JDuns

Where the underlying high deductible health plan is partially or fully insured, the state insurance laws will govern the benefits provided. To the extent that the state law mandates insurance coverage that would cause a plan not to be treated as a high deductible health plan for purposes of the HSA rules, after 2005 the purchase of an insured HDHP in that state would cause participants to be ineligible for HSAs. An insurer in those states could not offer non-compliant policies. If an employer chooses to self insure their HDHP, whether or not a insurer assists with the administration, ERISA pre-empts the state mandates and the employer is free to design their plan to comply with the requirements to enable the plan participants to be eligible for HSAs.

If an employer (and all companies in its controlled group) maintains no plans at the time of an employee's termination, there is no COBRA right. However, if the employer re-establishes a plan after an employee's termination, COBRA rights of the down-sized employee may be resurrected if the new plan is deemed a successor plan.

Sorry for being unclear - and I just realized that I posted this to the wrong board. It is not the retirement plan beneficiary designations but the welfare benefit plan (life insurance) designations. The employer had previously processed paper enrollment and beneficiary designations. However for the recently concluded open enrollment, they moved to an electronic process for both. Rather than searching the paper files for all employees and inputting the prior elections, the employer wanted to have all employees reset their designations. The employer proposes that the following rules would apply in processing distributions to beneficiaries: 1) according to the most recent designation made during or after the 2005 open enrollment window, if any 2) according to the plan's default provisions (to the spouse or estate), i.e. treating any election made prior to the open enrollment window for 2005 (in 11/04) as invalid. Given the number of employees who failed to redesignate their beneficiaries, the employer has expressed some willingness to reconsider their prior position and search the paper files. However, that raises other issues since we could not say on the statements: "Currently you have [designated ____ as your beneficiary] or [no beneficiary on file and your benefits would be payable to your spouse, if any, or to your estate]. To designated different beneficiaries, contact ..." The employer regularly reminds employees to update their beneficiary designations, but has had several employees die with prior spouses named as beneficiaries. They wanted to be able to remind employees of their designations as a prod to update (or to ward off competing claims).

Assume a company contributes to HSAs established by employees (without relying on 125 rules to avoid the comperability rule). Assume also that two employees are not, in fact, eligible for HSA contributions as follows: Employee A - covered by spouses first dollar coverage and Medicare Employee B - has a change in family status between open enrollment and January 1 and changes her election (but is not processed until after 1/1) I know that Q&A 82 of Notice 2004-50 provides that an employer may not recoup "any part of the employer's contribution the the employee's HSA" (which I find pretty clear), but I have a client (and a provider) indicating that they think the employer can raid the HSA account and take back the employer contribution from these employees. Does anyone see their argument or do you agree that the employee gets a windfall. Thanks for your help!

The plan previously relied on paper files and had not input beneficiary data into its systems. The employer plans to insert the current beneficiary designation in the annual statements to remind employees to update their information.

During its December open enrollment window, a plan requires employees to re-designate their beneficiaries and has clearly communicated (in mandatory employee meetings and written communications) that prior elections will not be carried forward. The plan provides that the beneficiary must be designated in accordance with procedures set forth by the plan. A significant number of employees did not update their beneficiaries. Does anyone have any concern with paying benefits to the default beneficiary (spouse or estate) rather than a previously designated beneficiary? Any past experiences would be helpful.

I have heard that Wisconsin is taxing HSA contributions (both employee deferral and employer contributions). Has anyone else heard this? Are any other states taking the same position?

The president signed it this morning.

Here is my understanding of the answers based on the conference version as passed by the house this morning: 1 - non-issue since investment option provision dropped in conference 2 - since election must be made prior to participant's fiscal year start and more than 6 months before the end of the bonus service period, election must be made by 12/31 of year 1. 3 - still open but probably not able to accelerate payment (even though it would accelerate the taxation). 4 - still open. 5 - despite 30 day rule on initial eligiblity, since deferral of bonus subject to 6 month rule and treasury directed to issue guidance to prevent deferral if "timing of such election would be inconsistent with the purposes of the provision", should deferral only be permitted if promoted before 7/1 for bonuses calculated on a calendar year's performance? All thoughts would be appreciated.

mbozek interpreted my question correctly. If the employer charges all employees (medicare enrolled or not) the same premium for the HDHP and also provides HSA contributions for HSA eligible employees (obviously excluding the medicare enrolled employees), the employer is making a lower total dollar contribution to the health benefits of the non-eligible individuals. Since such treatment would potentially violate the medicare secondary payor rules (creating an incentive to opt out of the HDHP and make medicare primary) or the ADEA (under the Erie decision), I have heard some commentary that the employer should pay the medicare enrolled employees an amount equal to the HSA contribution that would have been made for the medicare enrolled employee. That payment could be structured as additional cash compensation, a contribution to a FSA, or a contribution to a HRA. Neither CMS nor the EEOC have issued an opinion on the question so I was wondering what (if anything) others are considering.

I have heard several people opine that an employer who contributes to HSAs of its employees must make equivalent contributions for employees who are medicare enrolled (in an FSA, HRA or cash). This statement is based either on the ADEA or Medicare Secondary Payer rules. Has anyone else heard this comment?

SSA Pub No. 16-004 (ICN 361752) published Nov. 2002 entitled Employer's Guide to filing Timely and Accurate W2 wage reports provides You are not required to go back and amend any prior filings. However, any new filings should be made using the person's name and 000-00-0000. If they subsequently provide you with a valid number, the return filed using the 000-00-0000 ID would be amended with the new number. While it is true that this breaks the primary link between the old and (presumably) final reports for an individual, it could still be linked by the alpha name. A large employer may well have more than one report filed using the plug number for any one year.

(1) All employees (legal or not) have a right to receive all compensation earned while employed (including retirement benefits, vacation pay ...). (2) The social security administration and IRS have indicated that the proper way to report the income is to issue the 1099R (and any remaining W2s) using 000-00-0000 and amending the filing if (when) you receive a correct W-4. (3) Filing using a SS# you know is incorrect exposes the reporting entity to potential liability for knowingly filing a false report (although the penalties may be mitigated by reliance on the W-4 or W-9). (4) An employer may not require a potential employee to show their SS card at their date of hire. They may show two other pieces of identification and complete their W-4 without showing their card. (5) The plan may be able to be amended (prospectively only) to exclude undocumented aliens (excluding resident aliens also excludes people with green cards and undocumented aliens working more than 180 days during the year will be resident aliens with US source income). Hope this helps.

I had a few questions about the JOBS/AJCA bills. (1) If an employer maintains more than one account based qualified plan and only allows participant direction on some of them, do you think that the investment options for the non-qualified plans are limited to the shortest list for all of the account based plans or the shortest list for participant directed plans? (2) If an employer has a fiscal year that starts in either the last week of December or the first week of January (e.g., ending on the sunday closest to 12/31) and adopts a bonus plan based on that fiscal year, for a bonus earned for a fiscal year that starts in December year 1 and would otherwise pays out in year 3, must the deferral election be made (a) prior to 12/31 of year 0 or (b) prior to the start of the fiscal year in year 1. (3) If distribution elections may only be changed if the change is not effective for 12 months and defers payment for at least 5 years, may a plan permit a change to the form of payment that does not push out the payment commencement date. For example, if a participant has elected quarterly installments over 10 years, may he change his election (more than a year in advance) to elect either a lump sum or installments commencing at the same time but paid over 20 years. (4) May a plan continue to provide for accelerated payout on plan termination? (5) May an employee who is promoted into an eligible classification during the year still elect to defer a bonus attirbutable to service both before and after the date of promotion if the election is made within 30 days of becoming eligible?

The July 2003 preamble to the 401(k)/401(m) proposed regulations reads as follows: This chain has clearly identified at least one way that an NHCE could get less than the full match even though he contributed more than 5% of compensation each pay period. The preamble leads me to believe the IRS is leaning toward requiring safe harbor plans to match the catch-up contributions.

Jquazza, The need to test the match is based on the preamble to the final regs that state that "if a plan applies a single matching formula to elective deferrals whether or not they are catch-up contributions...the matching contributions under the plan must satisfy the actual contribution percentage test under section 401(m)92) taking into account all matching contributions, including matching contributions on catch-up contributions." I have heard some argue that the catch-up must pass the ACP test itself (and not one of the alternatives). I had also been concerned about violating the uniform availability requirement and am greatly reassured by Sal's position. I would love a cite to rely on. rcline, Do you agree that, where matching contributions are made on a payroll cycle basis, it is impossible for most employees to maximize both the 402(g) limit, catch-up contributions and match? The employee will reach the 402(g) limit before making catch-up contributions and, unless a portion of the early deferrals are characterized as catch-up contributions, the last contributions will be classified as unmatched catch-up contributions. Are you arguing that a safe harbor plan that matches on a payroll cycle basis MUST make a true-up calculation at year end? If so, do you also make a true-up match for someone who defers 10% of pay for the first half of the year?

rcline46 Your post assumes that the plan characterizes a portion of each deferral as regular (matched) deferrals and catch-up (unmatched) deferrals. If instead the plan treats all deferrals as regular (matched) until a limit is reached and only then classifies the remaining deferrals as catch-up (unmatched) then all catch-up employees will miss a portion of the match unless you match the catch-up deferrals.

I have reviewed the many postings on this question and want to confirm the following: A plan that provides the basic safe-harbor match (100% of the first 3% deferred and 50% of the next 2% deferred) which are credited each pay period (without a year end gross up) wants to permit catch-up contributions. Assume an employee earns 85,000 for 2004 and wants to maximize his deferrals. If he defers 19% of his compensation he will have deferred $13,000 by his 21st paycheck (of 26) and by the end of the year will have deferred $16,000. If the plan requires that a limit be actually reached prior to classifying a contribution as a catch-up contribution and the plan does not match catch-up contributions, the employee will receive a match of $2,877. If the plan matches both catch-up and regular deferrals, the employee would receive a match of $3,400. An employer could also require the employee to make a separate election regarding the catch-up contributions which could result in a match somewhere in the middle. If it matches the catch-up contributions, the plan avoids many of the administrative difficulties but the entire match must be tested under the ACP test (which in many plans would fail). If it does not match the catch-up contributions, the plan (1) will have to carefully define which contributions are matched, (2) will have to review the deferrals at year end and reclassify “catch-up” contributions if a limit had not been met (and possibly correct matches), (3) may have endangered its safe harbor status because it effectively has a deferral limit that may prevent an NHCE from obtaining the maximum match. In addition to the above discussion, the prior year catch-up contribution must be considered when performing the average benefits test using any testing period other than the current year. Please let me know if you believe any of the conclusions above are incorrect or if there are any other considerations I have not mentioned.

Again, unless the plan defines "legal spouse" as a "spouse pursuant to a state recognized marriage between one man and woman", I think that the term "legal spouse" would generally be defined with reference to state law which would allow anyone legally married to enroll their spouse, regardless of the gender of the parties.

Most domestic partnership coverages I have seen have separate premium structures. For an employer that a traditional plan and domestic partner coverage, a same-sex spouse would appear to be able to be enrolled in either benefit (as a spouse for the "main" plan or as a domestic partner). Enrolling under family coverage in the main plan will often be cheaper than enrolling for employee + domestic partner. Thus, even plans that have already adopted domestic partner coverage may have to address this (and the necessary systems to deal with the tax implications for the "main" plan of covering beneficiaries who may not be covered on a pre-tax basis).

To the extent that San Francisco, CA and Sandoval County, NM have begun issuing marriage licenses to same sex couples, does anyone have thoughts about the options for a plan that allows employees to enroll their "legal spouse." (1) Are the couples "legally married"? (2) Does a plan now need to have a procedure to track the gender of spouses (or whether they are dependents for federal tax purposes) to determine whether the benefits are taxable or non-taxable? (3) To accomplish (2) does a plan have to ask for information about all employees or just couples with at least one gender-ambiguous name. Any opinions (other than whether or not such licenses should be granted in the first place) would be appreciated.

Here is the example using 2003 limits: Comp per pay period (26 biweekly) - 11,582.46 - $300,000 total for 2003 Deferred compensation - 4% per pay period - $461.54 per pay period - $12,000 total for 2003 Plan defines the safe harbor match as follows: "for each payroll period ... equal to 100% of first 3% of compensation deferred as 401k deferral plus 50% of compensation deferred as 401k deferral that exceeds 3% but does not exceed 5%" My position is that the match should continue at 3.5% on a 4% deferral unless the plan's limit would be exceeded (4% of the comp limit, or 8,000 for 2003) The TPA and I agree on the match for the first 17 pays (YTD comp = 196,153.85) of 403.85 (3.5% * 11,582.46). However, the TPA insists that the match on the deferrals for the 18th pay should be limited to 153.85 (matching only on the 3,846 of compensation to the comp limit). They acknowledge that the plan language does not restrict the match to the "first comp" but assert that this is how their system calculates matching contributions for all clients who match on a payroll cycle basis. The further assert that DUE TO DISCRIMINATORY BRF ISSUES, matching on the deferrals made on compensation in excess of the compensation limit requires a year-end true-up (plan year basis calculation) and may not be made for payroll cycle plans. I'll admit that I can't see their argument and that's why I have asked for help.

I actually have a TPA who insists that the match should cut off, not at $8,000 (which I believe is the correct answer) but as soon as the calendar year compensation hits the compensation limit. The TPA would let the deferrals continue but insists that the match must stop (so the employee actually gets $6,330 in match in the example above). The in-house lawyer at the TPA argues that the only way to bring the HCE back to $8,000 to provide a year-end gross-up for all employees. Has anyone else ever heard of this argument.

I am using 2003 limits for my example because the numbers are easier for my little brain to work with. Assume that the plan matches, on a payroll basis, 100% of the first 3% of compensation deferred and 50% of the next 2% of compensation deferred. (and the plan uses identical language to describe the deferral and the match as a percentage of compensation) Assume an employee earning $300,000 wants defers 4% of pay each pay period ($12,000 total). It is clear that a plan may permit that deferral and not limit the deferral to $8,000 (4% of the first $200,000 of compensation). A reputable TPA agrees that this is allowed. However, they insist that a payroll based match may only consider the first $200,000 of compensation when calculating the match. Therefore, they insist that the employee referenced above would not be eligible for an $8,000 match (the lesser of 4% of 200,000 and 3.5% of 300,000) but a $7,019 match. (For those interested, the 7,019 is calculated by calculating each pay period's match as the elected deferral percentage multiplied by limited pay and divided by the total pay for that pay period. For the first 17 pay periods, the employee would receive a 3.5% match on 11,538 of compensation and for the 18th pay period a 1.33% match on 3,846 of comp.) They argue that this is required to avoid discriminating in favor of HCEs. Anybody else dealt with this question.

When freezing a cash balance plan, can the interest credit be frozen as well? Given that the IRS' position is that the future interest is part of each year's benefit accrual, can that future interest be eliminated in a plan freeze or must the plan be terminated to cut off the interest credits.