KJohnson

http://www.benefitslink.com/IRS/notice2000-11.shtml

I think the PT arises when S status is elected. You might want to look at DOL Opinion Letter 84-44A

PJK, I don't think the FSA applies to NQO's but I was wondering how people were looking at this for disqualifying dispositions in ISOs. The FSA seems to take the position that there is no difference between an ISO and an ESPP for purposes of what is wages in a disqualifying disposition and that 71-52 is "discredited" and "nullified" by the Sun Micorsystems ruling.

Sure--I also think the MPPP can be drafted to allow a subsequent "in-service" distribution of this rollover amount nothwithstanding the typical restrictions on in-service distributions from MPPPs

Employer has been approached about a program where employees can personally invest after tax dollars in mutual funds through payroll deductions. These are the same family of mutual funds offered in the employer's 401(k) Plan. It has been represented that employees who use this payroll deduction program can be "linked" with the assets in the employer's retirement plan for determining "break points" on reductions of sales charges etc. I know something like this was allowed for IRA's and non-Title I Plans in PTE 97-11, but has anyone seen something like this "linking" to a Title I Plan? Any comments on prohibited transaction issues? [Edited by KJohnson on 09-08-2000 at 02:20 PM]

It ain't a reg or the statute, but the LRM is good enough for me. Thanks Gary Lesser

Let me make sure that I have this straight. For coverage under 410(b)individuals who have irrevocably waived out of a 401(k) Plan will be included in minimum coverage but as not benefitting. They would also be entirely excluded from the ADP and ACP tests. Under 1.410(B)-3(a)(2) an employee will only be counted as benefiting if he or she is an "eligible employee" under 1.401(k)-1(g)(4) and 1.401(m)-1(f)4. Sections 1.401(k)(1)(g)(4)(ii) and 1.401(m)-1(f)(4)(ii) then exclude individuals who have made one time irrevocable elections from the definition of eligible employee. Also only "eligible employees" are included in ADP and ACP tests so these employees will be completely excluded from these tests. Finally, if there is a profit sharing contribution, only those who actually receive a contribution are counted as benefiting under 1.410(B)-3(a)(1) so these employees would be included but not benefitting under mimimum coverage for this portion of the Plan. Right? [Edited by KJohnson on 08-28-2000 at 07:00 PM]

PJK--What is your read on FSA 199926034? Does this change your view on the FICA withholding requirement on disqualifying dispositions?

Employer A and Employer B merge mid-year. At the same time Employer A's top heavy plan is merged into Employer B's non-top heavy plan with Employer B's Plan being the "survivor". As of the date of the merger, the resulting merged plan would be top heavy. What is the top heavy obligation for the year of the plan merger? 1) All non-keys? 2) All of A's non-keys, but base the contriubiton of B's non-keys on comp from the date of the merger? 3) A's non-keys only? or 4) no top heavy contribution is required. Under Q&A T-31 it is clear that all of the assets of the two plans will count toward a top heavy determination. However under 416(g)(4)©and Q&A T-22 the "determination date" is the end of the prior year (before the merger). At that point the "survivor" was not top-heavy. Of course the Plans could have been kept separate under the 410(B) grace period and would not have had to be aggregated for top-heavy in which case the only top-heavy contribution would have been for A's employees. However, the employer decided it wanted an immdediate merger. Any thoughts?[Edited by KJohnson on 08-25-2000 at 10:01 AM]

John here is the link: http://www.benefitslink.com/IRS/revproc2000-16.shtml Here is the explanation (without the examples): SECTION 3. EARNINGS ADJUSTMENT METHODS AND EXAMPLES .01 Earnings Adjustment Methods. (1) In general. (a) Under section 6.02(5)(a), whenever the appropriate correction method for an Operational Failure in a defined contribution plan includes a corrective contribution or allocation that increases one or more employees' account balances (now or in the future), the contribution or allocation is adjusted for earnings and forfeitures. This section 3 provides earnings adjustment methods (but not forfeiture adjustment methods) that may be used by an employer to adjust a corrective contribution or allocation for earnings in a defined contribution plan. Consequently, these earnings adjustment methods may be used to determine the earnings adjustments for corrective contributions or allocations made under the correction methods in section 2 and under the SVP correction methods in Appendix A. If an earnings adjustment method in this section 3 is used to adjust a corrective contribution or allocation, that adjustment is treated as satisfying the earnings adjustment requirement of section 6.02(5)(a). Other earnings adjustment methods, different from those illustrated in this section 3, may also be appropriate for adjusting corrective contributions or allocations to reflect earnings. (B) Under the earnings adjustment methods of this section 3, a corrective contribution or allocation that increases an employee's account balance is adjusted to reflect an "earnings amount" that is based on the earnings rate(s) (determined under section 3.01(3)) for the period of the failure (determined under section 3.01(2)). The earnings amount is allocated in accordance with section 3.01(4). © The rule in section 6.02(6)(a) permitting reasonable estimates in certain circumstances applies for purposes of this section 3. For this purpose, a determination of earnings made in accordance with the rules of administrative convenience set forth in this section 3 is treated as a precise determination of earnings. Thus, if the probable difference between an approximate determination of earnings and a determination of earnings under this section 3 is insignificant and the administrative cost of a precise determination would significantly exceed the probable difference, reasonable estimates may be used in calculating the appropriate earnings. (d) This section 3 does not apply to corrective distributions or corrective reductions in account balances. Thus, for example, while this section 3 applies in increasing the account balance of an improperly excluded employee to correct the exclusion of the employee under the reallocation correction method described in section 2.02(2)(a)(iii)(B), this section 3 does not apply in reducing the account balances of other employees under the reallocation correction method. (See section 2.02(2)(a)(iii)© for rules that apply to the earnings adjustments for such reductions.) In addition, this section 3 does not apply in determining earnings adjustments under the one-to-one correction method described in section 2.01(1)(B)(iii). (2) Period of the Failure. (a) General Rule. For purposes of this section 3, the "period of the failure" is the period from the date that the failure began through the date of correction. For example, in the case of an improper forfeiture of an employee's account balance, the beginning of the period of the failure is the date as of which the account balance was improperly reduced. (B) Rules for Beginning Date for Exclusion of Eligible Employees from Plan. (i) General Rule. In the case of an exclusion of an eligible employee from a plan contribution, the beginning of the period of the failure is the date on which contributions of the same type (e.g., elective deferrals, matching contributions, or discretionary nonelective employer contributions) were made for other employees for the year of the failure. In the case of an exclusion of an eligible employee from an allocation of a forfeiture, the beginning of the period of the failure is the date on which forfeitures were allocated to other employees for the year of the failure. (ii) Exclusion from a 401(k) or (m) Plan. For administrative convenience, for purposes of calculating the earnings rate for corrective contributions for a plan year (or the portion of the plan year) during which an employee was improperly excluded from making periodic elective deferrals or employee after-tax contributions, or from receiving periodic matching contributions, the employer may treat the date on which the contributions would have been made as the midpoint of the plan year (or the midpoint of the portion of the plan year) for which the failure occurred. Alternatively, in this case, the employer may treat the date on which the contributions would have been made as the first date of the plan year (or the portion of the plan year) during which an employee was excluded, provided that the earnings rate used is one half of the earnings rate applicable under section 3.01(3) for the plan year (or the portion of the plan year) for which the failure occurred. (3) Earnings Rate. (a) General Rule. For purposes of this section 3, the earnings rate generally is based on the investment results that would have applied to the corrective contribution or allocation if the failure had not occurred. (B) Multiple Investment Funds. If a plan permits employees to direct the investment of account balances into more than one investment fund, the earnings rate is based on the rate applicable to the employee's investment choices for the period of the failure. In accordance with section 6.02(5)(a), for administrative convenience, if most of the employees for whom the corrective contribution or allocation is made are nonhighly compensated employees, the rate of return of the fund with the highest earnings rate under the plan for the period of the failure may be used to determine the earnings rate for all corrective contributions or allocations. If the employee had not made any applicable investment choices, the earnings rate may be based on the earnings rate under the plan as a whole (i.e., the average of the rates earned by all of the funds in the valuation periods during the period of the failure weighted by the portion of the plan assets invested in the various funds during the period of the failure). © Other Simplifying Assumptions. For administrative convenience, the earnings rate applicable to the corrective contribution or allocation for a valuation period with respect to any investment fund may be assumed to be the actual earnings rate for the plan's investments in that fund during that valuation period. For example, the earnings rate may be determined without regard to any special investment provisions that vary according to the size of the fund. Further, the earnings rate applicable to the corrective contribution or allocation for a portion of a valuation period may be a pro rata portion of the earnings rate for the entire valuation period, unless the application of this rule would result in either a significant understatement or overstatement of the actual earnings during that portion of the valuation period. (4) Allocation Methods. (a) In General. For purposes of this section 3, the earnings amount generally may be allocated in accordance with any of the methods set forth in this paragraph (4). The methods under paragraph (4)©, (d), and (e) are intended to be particularly helpful where corrective contributions are made at dates between the plan's valuation dates. (B) Plan Allocation Method. Under the plan allocation method, the earnings amount is allocated to account balances under the plan in accordance with the plan's method for allocating earnings as if the failure had not occurred. (See Example 22.) © Specific Employee Allocation Method. Under the specific employee allocation method, the entire earnings amount is allocated solely to the account balance of the employee on whose behalf the corrective contribution or allocation is made (regardless of whether the plan's allocation method would have allocated the earnings solely to that employee). In determining the allocation of plan earnings for the valuation period during which the corrective contribution or allocation is made, the corrective contribution or allocation (including the earnings amount) is treated in the same manner as any other contribution under the plan on behalf of the employee during that valuation period. Alternatively, where the plan's allocation method does not allocate plan earnings for a valuation period to a contribution made during that valuation period, plan earnings for the valuation period during which the corrective contribution or allocation is made may be allocated as if that employee's account balance had been increased as of the last day of the prior valuation period by the corrective contribution or allocation, including only that portion of the earnings amount attributable to earnings through the last day of the prior valuation period. The employee's account balance is then further increased as of the last day of the valuation period during which the corrective contribution or allocation is made by that portion of the earnings amount attributable to earnings after the last day of the prior valuation period. (See Example 23.) (d) Bifurcated Allocation Method. Under the bifurcated allocation method, the entire earnings amount for the valuation periods ending before the date the corrective contribution or allocation is made is allocated solely to the account balance of the employee on whose behalf the corrective contribution or allocation is made. The earnings amount for the valuation period during which the corrective contribution or allocation is made is allocated in accordance with the plan's method for allocating other earnings for that valuation period in accordance with section 3.01(4)(B). (See Example 24.) (e) Current Period Allocation Method. Under the current period allocation method, the portion of the earnings amount attributable to the valuation period during which the period of the failure begins ("first partial valuation period") is allocated in the same manner as earnings for the valuation period during which the corrective contribution or allocation is made in accordance section 3.01(4)(B). The earnings for the subsequent full valuation periods ending before the beginning of the valuation period during which the corrective contribution or allocation is made are allocated solely to the employee for whom the required contribution should have been made. The earnings amount for the valuation period during which the corrective contribution or allocation is made ("second partial valuation period") is allocated in accordance with the plan's method for allocating other earnings for that valuation period in accordance with section 3.01(4)(B). (See Example 25.)

You may want to look at the following: http://www.benefitslink.com/cgi-bin/qa.cgi...a_distributions The wife should not roll her husband's IRA into an existing IRA, but should roll it into a new separate IRA. (This avoids any issues regarding whether you could use separate accounting discussed in the link above). Under the "inherited IRA" rules wife could then take wdistributions based on joint life expectancies with whatever beneficiaries she designates for the new IRA.

Any other thoughts?

It does not look like the old 1.125-2 Q&A 6(B)(1) has been deleted by the new proposed reg. The old 125 Q&A column on BenefitsBoard had this interpretation of that reg: ----------------------------------------------------------- (Posted February 15, 1999) Question 142: Due to financial hardship, an employer is going to have to ask its employees to increase their share of the medical insurance premiums mid-year. Is this allowable, since the employer has a Section 125 plan in existence? Answer: I'm afraid this might be problematic, unless an independent third-party carrier raised the cost of premiums in the middle of the plan year. See the following excerpt from Proposed Regulations 1.125-2 Q&A 6 (B)(1). "Significant cost or coverage changes--(1) Cost changes. If the cost of a health plan provided by an independent, third-party provider under a cafeteria plan increases or decreases during a plan year and under the terms of the cafeteria plan, employees are required to make a corresponding change in their premium payments, the cafeteria plan may, on a reasonable and consistent basis, automatically increase or decrease, as the case may be, all affected participants’ elective contributions or after-tax employee contributions for such health plan. Alternatively, if the premium amount significantly increases, a cafeteria plan may permit participants either to make a corresponding change in their premium payments or to revoke their elections and, in lieu thereof, to receive on a prospective basis, coverage under another health plan with similar coverage. No elective adjustments of participants' contributions or revocations of participants' elections other than those provided for in the preceding sentence may be permitted under a cafeteria plan on account of changes in the cost of a health plan." --------------------------------------------------------- Copyright 2000 R. C. Morris, Incorporated ___________________________________________________________ It appears that the new section (f)(2) to Q&A 6 simply supplements but does not replace the old b(1). This new section provides: 2) Cost changes -- (i) Automatic changes. If the cost of a qualified benefits plan increases (or decreases) during a period of coverage and, under the terms of the plan, employees are required to make a corresponding change in their payments, the cafeteria plan may, on a reasonable and consistent basis, automatically make a prospective increase (or decrease) in affected employees' elective contributions for the plan. (ii) Significant cost increases. If the cost of a benefit package option (as defined in paragraph (i)(2) of this section) significantly increases during a period of coverage, the cafeteria plan may permit employees either to make a corresponding prospective increase in their payments, or to revoke their elections and, in lieu thereof, to receive on a prospective basis coverage under another benefit package option providing similar coverage. For example, if the cost of an indemnity option under an accident or health plan significantly increases during a period of coverage, employees who are covered by the indemnity option may make a corresponding prospective increase in their payments or may instead elect to revoke their election for the indemnity option and, in lieu thereof, elect coverage under an HMO option. My trouble is that this seems to talk about the "cost of a beneft package option" rather than the allocation of this cost between the employer and participant. Also the new reg does not delete the old (B)(1).

I agree with all the other comments. However if trustee Parent has co-trustees and trustee Parent abstains from voting on the hiring of Sonny and "absents himself" from all consideration of this issue then you MIGHT be able to argue that there is no PT under the last example of the reg cited by Kirk. Sonny would still be a party in interest due to relationship with fiduciary trustee Parent, but co-trustees could 408(B)(2) the technical 406(a) PT (assuming reasonable compensation paid to Sonny and everything else required for the statutory exemption) and Parent Trustee would not have "caused" the Plan to do anything in violation of 406(B). However, be sure to look at the language of 2550.408(B)-2(e)(2). Frankly if Parent trustee is the CEO and he picks subordinates as co-trustees who would dare not cross Parent Trustee's known but unexpresssed wishes it would still "stink" to me.

PJK, I think your points are valid. However, the 4th Cicuit, where I live and breathe, doesn't buy into the incorporation of general fiduciary duties into the disclosure obligation. In Lundy Packing 91 F3d 646 (4th Cir. 1996) the Court stated: To accept the argument of the Appellants and the Amici we would have to hold that ERISA's general fiduciary duty provision, § 404(a)(1)(A), requires plan fiduciaries to furnish documents to participants and beneficiaries in addition to the documents that ERISA's specific disclosure provision, § 104(B)(4), requires the plan administrator to furnish. Such a holding would conflict with the principle that specific statutes govern general statutes. See > Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384, 112 S.Ct. 2031, 2037, 119 L.Ed.2d 157 (1992); > Farmer v. Employment Sec. Comm'n, 4 F.3d 1274, 1284 (4th Cir.1993). "However inclusive may be the general language of a statute, it 'will not be held to apply to a matter specifically dealt with in another part of the same enactment.' " > Clifford F. MacEvoy Co. v. United States, 322 U.S. 102, 107, 64 S.Ct. 890, 894, 88 L.Ed. 1163 (1944) (quoting > D. Ginsberg & Sons v. Popkin, 285 U.S. 204, 208, 52 S.Ct. 322, 323, 76 L.Ed. 704 (1932)). This principle "applies with special force with regard to a reticulated statute such as ERISA." > Bigger v. American Commercial Lines, 862 F.2d 1341, 1344 (8th Cir.1988); see also > Pension Benefit Guar. Corp. v. Alloytek, Inc., 924 F.2d 620, 626 (6th Cir.1991). Of course, where you draw the line under 104 is also a subject of debate. I recall there was an uproar a few years back when DOL said that certain proprietary UCR schedules were instruments under which the "plan is operated" I guess the upshot is that if you are going to deny documents, it is always best to have a very good reason and be sure to look at the law in your Circuit. Also, realize that once you get into litigation all bets are off, especially given what is out there on the fiduciary exception to the attorney client privilege.

The new propsed reg seems to indicate that in order for an employee to revoke his election or in order for the election to automatically increase, the "cost of the qualified benefits plan" must increase (or signficiantly increase in the case of revoking an election). I am just not sure that this captures an employer who simply wants participants to pay more of a health care cost that has not changed. On the other hand, couldn't the employer just require the employee to pay a greater portion post-tax outside of the 125 Plan?

FYI, you might want to look at DOL Opinion Letter 87-10A-- "With regard to your request, it is the view of the Department that the trustees' minutes containing information concerning the trustees' review of the performance of an investment manager would not, solely because of the inclusion of such information in the minutes, constitute "other instruments under which the plan is established or operated" within the meaning of section 104(B)(4) and , therefore, would not be subject to disclosure purusant to that section" You might also like to look at 82-21A and 82-33A. I believe encompassing common law fiduciary duties into disclosure is the subject of some debate. I think there is a 4th Circuit case about 2 years back called Luddy or Lundy that basically said you don't have to disclose minutes and you should not incorporate common law into disclosure obligations. I think the Ninth Circuit also talked about common law disclosure in an en banc decision about four or five years ago in one of the Hughes cases and I believe there was another case called Acosta.

An employer has a fully insured health plan funded through a 125 plan. The employer wants to increase the participant's share of the premiums mid-year although there has been no premium increase by the insurer. The prior proposed 125 regs seem to state that the only time you can "automatically" increase salary reductions or allow the employee to elect out of coverage mid-year is when the insurer increase the rate. Is this an accurate view? Do you think the new proposed regs change this rule for fully insured plans? If not, is there a way to accomplish the employer's goal such as eliminating the "old" health insurance and offer new insurance with the participant picking up a larger share of the premiums?

That's the way the law is going. I believe there was a case out of the 6th Circuit called "Pope" thay applied a hybrid test. I believe that the 3rd in Walling v. Brady and the 7th in an apprenticeship fund case (Howell?) have said Trustees amending the Plan are not acting as fiduciaries. If you are in the 2nd there is an older Masters Mates and Pilots case I believe called Chambless that you will have to deal with. However I doubt Chambless has much vitality after the Supreme's decisions in Spink and Hughes v. Jacobson. I think the government dropped a footnote in its amicus brief in Spink questioning whether the fiduciary/settlor distinction would apply to trustees of a multi and I think the DOL is shying away from this issue. However current case law seems to indicate that trustees of a multi can amend a plan for any reason as long as substantive provisions of ERISA and the Code are respected (411(d)(6) etc.

What is the issue? Usually whoever creates the Trust is the settlor so look at your Trust agreement. Typically you have joint settlors (union and employer association). However in many multis the settlor function of amending the plan is often delegated to the Trustees. The Trustees can then have both settlor functions (plan design and amendments) and fiduciary functions. Look at Walling v. Brady out of the 3rd Circuit for a good discussion. There are variations in some Cirucits and I am not sure that the DOL is in complete agreement that trustees of a multi can act in a "settlor" capacity. However, the case law seems to be going this way and the Supreme Court's langauge in the Spink decision and Jacobson decision indicates that it is the function being performed rather than the title of the person peforming the function which determines whether it is a "settlor" or "fiduciary" act.

I haven't looked at this lately, but I think the safest course is to provide in you document that the plan sponsor can pay the administrative expenses of the Plan and then have the employer pay this "outside" of the Plan. I think by having the employer contribute into the plan you run the risk of having these contributions included in all of your testing as well as your 404/415 limits etc.

http://www.benefitslink.com/cgi-bin/qa.cgi...qa_plan_defects

They will at least have to be included in your testing to see if you pass coverage. Since the individuals in the Subchapter S will all be HCEs via ownership, if the employees in the LLCs are not all HCEs you will undoubtedly have to cover some of them.

You need a money purchase pension to do this. 401(k) is a PS Plan. All PS Plans are considered one for 404--404(a)(3)(A)(iv) and you deductibility limit is therefore 15% 404(a)(3)(A)(i).

I must admit, it came as a surprise to me It may have been keyed to protoype plan language which often refers to a discretionary allocation for a plan year. I suppose if you had different allocation periods stated in you plan document, this might resolve their objections.