KJohnson

This is an area that is still up in the air, in my view, as to ERISA, HIPAA portability and discrimination, state HIPAA small marekt reform, and COBRA. Here is a link that discusses some of this. http://benefitslink.com/boards/index.php?s...=29815&hl=HIPAA I have nothing to do with EBIA but they actually had a teleconference on this yesterday----I didn't sign up for it, but someone on the Boards may have. ================================================================= INDIVIDUAL HEALTH INSURANCE POLICIES IN THE WORKPLACE Avoiding Pitfalls and Limiting Employer Obligations ================================================================== An EBIA Web Seminar Date: April 6, 2006 Time: 1:00-2:30 pm EST (12:00 pm CST; 11:00 am MST; 10:00 am PST) Level: Intermediate Many employers offer employees the opportunity to obtain or be reimbursed for individual health insurance policies. With the arrival of health savings accounts this practice may increase. But just because the policies are labeled as "individual" doesn't mean that they're not subject to ERISA, COBRA, HIPAA, and other federal benefits laws. And state insurance laws will usually apply, too. How can employers influence which laws will apply and comply with those that do? Join us in this 90-minute web seminar that will focus on these tricky issues. Register now! For one registration fee ($215), you and your co-workers can gather in one office or conference room to attend the seminar. For more information and to register, go to http://www.ebia.com/Seminars/WebSeminar/18393 .

On a rollover from a Roth 401(k) to a Roth IRA there are two separate five year holding rules that apply. Below are the examples from the proposed Roth distribution regs. This might get a little tricky on tracking basis in some instances... Example 1. Employee D, who is over age 59½, takes a distribution from D's designated Roth account in 2008, prior to the end of the 5-taxable-year period of participation used to determine qualified distributions from a designated Roth account. The distribution is an eligible rollover distribution and D rolls it over in accordance with sections 402© and 402A©(3) to D's Roth IRA, which was established in 2003 (i.e., established for more than 5 years). Any subsequent distribution from the Roth IRA of the amount rolled in, plus earnings thereon, would not be includible in gross income (because it would be a qualified distribution within the meaning of section 408A(d)(2)). Example 2. Assume the facts are the same as in Example 1 except that the Roth IRA is D's first Roth IRA and is established with the rollover in 2008, which is the only contribution made to the Roth IRA. If a distribution is made from the Roth IRA prior to the end of the 5-taxable-year period used to determine qualified distributions from a Roth IRA (which begins in 2008, the year of the rollover which established the Roth IRA) the distribution would not be a qualified distribution within the meaning of section 408A(d)(2), and any amount of the distribution that exceeded the portion of the rollover contribution that consisted of investment in the contract is includible in D's gross income. Example 3. Assume the facts are the same as in Example 2 except that the distribution from the designated Roth account is after the end of the 5- taxable-year period of participation used to determine qualified distributions from a designated Roth account. If a distribution is made from the Roth IRA prior to the expiration of the 5-taxable-year period used to determine qualified distributions from a Roth IRA, the distribution would not be a qualified distribution within the meaning of section 408A(d)(2), and any amount of the distribution that exceeded the amount rolled in is includible in D's gross income.

From the 1.401-1 (ii) A profit-sharing plan is a plan established and maintained by an employer to provide for the participation in his profits by his employees or their beneficiaries. The plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment. A formula for allocating the contributions among the participants is definite if, for example, it provides for an allocation in proportion to the basic compensation of each participant. A plan (whether or not it contains a definite predetermined formula for determining the profits to be shared with the employees) does not qualify under section 401(a) if the contributions to the plan are made at such times or in such amounts that the plan in operation discriminates in favor of officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees. For the rules with respect to discrimination, see Sec. Sec. 1.401-3 and 1.401-4. A profit-sharing plan within the meaning of section 401 is primarily a plan of deferred compensation, but the amounts allocated to the account of a participant may be used to provide for him or his family incidental life or accident or health insurance.

At an ABA conference the IRS has said that this works with a self-insured plan as to paying COBRA premiums for the executive. §105– Health and Medical Benefits It is not unusual for an employer to pay COBRA premiums for former employees for a limited period of time. Often this is done as part of a RIF or a termination agreement with a particular employee. If the plan is self-insured and some of the former employees were highly compensated individuals (“HCIs”), does this raise an eligibility discrimination issue, a benefits discrimination issue, both or neither under § 105(h)? Proposed response: It raises neither an eligibility discrimination issue nor a benefits discrimination issue as long as the premiums are treated as taxable income to the former employees, since in that case the employer’s payment of the premiums is not an extension ofcoverage or benefits under the plan itself. IRS response: The IRS agrees with the proposed answer Interestingly, at this same conference there was also a response going to Steve 72's point to some extent. It seems that as for your eligibility testing, they are taking the position that if you include one fomer employee you have to include all former employees in your 105(h) eligibility computation. It would seem it would be difficult to pass on tis basis: 6. §105 – Health and Medical Benefits It is not unusual for former employees to be allowed to continue to participate in their employer’s health plan for a limited period of time as if they were still active employees. Often this is done as part of a RIF or a termination agreement with a particular employee. If the plan is self-insured and some of the former employees were highly compensated individuals (“HCIs”), does this raise an eligibility discrimination issue, a benefits discrimination issue, both or neither under § 105(h)? Proposed response: It raises an eligibility discrimination issue, not a benefits discrimination issue. Thus, § 105(h) does not prohibit such an extension of coverage as long as it does not cause the plan to violate § 105(h)(2)(A) (requirement that plan not discriminate in favor of HCIs as to eligibility to participate). IRS response: The IRS agrees with the proposed answer, but note that providing a benefit to former employees will require that all former employees must be considered in testing for eligibility.

Also note that retirees are a separate group under the regs. So, even if you could pass 105(h) eligiblity if the retiree was "lumped in" with the actives, you have to look at retirees as an entirely separate group.

The example you cite in the the regs just stands for the proposition that there is no double family attribution. In other words in that example the minor son is only attributed the stock directly held by his father and not the stock that the father is attributed from his other son who is over 21 through another attribution rule. In this case you don't have double attribution. Minor son is deemed to own all stock owned directly by father (single attribution), minor son is deemed to own all stock directly by his mother (single attribution).

Look here: http://benefitslink.com/modperl/qa.cgi?db=...employer&id=262 If they have children under 21, you have a controlled group. If you are in a community property state you probably have a controlled group. If one of the spouses has any "invovlment" in the other's business (officer, director etc) you have a controlled group. There is a non-invovled spouse exception to the attribution rules, you would have to look at the regs to see what additional factors could constitute "involvment".

http://benefitslink.com/boards/index.php?act=ST&f=20&t=4708

Also, if the participant is getting cash to opt out (The employer says that you can have X$ contributed to the Plan or Y$ in cash) then it has to be a one time irrevocable election upon initial participation in order to avoid being an impermissble CODA.

But, the prospective solution is easy-- you just amend it to become a profit sharing plan with QJSA provisoin. Then the minimum funding/delinquent contractor situation goes away.

Below is from the 2004 ASPPA conference Q&A session with the IRS. I don't think eliminating the last day chages the BRF analysis: 22. A PS plan with a 1000 hour and last day requirement would like to quarterly fund contributions for some of its employees (i.e., 5% owners), but not all. Plan allows for individual brokerage accounts for all participants. Is this action possible without violating the qualification requirements of §401(a)(4)? A: No. This would not satisfy the requirement that benefits, rights and features be currently available to a nondiscriminatory group.

Don, You also might be interested in the following. The first is CMS's guidance on the numerator and denominator for any participation rule. As they note, states can adopt their own rules on how they determine the denominator either as all eligible employees or a subset of eligible employees. That is because the smaller the denominator the easier it is to pass the participation test. I would suspect the question in FLA is whether employees with individual plans are included or excluded under that States definition of the denominator. It appears that FLA could, however, clearly include them in the denominator if it wanted to. http://www.cms.hhs.gov/hipaa/hipaa1/content/HIP00-5.asp The second is CMS opining on when a plan marketed as an individual plan will acutally be considered a group plan mandating its guranteed availability and guranteed renewability to all small market employers. They essentially adopt a test as to whether it is considered a welfare plan under ERISA. http://www.cms.hhs.gov/hipaa/hipaa1/content/hip00-6.asp?

I did find a case that supported MBOZEk's point" New England Mut. Life Ins. Co. v. Baig , 166 F.3d 1 (1 st Cir. 1999) where the individual already "had" the policy and the employer agreed to reimburse him for it as part of an employment agreement. The Court said it was not an ERISA plan. Maybe it will work. The cases don't discuss the notion of this reimbursement arrangment being considered an employer provided arrangement and "plan" under 105 and 106 of the Code and the reimbursements being considered "contributions" to the "plan" for this purpose. I also wonder whether, to the extent that a DC health arrangments are used as an "end run" around HIPAA's discrmination provistions, certificates of creditable coverage, COBRA etc. DOL or others would "sit still" for this. EBIA and others say "don't do it" because of COBRA and HIPAA concerns. Contrary arguments can be made. As to Don's point, I guess you are talking about HIPAA small market reform and whether a small market carrier can impose minimum pariticipation standards. I know NC's law states: In applying minimum participation requirements to a small employer, a small employer carrier shall not consider employees or dependents who have qualifying existing coverage in determining whether an applicable participation level is met. "Qualifying existing coverage" means benefits or coverage provided under: (i) Medicare, Medicaid, and other government funded programs; or (ii) an employer-based health insurance or health benefit arrangement, including a self-insured plan, that provides benefits similar to or in excess of benefits provided under the basic health care plan. I guess you are back to looking at whether this is "employer based" which is essentially the ERISA/COBRA question. If it is not employer based then these employees would "count against you" in determining mimimum participaton. If it is employer based then they could not "penalize" you for employees selecting these individual policies.

I don't see how this can be anything other than an employer "program" established to provide employees with medical benefits. If an employer gave some employees in $4,000 taxable income and said go out and buy your own health insurance or buy a car, I don't care which-- I agree you would not have an ERISA plan. However, that is not what you have here. The employer has set aside $4,000 explicity for medical insurance. Not for other purposes. The employer presumably will review the invoices to determine that the amounts have actually been paid and that they are for health insurance. If they are not, the employee is not reimbursed. This arrangement. has a level of employer involvment and approval tha takes you into the ERISA arena. This is the employer's program for providing certain employees with health benefits. Also, the employer is not treating this as cash compensation but as a non-taxable "health plan" benefit to the employee under Code Sections 105 and 106. Section 105 is entitled "Amounts received under accident and health plans " Section 106 is entitled "Contributions by employer to accident and health plans" Section 106 provides and exclusion for amounts contributed for "employer-provided coverage under an accident or health plan." So you would be telling the IRS it is employer provided coverage and employer contribuiton under a health plan and telling DOL it is not. I agree there are times when you can argue that terms have different meanings under the Code and ERISA. I am not sure that you would get that far with arguing that you have a "plan" for purposes of 106 and 106 and not one for ERISA.

I agree that the 1961 Rev. Rul is still applicable and is still good law. Of course it has nothing to do with ERISA. What you have is an employer paid benefit welfare benefit. The employer is taking a deduction for the coverage and the employee is receivng the amounts pre-tax. I think it would be difficult to exclude this under the DOL's regulatory definition of a welfare plan. However, I agree that this is an unsettled area. Once it is an ERISA welfare plan providing medical benefits (and not "excpeted benefits") COBRA and HIPAA kick in. For one COBRA case on individual policies see: Stange v. Plaza Excavating, Inc., 2001 U.S. Dist. LEXIS 1190 (N.D. Ill. 2001)] It would be discriminatory under HIPAA because two different people with different health status would have to pay different premium amounts for the same policy. Again, the EBIA manual and other treatises urge caution in providing non-excepted benefits in this fashion because of the COBRA/HIPAA and ERISA issues--statutes that were not even in existence when the 1961 Rev. Rul. came out.

And look out for "look through" rules regarding plan assets where the assets of the partnership may be considered assets of the plan and you would need heightened awareness of PT issues.

61-146 resolves a host of tax issues assuming you don't have the option between taxable (like cash) and non-taxable benefits. If an employee is receiving benefits on a non-taxable basis and the employer is deducting the premiums reimbursed it would seem to have at least some of the indicia of an employer sponsored plan. HIPAA is generally applicable if you have 2 or more active employees (HIPAA's privacy provisions have different rules) and COBRA is generally 20 employees on a typical business day. There are nuances to these rules HIPAA discrmination, certificates of creditable coverage and special enrollment issues are unresolved in this area. As I mentioned there is an issue regarding COBRA. Also, you may not need a document for purposes of 61-146 but do you have a welfare plan under ERISA which would required a plan document, SPD etc? Resolving the tax issues is only one step.

At least as to the employer paying for COBRA the IRS has informally said that the employer paying the premiums on a post-tax basis did not raise a 105(h) issue. The following is from the the 2003 JCEB conference: 7. §105– Health and Medical Benefits It is not unusual for an employer to pay COBRA premiums for former employees for a limited period of time. Often this is done as part of a RIF or a termination agreement with a particular employee. If the plan is self-insured and some of the former employees were highly compensated individuals (“HCIs”), does this raise an eligibility discrimination issue, a benefits discrimination issue, both or neither under § 105(h)? Proposed response: It raises neither an eligibility discrimination issue nor a benefits discrimination issue as long as the premiums are treated as taxable income to the former employees, since in that case the employer’s payment of the premiums is not an extension of coverage or benefits under the plan itself. IRS response: The IRS agrees with the proposed answer

I assume that in the third situation the employees will not get the cash if they do not use up the entire $4,500. If these employees are being reimbursed for major medical insurance (as opposed to "excepted benefits" like dental or vision) you could have some real issues related to HIPAA. There are unresolved questions as to whether the insurance they are purchasing constitutes a plan of the employer. By its very nature insurance purchased on the "open market" will be discriminatory based on health status--a HIPAA violation if this is considered an "employer plan". Also if it is an emlpooyer plan you could have COBRA compliance issues. I know that the EBIA manual recommends against reimbursing for premiums for major medical coverage because of the HIPAA concerns.

Apparently this is the "hot" issue in the BoA case. 8/16/2005: Bank of America Suit Attacks Retirement Date Issue for Cash Balance Plan First (PLANSPONSOR.com: one-time registration required) Excerpt: "A motion filed in the lawsuit concerning Bank of America's (BoA) Cash Balance Plan asks the judge to rule on the legality of the retirement age used in the plan, saying it is the 'single-most important question' in the case http://www.plansponsor.com/pi_type10/?RECORD_ID=30453

As to the duty of consistency... "However, the duty of consistency is usually understood to encompass both the taxpayer and parties with sufficiently identical economic interests" LeFever v. C.I.R., 100 F.3d 778, 788 (10th Cir. 1996) Also I haven't read it, but a discussion of this case. Estate of Mildred Letts v. Commissioner, 109 T.C. 15 (1997), Doc 97-32197 can be found here: http://www.taxanalysts.com/www/tadiscus.ns...FB?OpenDocument And the summary is Prior cases have applied this concept to bind beneficiaries to representations made by estates. It has also been extended to husbands and wives. It would not be a great reach to extend it to estates of husbands and wives. In fact, the Tax Court in Letts held the estates of the husband and wife were a "single economic unit," and that would be an adequate basis for privity. Finally see TAM 20040701 whcich can be found here: http://www.irs.gov/pub/irs-wd/0407018.pdf

Belgarath--got it thanks. Sal also indicates that the realized income to the trust will be taxed and that 1041's must be filed to report trust income (which I belive was Locusts point). I think I confused myself-- and others-- with my terminology. The issue with regard to secular trusts that was the subject of a series of PLRs's in 1992 was employers attemepting to argue that the secular trusts were employer-grantor trusts and therefore the trust was not subject to tax under Subchapter J (641 and 1(e) of the Code.) The IRS did not buy off on this and determined that they were not employer grantor trusts and therefore you had double taxation of realized income (at the trust and vested participant level). The PLR cited by Mbozek is indeed dense reading, but I think the conclusion is the same. Realzied income is taxed at the trust level (while unrealized income is not). I know that the BNA porfolio also indicates that Subchapter J taxation rules will apply to a disqualifed trust. So, I guess I agree with Sal the notion that grantor trust rules do not apply to disqualifed trusts and this then supports the double taxation notion.

I thought that there was a series of PLRs in 1992 that stated that an employer grantor secular trust will be subject to taxation at both the trust level and the participant level (for vested participants). I think that you run a significant risk of double taxation on earnings. The fact that the participant is taxed does not establish that the trust escapes tax-free.

1. The point is that you cannot "self-disqualify" a plan. It would appear that without IRS action on retroactive disqualification, you would not have a basis to claim the account balance tax free. Sooooo the first step in this process would be to go to the IRS and tell them that they have no choice but to disqualify the Plan so that you can get $1.2 million tax free. That should be an interesting meeting. 2. Good point. Since this is not designed as an employee grantor secular trust both the trust and the participant would be taxed on earnings. 3. I admit I haven't gone back and looked at the duty of consistency cases. However, I doubt that distinctions between a taxpayer and a taxpayer's estate would mean all that much to the IRS in such a situation. I haven't looked for all of the potential problems in this approach, but I would think that a "lose your documents and get your money tax free" argument is jsut not going to win the day. Increasingly, the IRS is going to have no record on which plans are actually qualified in form. People with standarized prototypes rarely went in for determination letters and now the same applies for non-standardized and volume submitter. I can't imagine that just losing your documents is going to make you a non-amender for purposes of being able to take tax-free distributions after 3 or 6 years. Maybe I am wrong, but if Thornton's client takes this appoach, I would appreciate him posting the results. That said, I have used arguments similar to this in negotiating a penalty under the old walk-in-cap program where the penatly/user fee was not set and was geared to the tax effects of disqualificaiton. However, now with standarized VCP fees, I am not sure where this gets you if you use EPCRS.

1) I am not sure that you can just simply treat a plan that you have always treated as "qualifed" as diqualified without actual IRS action. 2) Even if it can be considered disqualified, the assets are now presumably sitting in a non-qualified trust. Depending on whether the schedule P has been filed withthe 5500, you would be looking at investment returns being taxed at trust rates for 3 to 6 years. 3) Even if it can be considered disqualified, this might be a case where the IRS imposes a "duty of consistency" especially if we are dealing with a one participant plan. In other words, the IRS would argue that it relied on the taxpayer's return stating that there was not a taxable event for the $1.2 million and is now taking the opposite position.