JWK

Sheila: Are there tax implications that need to be considered in offering the election between a cash out and transfer of the PTO hours to other uses? I'm thinking especially of constructive receipt. How have you dealt with those? Thanks.

Thanks, Brent and Carol. Carol, I put some language in the plan document along the lines of Rev. Ruls. 81-35 and 81-36 (while recognizing these aren't "pick ups," the same sort of tax rationale applies). Brent, I think you're right--one reason an employer might adopt this structure is to avoid the 402(g) limit, and, as long as the contribution really is a condition of employment and there isn't an opportunity for the employee to select or change the amount of the election, apparently this works. An interesting related question is whether the employer contribution that "matches" the condition of employment contribution should be tested under the ACP test or under the disparity safe harbors in Notice 89-23. I'd argue that the employer contribution isn't a matching contribution as defined for purposes of the ACP test, so the disparity safe harbors should apply. But I haven't found anything definitive on this. Thanks again for your responses.

On the Schedule A... Section 103(a)(2) of ERISA states: "If some or all of the information necessary to enable the administrator to comply with the requirements of this title [which includes the 5500 requirement] is maintained by * * * an insurance carrier * * *, such carrier * * * shall transimit and certify the accuracy of such information to the administrator within 120 days after the end of the plan year." So, yes, it is reasonable to expect the insurance company to automatically provide the Schedule A information to the plan administrator in time for the plan administrator to file the 5500.

Is anyone familiar with so-called "condition of employment" employee contributions to 403(B) plans? I'm seeing these for the first time. The proposed employee contribution is mandatory and is pre-tax. I found the following reference in the audit guidelines, which suggests they're permissible but I don't understand on what basis the contributions are pre-tax. ("Elective deferrals do not include elective contributions made pursuant to a one-time irrevocable election that is made at initial eligibility to participate in the salary reduction agreement, or pursuant to certain other one-time irrevocable elections to be specified in regulations, or pre-tax contributions made as a condition of employment.") It should be noted that this is NOT a governmental employer, so even if 414(h)(2) applies to 403(B) arrangements, it wouldn't apply to this employer. Assuming we can get past state wage withholding statutes, what are the tax issues? I understand that these are not salary reduction contributions, but on what basis are they pre-tax? General constructive receipt principles (i.e., no opportunity to receive as cash)? If there are two different levels of employee contributions based on employment classification, how do you test for nondiscrimination? What if there is an employer "match"? Do you use Notice 89-23?

I echo Mary C's comment. It's likely the plan is not subject to COBRA, as a church plan, and what's being offered is a state law continuation right under the state insurance code. 15 days does not sound like an implausible election period under state law continuation, which tends to be much less favorable than COBRA. You should read your insurance policy (certificate, policy description, or whatever other document was given to you at the time you enrolled) to figure what what kind of coverage is being offered. You may also want to contact the insurance company directly, rather than relying on your (former) employer for information.

I understand your position, and I see how you get there in the -6 regs. I think a possible distinguishing factor in this fact pattern is that the husband (i.e., former employee) specifically checked the box for individual plus spouse coverage (thereby saving money on premium). I think by checking that box he indicated that he was not covering her as a QB. I suspect, but don't know, that the former employee would have complained if he had been told he had to pay two individual premiums. Your point about erring on the side of not terminating COBRA is well taken. Thanks for the responses.

As noted previously, I agree that the spouse was a QB but I think she lost QB status when she didn't elect COBRA by the end of her election period. That's the cite to the -3 reg, which defines "qualified beneficiary". She's not covered under the new plan because the new employer doesn't offer coverage to dependents, only to employees.

Thanks for your reply, jeanine, but I guess I wasn't clear in my description of the facts. Spouse WAS offered COBRA, but she did not elect COBRA. Her husband, the former employee, elected COBRA and covered her as a dependent. The paid the premium for individual plus one coverage, not the premiums for two separate individual coverages. My reading of the regs is that an individual ceases to be a QB if he/she doesn't elect COBRA by the end of the election period. 54.4980B-3, A-1 (f). And, if the plan's obligation to offer coverage to a QB ceases because the QB becomes covered under another group health plan, "the plan is not obligated to make coverage available to the individual who is [covered under the plan but] not a qualified beneficiary." 54.4980B-7, A-1 ©. Therefore, it seems clear that COBRA coverage can be terminated for all the covered individuals, including the spouse, who lost QB status at the end of the election period. Comments?

Married employee terminates employment. Elects COBRA for self and covers spouse as dependent. Gets new job 6 months later, with group health plan coverage, no pre-ex exclusion. Does not enroll spouse in coverage at new job. Can Employer 1 terminate spouse's COBRA coverage? My opinion is yes, because she ceased to be a QB once the COBRA election period ran out under Employer 1's plan. However, I've seen advice in some COBRA guides that Employer 1 can't terminate spouse's COBRA coverage because SPOUSE did not become covered under another group health plan. My feeling is spouse has no COBRA rights once the 60-day election period expires and we're really terminating the former employee's coverage, which entails termination of dependent coverage as well. If we allow the spouse to continue, aren't we giving her a COBRA election outside the 60-day window? Any thoughts or cites appreciated.

Kirk raises a good point about licensure. The key is whether the treatment is illegal not whether it's unlicensed. I think in most states that these will be synonymous, but perhaps not in all. In Oregon, for example, it's a Class C felony to practice acupuncture without a license.

I think you need to focus on the Section 213 requirements for deductible (and, hence, reimbursable) medical expenses. A couple of points are key. First, the expense cannot be for the participant's general well-being--so massages generally will not be reimbursable whether or not the therapist is licensed. Second, "illegal operations or treatments are not deductible" (reimbursable). So I think you need to determine whether your state law requires licensing of acupuncturists (or other nontraditional health practitioners) and, if it does, then you could only reimburse expenses incurred for treatment by licensed acupuncturists (or alternative providers). Note that some states require licensing of naturopaths, while other states may prohibit the practice of naturopathy (the last information I had indicated that naturopathy was illegal in Tennessee and South Carolina). Finally, the rules for "medicine and drugs" are stricter. Only medicine and drugs prescribed by a "physician" (basically a traditional practitioner such as an M.D., D.O., D.M.D., etc.) can be reimbursed. See Section 213(d)(3) and (4).

Has anyone seen an education assistance program that reimburses employees for student loan payments? I'm envisioning a program much like a health FSA where the employee submits his/her proof of payment of each installment due on student loans and gets reimbursed by employer up to $5250 per year. It's possible that the employee took the courses several years ago and is still making loan payments. Would this work under section 127?

I'd be interesting in hearing real-life experiences with "bridge" loans on termination of a 401(k) plan (i.e., to avoid loan offset, a short-term loan is made to pay off the plan loan, the account is rolled to a different plan, and a loan from the second plan pays off the short-term bridge loan). If you've used it, were participants advised to find their own outside source of funds, or did an employer lend the funds for the "bridge" loan? If the latter, did you have collection problems? DOL or IRS problems? What if participants with loans are disproportionately HCEs? Did you consider simply grossing up regular comp for the tax hit? Any other problems/issues? Thanks for your comments.

I'd be interesting in hearing real-life experiences with "bridge" loans on termination of a 401(k) plan (i.e., to avoid loan offset, a short-term loan is made to pay off the plan loan, the account is rolled to a different plan, and a loan from the second plan pays off the short-term bridge loan). If you've used it, were participants advised to find their own outside source of funds, or did an employer lend the funds for the "bridge" loan? If the latter, did you have collection problems? DOL or IRS problems? What if participants with loans are disproportionately HCEs? Did you consider simply grossing up regular comp for the tax hit? Any other problems/issues? Thanks for your comments.

Thanks, Wessex, that's a good rule to keep in mind. Unfortunately, this plan also has annuity options (it's an insurance company prototype with about 9(!) different annuity forms.)

Thank you, Mr. X. The insurer sponsoring the prototype confirmed they have an "installment annuity" product.

I'm interested in hearing how employers are handling the situation where an employee misses an enrollment deadline, e.g., to enroll a new dependent. Say the plan has a 30 day enrollment window and the employee requests enrollment after the window closes. Do you allow administrative exceptions? What would an employee have to show to qualify for an exception? Ever been sued over this issue? Assume no cafeteria plan issues. Thanks for your insights.

A related question on this topic: what if the terminating 401(k) plan provides installments as an optional form of payment? This plan provides for "fixed period installments over a period of whole months which is not less than 60." If a participant elects that option, how can the plan terminate? Is there a way to work around this? Thanks for your help.

Jeanine's caveats are well-taken. I would just add that a majority of courts that have addressed the issue have held that the plan's obligation is to prove that initial COBRA notices were sent to the employee and his or her spouse, not that they were actually received. So the former spouse would probably not prevail merely by claiming that he/she did not actually receive the notice. But as Jeanine points out, even proving that an initial COBRA notice was sent to a former spouse is not necessarily a slam dunk.

dweiss: Here's your cite to the regs: 1.125-4©(2)(iii), which states in pertinent part, "In addition, if the eligibility conditions of the cafeteria plan or other employee benefit plan of the employer ... depend on the employment status of that individual and there is a change in that individual's employment status with the consequence that the individual becomes (or ceases to be) eligible under the plan, then that change constitutes a change in employment under this paragraph ©." There follows an example of an employee losing eligibility due to a change from salaried to hourly-paid status. I think you're justified in terminating contributions mid-year.

RW: An example could be a child going off to college, moving out of the coverage area of a region-specific HMO. I agree it would be rare to have an event for an employee that wouldn't already qualify under the change in worksite rule.

I can't suggest an auditor, but in deciding who to engage, you should have a clear idea of what you want the audit to accomplish and what you will do if the audit uncovers claims-paying errors. I have seen plan sponsors spend well into five figures for audits without knowing what to do with the results. What does the agreement with the TPA say about remedies for claims errors? Do you have to prove "gross negligence" as a condition to any contractual remedy? I encourage you to look into these issues before you start paying an auditor.

Am I the only person who, before reading this thread, thought that there was no such thing as a multiple employer 125 plan?

Pat: Thanks for the response. Here there is an employee contribution for coverage and the employee is covered under new spouse's plan. Doesn't want coverage but has to cover the child from prior marriage. Is the basis for your opinion the provision in the statute that does not require a plan to offer a type or form of benefit, or any option, not otherwise provided under the plan. So, if the plan doesn't generally offer "child only" coverage, it wouldn't have to do so for a QMCSO. Or, are you aware of other guidance besides the statute on this point?

Plan receives QMCSO requiring coverage of employee's child. Employee had waived coverage under plan. Can plan force employee to enroll as a condition to enrolling the child pursuant to the QMCSO? Or does the plan have to permit "child-only" enrollment?