatti Key District Office is that you can't do it that way. The only refernce is to compare the statuory language in 401(k)(12) to the statutory language for SIMPLE Plans (where you can implement the safe harbor contribution through the notice to employees).

It depends on how the profit sharing plan is worded. If the normal form of distribution is a QJSA, then the new cash out rule doesn't apply. But, if the plan only requires a QJSA if a participant elects an annuity form of payment, then the new rule can be used. The point is that EGTRRA doesn't permit you to exclude rollovers in determining whether the interest in the plan is over $5,000 for purposes of the QJSA rules. A technical correction to the law will probably be needed to change that. So, you need to look at the plan -- if it states that a distribution will be in the form of QPSA unless an alternative is elected, then the new rule doesn't apply. But, if it says that a participant can elect a lump sum (without spousal consent) or an annuity, and that it's only if an annuity is elected when the QJSA rules apply (e.g., the need to get spousal consent), then the new rule could be used.

For whatever it's worth, you might look at IRC Section 1372. I don't have it in front of me, but it generally provides that more than 2% shareholders in an S Corp are treated like partners for fringe benefit purposes. Then, you go back to the prop. 125 regulations which state that, in general, a cafeteria plan must be for employees. Pension plans have IRC Section 401© which states that partners and self-employed individuals are treated as employees. But, there is no similar provision for IRC Section 125. So, the bottom line is that more than 2% shareholders in an S Corp aren't employees and therefore can't participate. Also, due to stock attribution, there may be others (e.g., spouses) who are also ineligible.

The premiums can be paid from the employer's general assets.

There is no answer to this issue. Since you are generally using self-correction, I think the excess is not in the ADP test or 415 limits. My reasoning is that under self-correction the theory is to undo the transaction as though it never happened. But, that's just my opinion and I'm sure others may disagree.

As you can see, there are numerous issues that need to be resolved regarding catch-up contributions. In addition to the issue with multiple plans and the402(g) limit, it's not even clear whether the catch-up is a calendar year or plan year limit (as pointed out, the catch-up is in IRC 414, not 402). Or, whether someone gets two catch-ups if in 2 plans of unrelated employers. I wouldn't think so, but it's not clear from the statute. It is clear that you can have a catch-up when you reach 402(g), a plan limit, or a limit resulting from an ADP test. Other than the multiple plan issue, the 402(g) is easy to apply. Also, a plan limit is also easy to apply. But, contrary to the prior posted message, I'm wondering if people will put very low plan limits in rather than no limit. For example, an HCE earning 200,000 can defer $11,000 (a little over 5%). Put that limit in for HCEs so that any HCE who wants to defer over the limit can only do so as a catch-up. That way the catch-up for the HCE won't be in the ADP test. But, the toughest issues are how to determine when someone has reached an ADP limit. It's difficult when there are more than one HCEs. I'll spare you the number crunching but you get some strange results due to the SBJPA methodology of giving refunds to the person with the highest dollar deferrals. An HCE under age 50 could be impacted by whether deferrals of an HCE over 50 are catch-up contributions. I think the best you can do right now is wait for the IRS to issue guidance. They know this is a high priority item.

Many plans include language allowing somene to opt out of a plan. I haven't seen any that allow an employee to elect to have a specific contribution made. The 402(g) regulation is a safe harbor rule. If you don't follow it (i.e., if the election is revocable or made after participation began), it doesn't mean you have a problem. But, it would be highly suspect as to whether the contribution is an elective deferral. Based on your facts, I think you need to follow the safe harbor standard and have the election made prior to 1/1/02 and make it irrevocable. But, even then, I wouldn't allow it. The person is not an HCE right now but what if that changes. A contriution made pursuant to the irrevocable election is an employer contribution subject to all non-discrimination rules. If that person becomes an HCE, you have a 20% contribution for the HCE and possibly a smaller contribution for the NHCEs. Now you have a problem. The election is irrevocable so now you need to increase the contribution for the NHCEs. I think that's why you don't see this type of provision in any plans. It would work better if you have an HCE who wants a lower contribution (and more take home pay). Then you don't have the discrimination problem.

You are reading it correctly. Adopters of non-standardized and volume submitter plans can generally rely on the opinion letter or advisory as to the form of the plan. You have no reliance for the coverage and non-discrimination requirements, but most people won't care because these are annual tests. Some people may still want to obtain determination letters for a variety of reasons. But, I think the IRS will see a significant decrease in the number of determination letters requested.

If you look at the statute in detail, any plan that only provides SH contributions and deferrals satisfies top-heavy. So, the 3% non-elective w/no other contributions satisfies top-heavy. Likewise, an enhanced match satisfies top-heavy. And, a plan w/the 3% SH non-elective with a regular match (subject to vesting schedule, etc.) satisfies top-heavy as long as match satisfies ACP SH (e.g., doesn't take into account deferrals over 6% of comp and, if discretionary match, doesn't exceed 4% of comp). I've seen some misleading outlines on EGTRRA, but, again, look at the statute. You won't find anything in the statute that singles out just basic SH matching contributions.

Both of those issues are plan document issues. There is nothing in the law mandating that the $5,000 dependent care limit be reduced for a short year. That's an annual limit on what an employee can exclude from income. Since there is no risk of loss to the employer, most plans do not reduce the limit for a short year. There is no legal dollar limit on a health FSA. So, the limit is entirely based on the terms of the plan - even for a short year.

Actually "pairing" is a special term used for prototype plans. As pointed out, a participant is only required to get the top heavy out of one plan. And, all plans are required to include top heavy provisions (except for govt. plans). So, if an employer had both a p/s and a m/p plan, and no special language was provided, both plans would state that the top heavy minimum would need to be provided (i.e., a participant would get 3% out of each plan). But, if the employer only wants to give one top heavy minimum, then the plans need to be coordinated. Typically the p/s plan would state that if somone is in a plan where there is a required contribution (i.e., a money purchase plan), then the top heavy will be provided in that plan rather than the p/s plan. And, the money purchase will provide that if someone is in both plans, that it will provide the minimum. Thus, both plans are coordinated to provide that the top heavy minimum will only be provided in the money purchase plan. Now, you throw into the mix the fact that an employer is using a standardized prototype. The general rule is that an emloyer can rely on the opinion letter issued to the sponsor. The exception is that there is no automatic reliance if the employer maintains two plans -- unless those plans are "paired." If both plans are "paired" then the employer has automatic reliance on both of the plans. "Paired" plans are standardized adoption agreements (of the same sponsor) that include top heavy (and 415) coordinating language. Because that coordination is built into the plan, the IRS can give the automatic reliance. For example, what if a p/s plan were drafted to provide that the m/p plan will provide the top heavy benefit and the m/p is drafted to state that the p/s will provide the minimum? You then have no minimum and a qualification problem. That's why the IRS wants to review plans that don't include the automatic coordinating language (i.e., the "pairing" provisions). As mentioned, this issue will go away once m/p plans go away. (Also, the IRS is going to provide automatic reliance to non-standardized plans (guidance will be issued on this in the next several weeks)).

I haven't seen any comments on this. I think many people think that since it's generally HCEs who put in the maximum, that no communication will be made. I do know that the IRS is considering whether it should issue an explanation of the tax credit for elective contributions. Many employers may be reluctant to provide anything that gets close to tax advice and that's why the IRS is looking into this. And, getting the word out on the tax credit will help increase participation of NHCEs.

One would think that there is ERISA pre-emption. But, it's not clear. A similar issue arises with negative elections. Can you withhold money out of a paycheck without written authority? A request has been sent to the DOL to rule on this because in CA you need consen. But, the DOL has not responded.

Under ERISA, there is a PT if there is a transaction between the plan and a "party in interest" unless an exemption applies. It's possible the loan could be exempt. Many times loans are made from a policy to strip it of cash value before making a distribution. The exemption for loans applies if all of the rules are satisfied - adequate security, reasonable rate of interest (I'm not sure where the 6% comes from), reasonable available, follows terms of loan program, etc. I think you'd need to go through each of these to determine where the loan complies. For example, the loan program probably requires payroll deduction (at least most do). If the person went directly to the insurance company, it's possible payroll deductions aren't being made. That could be a problem. And you have the 72(p) issues to deal with (can't exceed 5 years, etc.). If you find that it is a PT, then there is potential disqualification of the plan. Under IRC 401(a)(13), you can't pledge your interest in a plan as collateral unless it's a participant loan exempt from the PT rules.

There is no guidance on the "benefits" test. Based on the proposed regulations, it appears to be a utilization (rather than availability test), but it makes no sense. I don't know of anyone who even attempts to deal with this test. I guess the good news is that if a cafeteria plan were audited, the IRS wouldn't know how to apply the test either.

I've always wondered what would happen if a plan DIDN'T exclude non-resident aliens with no U.S. source income. In other words, would these people still be excluded because they had no 415 compensation. Interestingly, in a conference call today with various IRS people, a comment was made by one well known individual at the IRS (I don't want to use names to protect the innocent) that the Service has treated the non-U.S. source income as 415 compensation even though it is technically excluded. I had never heard that before and was curious if anyone else had heard of this. It still doesn't solve the international tax issues - i.e., the foreign country could tax amounts contributed to the plan.

OK - Here's some more for you. First of all, you are dealing with a spin-off of a plan and I'm presuming the transition rule applies because there is a spin-off of the company as well. I was a little confused about the gray book message because it seems to be dealing with a situation where the sponsors of both plans are part of a controlled group. In that situation, if separate plans are maintaind and the 410(B) coverage tests are satisfied w/out aggregation of the plans, then ADP/ACP tests can be run separately. And, due to permissive aggregation, both plans could be combined for testing purposes. But, that doesn't address the spin-off situation. At other conferences, the response from the IRS has been do what's reasonable. Unfortunately, there isn't anything out there to hang a hat on. Here are 3 alternatives: 1. 1 test is run for the entire year aggregating both plans. 2. 1 test is run through date of spin-off. Then each plan runs a test from date of spin-off through the end of the year. 3. 1 test is run for entire year for the "lead" plan and the spun-off plan runs a test for the short period Each of these has its plus and minuses (e.g., how do you support aggregation if they are no longer part of a controlled group, or is it fair that an HCE defers the 402(g) max at the beginning of the year and is later in a disaggregated plan so the initial plan doesn't have full year compensation, etc.). In IRS comments that I've been working on, we're asking for all 3 alternatives. The key should be that all deferrals are tested at least once during the year. And, if this is a spin-off where they are no longer part of controlled group, try to figure out who your HCEs are for this year and next year. That's another area where guidance would be helpful.

You can't count the QNECs twice. Notice 98-1 prohibits this for testing years after 1999.

Your numbers appear to be correct. But, I didn't actually use a calculator to double check your figures. My main reason for responding is just to point out a potential problem. As R. Butler pointed out (and which you applied) all plans are treated as one for purposes of 72(p). But, I have not been able to find a similar provision in ERISA. What this means is that even though the maximum loan may be $29,000 to avoid taxation, the ERISA requirement that no more than 50% of the vested interest in a plan can be used as collateral for the loan is applied separately to each plan.

I don't have a list of events that could disqualify a plan (it would certainly be a long list). But, you might want to look at the Q & As on benefitslink -- there is section on correcting plan defects. In there you will see 100 or so of some common problems. Regarding your specific question, a PT doesn't generally result in the disqualification of a plan. However, this particular PT could result in a disqualification because of the anti-alienation rules. The anti-alienation rules prohibit a participant from using an interest in the plan as collateral for a loan. But, if you look at the Code (I think it's IRC Section 401(a)(13)), it states that you can use an interest in the plan as collateral for a plan loan -- if the loan is exempt from the prohibited transaction rules. So, the problem you have is that if the interest in the plan was used as collateral (which most plans require) then the plan could be disqualified.

For insured health plans you are correct. There are no nondiscrimination rules as to coverage. (We can still be thankful that IRC Section 89 was repealled.) But, you're dealing with a self-funded health plan which is covered by IRC Section 105(h). That section does impose nondiscrimination requirements for eligiblity (and benefits) for self-funded health plans. I don't have the Code in front of me, but in either Code Section 105 itself or in Code Sections 414(B), © and (m) (these are the controlled group, affiliated service group, etc. rules), you'll find that these rules apply for purposes of 105(h). So, just as with retirement plans, the parent and wholly owned subsidiary are treated as one entity. Thus, excluding the subsidiary could result in a discriminatory self-funded health plan. And, if it's a large enough company, you might even be able to use the separate line of business rules (IRS Section 414®) to exclude the subsidiary without any problems at all.

I can' cite any specific cases. But, if the agreement didn't meet the requirements of a qualifid domestic relations order or constitute a waiver of the QPSA, then the widow is entitled to the QPSA under the plan. Of course, you never know what a court will do given the right circumstances (such as a sympathetic plaintiff). Perhaps one avenue is to determine whether, under state law, they were still considered married when they had been separated for 10 years. I don't know enough about domestic law to know whether this is possible in any state, and, maybe someone already determined that they are still legally married because they were in the process of getting a formal divorce.

Here's the language from Notice 98-1: "The change occurs during the plan's remedial amendment period for the SBJPA changes (see Rev. Proc. 97-41)." Unfortunately, it's the only guidance we have so your question is open to interpretation. Personally, I think you could use whatever testing method you want in 2002. The argument I would use to support this is that the testing method affects the testing of deferrals that were made durng the RAP (i.e., from 1/1 to 8/31 - the 12 month period ends on the last day of the 12th month). Again, that's just my own opinion. More guidance is expected this year, but I don't know if this particular issue will be addressed. One final caveat -- Notice 98-1 contains an anti-abuse provision. I think the IRS could use this to say changing methods each year, even during the RAP, is abusing the rules. It's subjective so I don't know if the IRS would ever be able to enforce this, but it's something to keep in mind.