Bob R

The regulations state that termination of employment triggers the change. (However, I'm a little confused on what election change she wants to make especially if the employer pays the entire premium.) And, it could be argued that the loss of coverage could be considered a second event triggering another change.

The problem is that Section 125 only permits deferrals to a 401(k) plan. A 403(B) plan is a type of deferred compensation plan under the Code. The fact that it might be exempt from ERISA doesn't change that. So, I do not think you can put the unused funds into a 403(B) plan.

For whatever it's worth, I think excluding employees who are not directors could be considered a reasonable classification. Unfortunately there isn't anything in the 410(B) regulations clarifying what is reasonable (other than excluding someone by name is not reasonable). As long as they are not HCEs (i.e., not earning over $85K and not 5% owner) then you'll pass the nondiscriminatory classification test. And, as long as none of them are key employees, then you don't have to worry about the 25% concentration test.

Based on the language in the regulations, I think the plan entry dates should be used in determining who is statutorily excludable. But, I understand the argument supporing the use of statutory entry dates. If this position is taken, you must first decide what the statutory entry dates are. The previous messages correctly point out that it is the earlier of the first day of the plan year or six months following satisfaction of the min age/service conditions. For a calendar year, 1/1 and 7/1 are NOT statutory entry dates. These satisfy the statute because they are more liberal than the maximum that could be imposed. Under the statute there would be around 183 entry dates (Jan. 1 or six months after completing age/service if the requirements are met between 1/1 and 6/30). 1/1 and 7/1 entry dates are only used because of adminstrative ease - not because they are mandated. My point is that if you think (which I don't) that the statutory entry dates can be used, does this mean you can use any entry dates you want as long as they satisfy the maximum permitted by the statute? One other issue -- for a 401(k) plan, regardless of which entry date you use, if someone is only excludable for part of a year, are they included for the entire year or do you split the deferrals and comp? In other words, if someone is no longer excludable on 7/1, is the ADP test based on deferrals and comp from 7/1 - 12/31 or is it based on the full year?

Kirk - I think Linda's argument will be sufficient. A health FSA is a self funded health plan (i.e., it's subject to IRC Section 105(h)). Other than that, it isn't different than any other type of health coverage. While it's true in most cases the maximum equals the premiums, that's not always the case. For example, suppose the coverage is $1,200 per year. An employee who incurs $1,200 of expenses in January is entitled to a reimbursement of $1,200. That employee might only be working on a prevailing wage contract for January. Or the employee could just quit in February. The employer has assumed the risk. Of course the employee has a risk of loss if the employee is in the plan for the full year and doesn't incur expenses up to the maximum. But, based on the net cost to the employer for the year, it's possible that a higher "premium" could be charged if the employer wanted to do so. If the plan were funded, the rules under IRC Sections 419 and 419A permit a higher premium to be charged. Just because the employer doesn't charge a higher premium shouldn't be a factor. Also, you could point out that the health FSA is no different than a typical indemnity policy when it comes to utilization (the use it or loose it issue). Providing health coverage through an insurance contract in order to satisfy the prevailing wage is acceptable to the DOL. What if the employee doesn't ever use the coverage? (maybe the employee has no medical expenses, a spouse has primary coverage, or like somone at our firm, an employee is still entitled to medical coverage through the government because he is a veteran). It's no different than the health FSA. An employer is providing coverage - whether an employee uses that coverage is irrelevant. I haven't actually had this issue raised before. We have prepared numerous qualified plans that are designed to satisfy the prevailing wage laws (such as the Davis-Bacon Act), but all of them have provided for full vesting of the prevailing wage contribution.

I agree that the plan is still qualified. Any plan established or amended after 12/7/94 is entitled to the extended 401(B) remedial amendment period for GUST (see Rev. Proc. 2000-27 for the latest extension). Under Rev. Proc. 2000-27, a prototype plan will not be able to include cross-tested allocation methods. So, when you update the plan for GUST, you will need to use an individually designed plan. Volume submitter plans are a type of individually designed plan and they can inlcude crosss-tested allocations. That would lower the IRS user fee to obtain a determination letter (either $125 or $1,000 depending upon the scope of the determination letter requested). Rev. Proc. 2000-20 also provides that even though the cross-tested allocation took the plan out of prototype status, it is still treated as a prototype for purposes of the extension of the remedial amendment period that applies to prototypes. So, if the sponsor of the prototype updates the prototype for GUST, your client generally has until the later of the end of the 2001 plan year or 12 months following the date the new protoytpe is approved to update for GUST.

I think the 3% safe harbor may need to be tracked separately. Keep in mind that it must be a nonelective contribution subject to the same distribution restrictions as QNECs. This means most of the distribution restrictions that apply to elective deferrals apply to the 3% contribution. While money purchase plans are generally restricted as to when distributions may be made, one permissible event is "severance of employment." However, for elective deferrals (and the 3% safe harbor) there must be a "separation from service." The IRS has just relaxed the same desk rule a little, but not completely. Or, money purchase plans may provide for a distribution upon termination of the plan. But, elective deferrals (and the 3% safe harbor) may generally not be distributed if there is a successor plan. Right now you can operationally apply the safe harbor rules. But when plans are updated for GUST, money purchase plans will need to add the restrictions found in Regulation 1.401(k)-1(d) for the safe harbor contributions. I guess you could apply these restrictions to all money purchase assets. But, if the plan is already in existence and doesn't contain the restrictions, there might be some 411(d)(6) cut back issues with respect to the existing money purchase contributions.