JWK

Thanks, IRC401. That's the result I'm trying to avoid by characterizing this arrangement as an eligible plan.

You are correct that this arrangement is like a severance pay plan, and benefits are all employer-paid. However, it doesn't pass all of the criteria in Announcement 2000-1 to be treated as a severance plan. I understand that we aren't precluded from arguing that it's a severance pay plan just because we don't satisfy each and every criterion in 2000-1, but I wanted to have an alternate argument available in case of audit. Also, this arrangement has consistently been communicated as an early retirement plan, which makes it sound like deferred comp rather than severance.

Eligible employer sponsors a "bridge" plan that pays $400 per month to employees who terminate after age 55. Payments end at age 62, with the intent that payments are a bridge to Social Security benefits. Plan doesn't satisfy 2000-1 "severance pay plan criteria." If 457(f) applies, we have a tax problem because no substantial risk of forfeiture. Can this arrangement be treated as an eligible 457 plan? Has anyone seen this type of formula in an eligible plan? How do you calculate dollar limits under 457(B)(2)? Since there are no employee deferrals and no assets are set aside to pay benefits, is a 457(g) trust required?

You need to review state law on this question. Note that a self-funded governmental health plan is likely to fit the technical definition of an "insurance policy" under the state insurance code, which makes the sponsoring employer an entity transacting insurance. This problem doesn't arise if a plan is subject to ERISA because of the "deemer" clause (the ERISA provision that says a self-funded plan isn't deemed to be an insurance company under state law). But, as you point out, a governmental plan isn't subject to ERISA so isn't shielded by the deemer clause. The state insurance code should have a section that states what sorts of entities are exempt from regulation by the state insurance commissioner. Sometimes the exemptions will include governmental plans, but the plan may have to satisfy certain requirements to qualify for the exemption. In Oregon, one of those requirements is distribution of a summary plan description. Oregon also requires self-funded governmental plans to meet all mandated benefits requirements applicable to insured plans and specifies a claims procedure. You should definitely look at your state's insurance laws and see what the comparable requirements are.

One caveat to KClark's answer. The regulation KClark cited states that the plan may permit participants to revoke their elections "and, in lieu thereof, to receive on a prospective basis, coverage under another health plan with similar coverage." It then says no other revocations are permitted. Therefore, a plan may allow a participant to elect different coverage but cannot allow a "no coverage" election after a plan year starts on the basis of a significant premium increase.

Prototype 401(k) plan provides for several annuity forms of distribution as well as lump sums. Sponsor wants to terminate plan. Code section 401(k)(10(B) says distributions upon plan termination must be lump sum. How does this work if a participant elects an annuity? Can the plan not be terminated? Can the plan satisfy this requirement by purchasing an annuity contract for the participant?

Prototype 401(k) plan provides for several annuity forms of distribution as well as lump sums. Sponsor wants to terminate plan. Code section 401(k)(10(B) says distributions upon plan termination must be lump sum. How does this work if a participant elects an annuity? Can the plan not be terminated? Can the plan satisfy this requirement by purchasing an annuity contract for the participant?

I understand there's a "correction" for this in the Small Business Tax Fairness Act of 2000, which includes most of the pension provisions that were in the tax bill vetoed by the president last fall.

Thanks for the response. As I understand it, you're distinguishing between a voting right (presumably a corporate governance issue and a matter of state corporate law) and the consent requirement (a tax code issue). Logically that makes sense, but I wonder if you have seen any IRS authority for this proposition?

C corp, which does not have registered securities, sponsors ESOP. C corp shareholders are considering making an S election. With respect to shares held by the ESOP, does voting on the S election have to be passed through to ESOP participants? Is the S election a "reclassification" under Section 409(e)(3)?

A cafeteria plan is not an "employee benefit plan" subject to ERISA. Therefore, there is no requirement under ERISA to file a 5500 for a cafeteria plan. The cafeteria plan's filing obligation arises exclusively under section 6039D of the Code. If you have only a premium conversion plan, you can deal with the IRS and be done with it. Don't even tell the DOL--they don't care. One caveat. If your cafeteria plan includes a health FSA, the health FSA is an employee welfare benefit plan subject to ERISA. Generally, you would have to file a 5500 for the health FSA, but if you have fewer than 100 participants and you are treating the FSA as "unfunded", you don't have to file. Bottom line: I think I get to the same place you do but for slightly different reasons.

The administrator of a 401(k) plan failed to notify some eligible employees that they were eligible to participate in the plan. We're in the same plan year, but the 3 month de minimis period has expired. We'll notify the excluded employees of their eligibility, but is there a way to fix the period of exclusion before we calculate ADP/ACP at the end of the year? We'd rather clear this up now since these are generally short term employees and will likely be gone by the end of the year. Then we'll have to find them just to give them a very small plan distribution. Any ideas?

Larry M gave the right answer. It is not accurate to state that all employee-pay-all group term life plans avoid imputed income. You have to ask more questions. The issue is whether some employees pay more and some employees pay less than Table I rates. If all employees pay more than Table I rates, there's no imputed income. If all employees pay less than Table I rates, there's no imputed income if the policy is a separate policy that isn't subsidized by the employer and that is supported actuarially by premiums paid by employees. If some pay more and some pay less, those who pay less have imputed income equal to Table I rate for their age group minus the amount they actually pay (with after-tax dollars, of course) times their coverage amount. Those who pay more have no imputed income. All this assumes the policy qualifies under section 79 and is not discrminatory.

Good point about state insurance law for insured plans. And, if the plan's insured, you don't have to consider nondiscrimination rules under section 105 of the code. If the plan's self-funded, the section 105 nondiscrimination rules do apply. I'm assuming there's a reason why the cut-off is age 25, and it's probably because you can exclude employees under age 25 from section 105(h) discrimination testing. (As an aside, I'm not aware of a nondiscrimination rule for health benefits under ERISA--leaving aside the health status nondiscrimination rules, which presumably aren't at issue for this group.) So, excluding the under 25 group won't hurt you for nondiscrimination testing under the code. Same rationale on 1,000 hours. Actually, you can exclude as "part-time" anyone whose "customary weekly employment is less than 25 hours", i.e., 1300 hours per year. So, you'd be letting in some employees who are otherwise excludable and you'd have to include them in your test, but you could generally exclude anyone with less than 1,000 hours. Also, the ADEA doesn't apply to employees under age 40, so no problem there. You should review state nondiscrimination in employment statutes--also check to see if there's an exception for "bona fide" employee benefit plans. Finally, it seems a little unusual to exclude the group of employees that conventional wisdom says are the healthiest. So, if there's some ulterior motive (e.g., if there is some sort of health issue that could violate HIPAA), I'd want to explore that as well. ------------------ [This message has been edited by JWK (edited 03-03-2000).]

If the employer has always paid the premiums for the policy, then the employer should be able to keep the demutualization proceeds for any corporate purpose. Those premiums do not become plan assets. I don't think there's any definitive cite for this proposition in the context of a demutualization, but the DOL took this position with respect to employer-paid premiums generally in Adv. Op. 81-11A (1/15/81). There are some arguments that demutualization proceeds may be distinguishable, but I don't think the DOL is pushing those arguments. It is possible that your insurance contract or employee communications or a state insurance law require a different outcome. You'd want to check those areas before doing anything with the proceeds. Finally, because this is a high-profile issue, I'd request a legal opinion before using the demutualization proceeds for corporate purposes.

The employer does not have to offer employees the option to purchase medical coverage with after-tax dollars. The choice under a cafeteria plan is between cash and a qualified benefit. So, the cafeteria plan choice is: 1. take the full amount of compensation, or 2. direct some of the compensation to the purchase of medical coverage--and not get taxed on the portion of the compensation so directed. We needed a section 125 to prevent the employee in number 2 from being taxed as if he received the compensation under the constructive receipt rules. The cafeteria plan rules do NOT require an employer to offer the third choice of taking the full amount of compensation and THEN directing it to the purchase of a benefit. Some employers offer this third choice, but the cafeteria plan rules do not require it.

See Winter 1999 edition of Benefits Law Journal, page 7.

I've heard the idea of limiting the test to just those people who could benefit under a DCAP, i.e., only those who have at least one eligible dependent. The part I have a hard time with is how you identify that group. Do you do an annual survey of employees and ask them whether they have any dependents? Doesn't that seem a bit intrusive?

In most health FSAs you have to incur the expense while you are actively employed for it to be reimbursable. Whether this restriction applies to your plan and, if so, whether it was adequately communicated to you are questions we can't answer on the facts presented. What is clear is that your employer had to offer you COBRA for your health FSA. This would allow you to use the "stranded" $900 provided you made a timely election and paid the applicable premium. You have 60 days to elect COBRA from the date you receive the notice of right to elect COBRA. I suggest you pursue the COBRA angle with your former employer's HR department. Refer them to the proposed COBRA regulations, issued in Feb. 1999.

ERISA doesn't provide a COB rule, so courts have had to supply one in the case of a conflict between plans. The PM Group case cited by Larry M appears to be directly on point. Unfortunately, it is from the 9th Circuit and is not binding in PA. The decision states that 42 states use the birthday rule (citing information from 1991--fairly old now). I'd put pressure on the plan using the gender rule to justify its position as secondary payor to provide some legal support for that position.

I thought Boggs v. Boggs, 117 U.S. 1754 (1997), held that community property laws are preempted by ERISA. So, until there's a DRO, does the (former) spouse have a cognizable right to the participant's benefit? If not, I share the concerns expressed about freezing the account of the participant based on information that a divorce is pending. The decree may not divide the retirement plan benefits--many households have two working spouses who each have their own retirement accounts. You will have deprived the participant of access to his/her account for no reason. On the other hand, I can't see how the participant spouse is damaged (in a way that is compensable under ERISA's remedial scheme) if withdrawals are frozen for a limited time. But, if withdrawals are not frozen, the damages to the alternate payee are easily measured and there may well be a sympathy factor as well.

Not required. Sometimes offered.

I agree with Linda, especially if the COBRA premium represents the employee plus employer cost of coverage plus maybe even 2 percent. So there's no employer-provided benefit and no need to impute income....

You may want to take a look at the new final regulations, specifically 54.4980B-8, A-2(B), which indicates that the amount can be increased during the 12-month determination period if the plan was charging less than the maximum permitted amount and the increased amount does not exceed the maximum permitted amount.

I think the general ERISA rule is 210 days after the end of the plan year in which the change was adopted. Keep in mind, though, that you are vulnerable to a participant lawsuit based on reliance on the SPD until you provide updated information. So, even though ERISA may give you lots of time, as a practical matter sooner is better. Also, don't forget the 60 day rule for a summary of material reduction if your dental plan is subject to HIPAA. [This message has been edited by JWK (edited 02-02-2000).]