KJohnson

Double dipping is tax-free employer reimbursement of premiums paid on a pre-tax basis There is no double dipping in the second arrangement because the premiums were paid post-tax. Pull out your EBIA cafeteria maual and look for the extensive dicussions regarding premium reimbursement accounts. 2002-3 distiniguishes 61-146 it in no way overrules it. To determine what is permissible, you have to "put them together". Of course, I would never recommend a PRA for major medical coverage because of the HIPAA and COBRA issues dicussed in a prior post.

Also, the following is from the IRS' publication "Introduction to Cafeteria Plans" http://www.irs.ustreas.gov/pub/irs-utl/int...a_plans_doc.pdf a. Employer-provided accident or health coverage under sections 105 and 106. This includes health, medical, hospitalization coverage, disability insurance and coverage under an accidental death and dismemberment policy. It also includes reimbursement for health care expenses under a health flexible spending arrangement (FSA). Individually owned accident or health insurance policies may be offered under a cafeteria plan provided that the employer requires an accounting to insure that the health insurance is in force and is being paid by the employees. See, Rev. Rul. 61-146, 1961-2 C.B. 25. Moreover, the plan may not reimburse the health insurance premiums under a health FSA.

I would not call the first a straight POP plan. At least in my mind a POP plan is a method of financing with employee salary reductions the group medical plan sponsored by the employer rather than an invidual insurance product selected by the employee. I agree, however, that the concept is the same. The support the the second concept is Rev. Rul. 61-146, and Rev. Rul. 2002-3. The premium payments are made by the employee post-tax (the first step of 61-146). Then these premiums are reimbursed by the employer on a tax-free basis (the second step of 61-146). As 2002-3 makes clear when the amount of an employees' salary reduction are used to pay insurance premiums, those amounts are treated as paid by the employer.

You can run a PRA where: 1) The employee has amounts withheld pre-tax and the emloyer then takes this money and pays the premiums to the individual insurer directly, or 2) You can have a PRA where the employee has amounts withheld pre-tax and then the the employee pays the premium himself or herself with post-tax dollars and receives a non-taxable reimbursement from the PRA. In each of these situations, the employee is funding the account on a pre-tax basis but neither of these situations implicate prohibited "double dipping." What you cannot have is a tax-free employer reimbursement of amounts that were already purchased on a pre-tax basis (e.g. if in situatio (1) above the employer also took the position that it could reimburse the employee on a tax-free basis for the amount paid for the insurance premium).

I believe that Harry Beker from the IRSs stated informally that reimbursement may be allowed for a spouse's coverage under the group health plan sponsored by the spouse's employer or for an individual policy owned by the spouse. Of course you can't rely on these comments, but at least that was the view at one time of the Service's 125 Plan "guru".

To get out of the 5500 uner the less than 100 rule you generally have to be insured or benefits must be paid from the general assets of the employer. A VEBA does not meet either of these conditions.

I think g8r acknowledges that you can't reimburse these premiums through the FSA however you can have a separate "premium reimbursement account" (PRA) through a 125 plan based on Rev. Rul. 61-146. There are a number of issues that make these difficult to administer. If an employer offers a PRA for major medical coverage there can be significant HIPAA issues. Major medical benefits are clearly covered under HIPAA's non-discrimination and speciail enrollment provisions while other benefits such as those that cover a specific disease (“cancer insurance”) as well as “limited scope” benefits (such as vision and dental) may not be covered (provided that a separate premium is charged for these benefits and a participant may “opt out.”) If HIPAA is implicated by individual insurance policies, it would be difficult to monitor or insist on compliance with such things as limits on preexisting conditions, certificates of creditable coverage, special enrollment etc. The most troubling aspect of HIPAA compliance for major medical coverage in individual policies is that the premium structure for such a policy would probably violate the non-discrimination rules based on health status. If individual insurance is purchased on the open market, sick people will obviously pay higher premiums for policies than healthy people – a probable HIPAA violation. Also each separate policy chosen by a participant may be treated as a separate group health plan for COBRA purposes. Even policies for excepted benefits (vision and dental) will probably be covered under COBRA as “group health plans” and the employer must be capable of providing COBRA continuation coverage (except for certain small employers) as well as COBRA notices. This could raise issues with policy language. You might want to look at this link: http://benefitslink.com/modperl/qa.cgi?db=qa_125&id=145

Here's the PLR: http://www.benefitslink.com/IRS/plr200031060.html

It used to be that one of the factors that was considered is the fee that you would have had to pay under VCP (which for your plan would could have been as low as $375 provided it was submitted to VCP within one year after the CRA amendments should have been adopted). Unfortunately, the IRS got rid of this factor in 2003-44. I am not sure about the IRS' position that the amount is non-negotiable--by its vary nautre and as stated in the Rev. Proc. the sanction amount is a negotiated amount. I would think that the IRS would be willing to listen to arguments for a reducition in the amount based on the factors listed in 2003-44: 02 Factors considered. Factors include: (1) the steps taken by the Plan Sponsor to ensure that the plan had no failures, (2) the steps taken to identify failures that may have occurred, (3) the extent to which correction had progressed before the examination was initiated, including full correction, (4) the number and type of employees affected by the failure, (5) the number of nonhighly compensated employees who would be adversely affected if the plan were not treated as qualified or as satisfying the requirements of § 403(b), § 408(k) or § 408(p), (6) whether the failure is a failure to satisfy the requirements of § 401(a)(4), § 401(a)(26), or § 410(b), either directly or through § 403(b)(12), (7) the period over which the failure(s) occurred (for example, the time that has elapsed since the end of the applicable remedial amendment period under § 401(b) for a Plan Document Failure), and (8) the reason for the failure(s) (for example, data errors such as errors in transcription of data, the transposition of numbers, or minor arithmetic errors). Factors relating only to Qualified Plans also include: (1) whether the plan is the subject of a Favorable Letter, (2) whether the plan has both Operational and other failures, (3) the extent to which the plan has accepted Transferred Assets, and the extent to which the failure(s) relate to Transferred Assets and occurred before the transfer, and (4) whether the failure(s) were discovered during the determination letter process. Additional factors relating only to 403(b) Plans include: (1) whether the plan has a combination of Operational, Demographic, or Employer Eligibility Failures, (2) the extent to which the failure relates to Excess Amounts, and (3) whether the failure is solely an Employer Eligibility Failure.

For what it is worth, this was in the Fall 2002 of the IRS' Employee Plan News. Vesting of Separated Participants upon Plan Termination Despite a 1984 General Counsel Memorandum (GCM), there remains some confusion on the issue of full vesting for participants – who have yet to incur a forfeiture in accordance with plan terms – as a result of plan termination. This topic is a recurring determination letter issue, a potential examination issue and also tends to show up during plan termination sessions at various benefits conferences. When a complete or partial plan termination happens, the result is full vesting for affected participants. In April 1984, the Service concluded in GCM 39310 that a partially vested participant who separates from service and would not incur a forfeiture of their benefit under the terms of a qualified plan must be vested in their accrued benefit (to the extent funded) at plan termination. A defined contribution (DC) plan may provide for acceleration of forfeitures under the cash-out rules of Internal Revenue Code section 411. Except in the case of a non-vested participant, forfeiture cannot precede distribution under the cash-out rules. If a DC plan does not use the cash-out provisions, it may provide that forfeiture will still occur through use of the break-in-service rules of section 411 (at the end of the applicable break-in-service period). In a plan that uses the break-in-service rules to determine when forfeiture occurs, if the plan terminates before forfeiture occurs, partially vested separated participants are affected employees who must become fully vested. This is regardless of whether they received a prior distribution. Conversely, in the case of a plan that uses the cash-out rules, a participant who separates from service and is paid their vested accrued benefit has no years left for purposes of accruing benefits. In a plan that uses years of service to determine accrued benefits, a cashed-out employee has no accrued benefit and nothing in which to fully vest at plan termination. The rationale in GCM 39310 applies to defined benefit plans as well as DC plans.■

I don't think DOL's conclusion in 2003-05A turned on the fact that it was a non-contributory plan or that there was no reversion. DOL said that there was no plan so there can be no plan assets. 4044 only speaks to the allocation of plan assets--so I don't think this changes the analysis. If there are no plan assets, participants don't get anything absent something "screwy" in your annuity contract. I think the people in DOL's Office of Interpretations and Regulations would be willing to talk this over with you if you called to D.C. Based on prior conversations I think you will like their always non-binding veiws.

So I guess both the TAM and Izzarelli are in agreement that whether the contribution has been made is irrelevant to the accrued benefit analysis.

Here is a link to the TAM http://www.benefitslink.com/IRS/tam9735001.html

In the TAM the contribution was made on January 6th but the IRS determined that any contribuiton made for the prior year--no matter when it was made-- must be allocated based on the formula in existence on December 31. In the TAM the employer actually argued that the particpiant did not accure a benefit until the contribuiton was actually made. After first noting the inapplicability of the argument because the 1/6 contribuiton had indeed been made prior to the 3/15 amendment, the IRS went on to reject the argument that the timing of the contribution has anything to do with accruing the benefit or preserving the allocation formula.

Ashley, You are probably right. I always had the same understanding that you did. Then I went back and read the Tech Release for the first time in a few years. I was expecting to see a requirement that the particpant contributions remain unsegregated in the general assets of the employer-- but it wasn't there. I know that EBIA takes the position that the language in the preamble to 1998 proposed amendments to regulations regarding annual reporting refutes this argument. Indeed that preamble stated that Technical Release 92-01 “does not apply to participant contributions after they have been segregated from an employer’s general assets and transmitted to an intermediary account.” 63 Fed. Reg. 68369, at footnote 5 (Dec. 10, 1998). But, of course that was a preamble to annual reporting regulations and there is an independent requirement that if you want to be exempt from a 5500, benefits must be from the general assets of the employer. 92-01 had two parts the-- reporting aspect and the trust aspect. In the preamble, were they commenting on both parts of 92-01, or since it was a reporting and disclosure regulation, were they only commenting on the reporting aspect? Still, I would agree that the "accepted wisdom" is that they must remain in the general assets of the employer in order to be exempt from both the trust and reporting requirements even though I don't think that the language of the Tech Release gets you there and I don't find the citation to the preamble to reporting and disclosure regulations completely authoritative. Maybe I am safer never rethinking what I thought I knew was true? Of course the DOL's position is kind of silly. The trust is obviously for the protection of the participants. Thus DOL says that if you leave the participant contributions completely unprotected we won't require a trust. However, if you go to the trouble of giving the participants another level of security by segregating the assets in the Plan's name, we will impose the trust requirement.

I think you are right that you are outside the applicable exemption to 5500 because the funds are not being paid from the general assets of the employer. However, I am not so sure that there is a trust requirement or whether you still fall under the non-enforcement policy in that regard. You may want to look at the actual language here: http://www.dol.gov/ebsa/Newsroom/tr92-01.html I think the operative provisions are: In the case of a cafeteria plan described in section 125 of the Internal Revenue Code, the Department will not assert a violation in any enforcement proceeding solely because of a failure to hold participant contributions in trust. Nor, in the absence of a trust, will the Department assert a violation in any enforcement proceeding or assess a civil penalty with respect to a cafeteria plan because of a failure to meet the reporting requirements by reason of not coming within the exemptions set forth in §§2520.104-20 and 2520.104-44 solely as a result of using participant contributions

Of course you could always try those words the IRS loves to hear: scrivener's error. There might be some validity to the idea of keeping your old allocation formula, deciding not to fund it, and add a new allocation formula. This would seem to be form over substance. But, when you think about it the TAM is pretty stupid to begin with because of the point made by MBOZEK. However, I believe that the IRS has acknowledged that if you have this kind of problem there is nothing to prevent you from establishing a new plan and not funding the allocation formula of the old plan. But, this would really only work in a situation where you had a 500 hour requirement or something similar for an allocation because you would need to get the new plan up before the end of the year.

Your facts are exactly that contained in TAM 9735001. Do a search on that on the Boards. In that TAM the IRS said that you could not change the allocation formula. I don't think 401(b) gets you there. As Gregory points out 401(b) only applies to disqualifying provisions which are: (b) Disqualifying provisions. For purposes of this section, with respect to a plan described in paragraph (a) of this section, the term ``disqualifying provision'' means: (1) A provision of a new plan, the absence of a provision from a new plan, or an amendment to an existing plan, which causes such plan to fail to satisfy the requirements of the Code applicable to qualification of such plan as of the date such plan or amendment is first made effective. (2) A plan provision which results in the failure of the plan to satisfy the qualification requirements of the Code by reason of a change in such requirements-- Given that provision of the Code, I am not sure how much reliance you could really have on the determ letter based on a 401(b) argument. BTW--The IRS was asked if they were "backing down" on the TAM mentioned above at the 2002 JCEB conference. Below is their response: 20. §411(d)(6) – Anti-cutback rule Assume a discretionary profit sharing plan (or a §401(k) plan) does not have a 1,000 hour or last day of the plan year requirement. Is there an anti-cutback problem if the plan is amended midyear to: •increase the annual compensation limit to $200,000 (contribution allocated on a pro ratabasis) •change the vesting schedule to provide for faster vesting for matching contributions (thereby reducing the amount of forfeitures to be allocated for the year) •increase the annual compensation limit to $200,000 in a §401(k) plan resulting in the plan passing the ADP test. Assume a discretionary profit sharing plan has a last day of the plan year requirement but the requirement does not apply to participants who retire, die or become disabled during the plan year. The plan is amended mid year to increase the compensation limit to $200,000. Is there an anti-cutback issue with respect to the participant who retires, dies or becomes disabled prior to the adoption of the amendment? Proposed response: In a discretionary profit sharing plan there is no anti-cutback issue regardless of whether there is a last day of the plan year requirement. A participant does not accrue a protected benefit until the contribution is actually made to the plan and the participant has met any other requirements imposed by the plan (such as an hour requirement). In TAM 9735001 a discretionary profit sharing plan’s allocation formula was retroactively amended after the end of the plan year and after a contribution had been made to the plan but before the due date of the employer tax return. The IRS concluded that the retroactive amendment of the formula violated §411(d)(6). The facts presented in the TAM are different from the facts outlined above where the plan is being amended mid year (or in any event by the last day of the plan year) and therefore a similar conclusion should not be applied to the above facts. Moreover it is our understanding that: •this TAM is currently under reconsideration; •the IRS has orally agreed not to challenge anti-cutback issues regarding changes in a discretionary profit sharing plan formula prior to the reconsideration being complete and the IRS issuing something in writing; •the IRS will not challenge the §411(d)(6) cutback issue regarding EGTRRA amendments for 2002 and that no amendments (with respect to the compensation limit increase or the faster vesting for matching contributions) needed to be in place by the end of 2001 to be effectivefor the 2002 plan year. IRS response: The IRS agrees with the portion of proposed response that it will not challenge the §411(d)(6) cutback issue regarding EGTRRA amendments for 2002 and that no amendments (with respect to the compensation limit increase or the faster vesting for matching contributions) needed to be in place by the end of 2001 to be effective for the 2002 plan year. Rev. Proc. 2001-42 establishes an amendment procedure for plan amendments, but mandatory and discretionary amendments, allowing plan sponsors until the end of the 2002 plan year to adopt good faith amendments. Specific §411(d)(6) relief is provided for top heavy plans in that procedure[/color]. The IRS disagrees with the portion of proposed response that the TAM is under reconsideration or that it has orally agreed not challenge anything.

I think that asset based fees can sometimes include commissions in certain wrap arrangements. That's where you might have a problem. But a straight asset based investment advisory fee should present no problem.

I would look at Rev. Rul. 86-142. Also look at PLR 8941009 (partially revoked in PLR 9124035). If these are investment advisory fees you probably don't have an issue. If, as Q-phile points out you are looking at some kind of wrap that includes brokerage commissions and transaction costs then you have an issue. I think the test is whether the employer is paying is an "overhead expense incurred in connection wth the maintenance of the trust" which is fine. Or whether it is a charge that is "intrinsic to the value of the asset" in which case it must be treated as a contribution. There are several long discussions on the Board regarding employers paying surrender fees or CDSC's in this regard.

Then in my experience you are far ahead of the game. I find this to be the major flaw in 404© compliance in the mid and small markets.

There are two requirements, one is to provide the prospectus automatically either immediately before or immediately after a participant first invests in the mutual fund. The other is to provide the prospectus upon request. I am not sure that your method satisfies the second requirement and I think it clearly does not satsify the first. The reg is below (1) The participant or beneficiary is provided by an identified plan fiduciary (or a person or persons designated by the plan fiduciary to act on his behalf): (i) An explanation that the plan is intended to constitute a plan described in section 404© of the Employee Retirement Income Security Act, and title 29 of the Code of Federal Regulations, Sec. 2550.440c-1, and that the fiduciaries of the plan may be relieved of liability for any losses which are the direct and necessary result of investment instructions given by such participant or beneficiary; (ii) A description of the investment alternatives available under the plan and, with respect to each designated investment alternative, a general description of the investment objectives and risk and return characteristics of each such alternative, including information relating to the type and diversification of assets comprising the portfolio of the designed investment alternative; (iii) Identification of any designated investment managers; (iv) An explanation of the circumstances under which participants and beneficiaries may give investment instructions and explanation of any specified limitations on such instructions under the terms of the plan, including any restrictions on transfer to or from a designated investment alternative, and any restrictions on the exercise of voting, tender and similar rights appurtenant to a participant's or beneficiary's investment in an investment alternative; (v) A description of any transaction fees and expenses which affect the participant's or beneficiary's account balance in connection with purchases or sales of interests in investment alternatives (e.g., commissions, sales load, deferred sales charges, redemption or exchange fees); (vi) The name, address, and phone number of the plan fiduciary (and, if applicable, the person or persons designated by the plan fiduciary to act on his behalf) responsible for providing the information described in paragraph (b)(2)(i)(B)(2) upon request of a participant or beneficiary and a description of the information described in paragraph (b)(2)(i)(B)(2) which may be obtained on request; (vii) In the case of plans which offer an investment alternative which is designed to permit a participant or beneficiary to directly or indirectly acquire or sell any employer security (employer security alternative), a description of the procedures established to provide for the confidentiality of information relating to the purchase, holding and sale of employer securities, and the exercise of voting, tender and similar rights, by participants and beneficiaries, and the name, address and phone number of the plan fiduciary responsible for monitoring compliance with the procedures (see paragraphs (d)(2)(ii)(E)(4)(vii), (viii) and (ix) of this section); and (viii) In the case of an investment alternative which is subject to the Securities Act of 1933, and in which the participant or beneficiary has no assets invested, immediately following the participant's or beneficiary's initial investment, a copy of the most recent prospectus provided to the plan. This condition will be deemed satisfied if the participant or beneficiary has been provided with a copy of such most recent prospectus immediately prior to the participant's or beneficiary's initial investment in such alternative; (ix) Subsequent to an investment in a investment alternative, any materials provided to the plan relating to the exercise of voting, tender or similar rights which are incidental to the holding in the account of the participant or beneficiary of an ownership interest in such alternative to the extent that such rights are passed through to participants and beneficiaries under the terms of the plan, as well as a description of or reference to plan provisions relating to the exercise of voting, tender or similar rights. (2) The participants or beneficiary is provided by the identified plan fiduciary (or a person or persons designated by the plan fiduciary to act on his behalf), either directly or upon request, the following information, which shall be based on the latest information available to the plan: (i) A description of the annual operating expenses of each designated investment alternative (e.g., investment management fees, administrative fees, transaction costs) which reduce the rate of return to participants and beneficiaries, and the aggregate amount of such expenses expressed as a percentage of average net assets of the designated investment alternative; (ii) Copies of any prospectuses, financial statements and reports, and of any other materials relating to the investment alternatives available under the plan, to the extent such information is provided to the plan; (iii) A list of the assets comprising the portfolio of each designated investment altenaive which constitute plan assets within the meaning of 29 CFR 2510.3-101, the value of each such asset (or the proportion of the investment alternative which it comprises), and, with respect to each such asset which is a fixed rate investment contract issued by a bank, savings and loan association or insurance company, the name of the issuer of the contract, the term of the contract and the rate of return on the contract; (iv) Information concerning the value of shares or units in designated investment alternatives available to participants and beneficiaries under the plan, as well as the past and current investment performance of such alternatives, determined, net of expenses, on a reasonable and consistent basis; and (v) Information concerning the value of shares or units in designated investment alternatives held in the account of the participant or beneficiary..

I agree that would seem to be the conclusion that you would come to under the language of that ABA Q&A, but I didn't see any direct support in the regs for such a definition of period of coverage. I guess you could read more into the Q&A and come to the conclusion that the termination of employment was a change in status revoking the election and it is actually the revocation of the election that ends the period of coverage. On the other hand a plan with the "last paycheck rule" will neither mandate hor allow the terrmination of employment to be a change in status revoking the election and therefore the period of coverage continues.

O.k.--It was your prior reference to the FSA that threw me off. I don't think there is any way around an FSA being an ERISA plan. However, I can at least see someone arguing that the last paycheck was not "taken" pursuant to the FSA but pursuant to the 125 plan. I agree that the 125 plan itself is simply a funding mechanism for underlying ERISA benefits and would not be an ERISA plan in itself.

MGB--Not doubting its there, but what is the cite for the notion that a period of coverage must end with the separation from service? I realize that it is a change in status which, if the plan allows it, permits a participant to revoke a previoius election during a period of coverage. However, I was not aware of language that mandated a period of coverage end with a separation from service. I do agree with your conclusion that he should be able to claim expenses incurred through 12/31 (assuming a calendar year plan).