jstorch

Is anyone aware of any guidance that would let a HDHP cover the expenses of a newborn incurred in the period immediately after childbirth until release of the child and mother if a) the newborn's expenses are billed out separately from the mother's and b) the plan has separate deductibles for each family member? (If the child returns to the hospital, it has to satisfy its separate deductible before coverage.) On its face, this seems to violate the restriction on coverage before the deductible is met. However, if the charges were instead imposed on the mother and the mother's deductible is met (likely in childbirth), then the expenses could be covered. This result seems based more on form than on what's actually happening. Any thoughts?

For what it's worth, I've pasted the plan's full "Compensation" definition below. I've looked at numerous IRS PLRs on SEPs. They are uniformly cursory; no useful analysis. Based on the IRS' apparent lack of concern in the area, I feel more comfortable in advising the employer that a PLR may not be worth the cost. "Compensation" means wages within the meaning of Code Section 3401 (a) and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Code Sections 6041(d), 6051(a)(3) and 6052. Compensation, however, shall not include amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under Code Section 217. Compensation shall also exclude all payments to Employees under retention agreements with the Employer and such payments are hereby deemed irregular or additional compensation properly excludable from compensation under Section § 1.414(s)-1 of the Code of Federal Regulations. Compensation under this Section must be determined without regard to any rules under Code Section 3401 (a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). "Compensation" shall also include: (a) elective contributions that are made by the Employer on behalf of its Employees that are not includible in gross income under Code Sections 125, 402(e)(3), 402(h) or 403(b); (2) compensation deferred under an eligible deferred compensation plan within the meaning of Code Section 457(b); and (3) Employee contributions under governmental plans described in Code Section 414(h)(2) that are picked up by the employing unit and thus are treated as Employer contributions. For any self-employed individual covered under the Plan, Compensation means earned income within the meaning of Code Section 401©(1) but determined without regard to any exclusion under Code Section 911. Compensation shall include only that compensation that is actually paid or made available to the Participant during the Plan Year. In addition to other applicable limitations set forth in the Plan, the annual Compensation of each Employee taken into account under the Plan shall not exceed $200,000, as adjusted for increases in the cost of living in accordance with Code Section 401(a)(17)(B) ("annual Compensation limit"). If the Plan determines Compensation for a period of time that contains fewer than 12 months, the annual Compensation limit shall be an amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12. Notwithstanding anything in the Plan to the contrary, the following special transitional rule for governmental plans shall apply to certain Participants in lieu of the annual Compensation limit in the preceding paragraph to the extent provided under Section 1.401(a)(17)-1(d)(4)(ii) of the Regulations under the Code: Any Participant who first became a Participant in the Plan prior to January 1, 1995, shall have his or her Compensation determined using the limit on Compensation in effect on July 1, 1993, provided that the annual Compensation limit that would otherwise apply under Code Section 401(a)(17) has the effect of reducing the limit on Compensation in effect on July 1, 1993.

Broadly speaking, a retention payment is a payment made after the employee completes a specific period of service, like a bonus--e.g., if the employee works for the employer for three years, after that three years the employee will receive an additional payment of compensation. I have not been asked to look at the retention agreements so do not have specifics. I should clarify that the employer is a non-federal governmental employer. Nothing in § 408(k) prohibits these from sponsoring a SEP, although state or local governments, their political subdivisions, etc., cannot sponsor a SARSEP, per § 408(k)(6)(E). See also Gary Lesser's SIMPLE, SEP & SARSEP Answer Book, Q 2:22.

For starters, its compensation definition is W-2 wages, less moving expenses, less irregular/additional compensation (this latter is to exclude retention payments, which are important to the employer to exclude). I've determined this satisfies § 414(s) under Treas. Reg. § 1.414(s)-1(d)(1), through Treas. Reg. §§ 1.414(s)-1(d)(2)(i), 1.414(s)-1(d)(2)(ii), and 1.414(s)-1(d)(3)(i) (I am assuming that the exclusion of retention payments is nondiscriminatory, in that it will reduce HCE's compensation on average more than Non-HCEs). This is the main area where a PLR could have some benefit. I have not looked yet whether there are any PLRs already issued on this or a similar definition. Next, it's a government plan following the grandfathered compensation limit rule of Reg. § 1.401(a)(17)-1(d)(4)(ii), which for 2005 is $315,000 (as opposed to the "normal" 401(a)(17) limit of $205,000). There's at least one participant who is affected by this rule. The SEP LRMs don't have language for either item and I doubt there are any prototypes out there allowing these options. For now, we'll probably hold off on a PLR, but I will check PLRs for compensation definition rulings--thanks for the suggestion.

No, though that's a good idea. But even if I'm able to find favorable rulings, it's still just me saying that the plan follows the law. The question remains, is getting a PLR worth the added certainty? It would help the analysis to know whether it's common or rare for individually designed SEPs to get PLRs.

Any thoughts on what is standard practice with individually designed SEPs on whether to apply for an IRS ruling or not? I'm working with an individually designed SEP that has a non-standard definition of compensation, but I'm confident the definition satisfies Code § 414(s) & regulations. Of course, an IRS ruling on it (& the plan) would be the most conservative route. Before I discuss with the employer whether to spend the money on a ruling, though, I'd like to know what other individually designed plans are doing.

Is the subsidiary's employee demographic representative of the company as a whole? If the subsidiary had a disproportionately higher concentration of highly compensated employees, discrimination could be an issue.

Thanks for the replies. In response to some of the comments: ERISA should not be a concern because the employer is a non-federal governmental employer. As for coding, as I understand it, the employer sent the contributions to each individual's custodian (in other words, the new "main" custodian doesn't receive funds to forward to accounts at other institutions). The coding problem would happen because the custodian did not understand that the money coming in was for a SEP IRA. Who is at risk for improper codes here? Employee could run into IRA contribution limits, but what about the employer or custodian? Is the employer open to any liability to the employee, and does the employer need to worry about blowing its entire SEP with the IRS? Does the employer have any duty to make sure the custodian knows the money is a SEP-IRA, or can the employer simply follow the employee's instructions? The employer's initial enrollment sheet consistently says "SEP-IRA" account information is needed, but does not contain an express warning that the employee must ensure the information is for a SEP-IRA and not some other kind of account.

Employer recently changed custodians for its SEP. In the process, several individuals chose to have their accounts at a different institution. Employer asked them to provide the account information and employer made SEP contribution to those accounts. (Contribution made approximately July 2004; calendar year plan.) Employer has now learned that some of those accounts were an employee's existing traditional IRA, and not an IRA devoted solely to the SEP. Is this a problem for the employer? For the employee? What actions, if any, should/can employer take with respect to the contributions already made? (Employer was switching to monthly contributions in 2005, but they are being held up for the accounts in question.)

Per Rev. Proc. 2004-22, prescription drug plans are "grandfathered" so they can be offered w/HSA plans through 2005. How are insurers handling non-calendar-year prescription drug plans that would run 2005-2006 & HSAs? Only thoughts I have are 1. make short plan years terminating on 12/31/05. 2. not offer them at all after the plan year ending in 2005. 3. let them be and tell those taking it that they won't be HSA eligible as of 1/1/06. Anyone know what insurers are doing in practice or have other ideas?

Not only are HSAs not deductible in WI, the WI Department of Revenue is treating rollovers of MSAs into HSAs as a taxable distribution. (see below) Makes sense from a legal perspective, in that a regular distribution from an MSA is taxable, and there's no corresponding WI deduction on the contribution to the HSA. However, would've been nice if WI DOR had come out with this position before September. I asked DOR if they would allow a MSA-HSA rollover to be "unwound" so that the money could remain in the tax-preferred MSA. A spokesperson told me that if the IRS permitted it, WI DOR would permit it. So, anyone who converted an MSA to HSA in WI seems out of luck unless they fall into the 60-day rollover window or get a PLR. Even without this issue, record-keeping is going to be a mess. http://www.dor.state.wi.us/taxpro/news.html#health Health Savings Account The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Public Law 108-173), was enacted December 8, 2003. This federal Act amended the Internal Revenue Code (IRC) and provided for the establishment of health savings accounts. For tax years beginning in 2004, Wisconsin generally follows the IRC as amended to December 31, 2002. Because the federal provisions in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 relating to health savings accounts were enacted during 2003, they do not apply for Wisconsin for taxable years beginning in 2004. Effect of Wisconsin Not Following 2003 Federal Law Changes All federal provisions relating to health savings accounts do not apply for Wisconsin. For example: A deduction is not allowed for the amount contributed to a health savings account for an individual. Earnings on the health savings account are taxable to the individual. Amounts distributed from the health savings account are not taxable to Wisconsin, regardless of whether or not the amount is used to pay medical expenses. Medical expenses paid with a distribution from a health savings account are allowed in the computation of the Wisconsin itemized deduction credit. A rollover from an Archer medical savings account to a health savings account results in a taxable transaction. Amounts contributed by an employer to a health savings account for an employee are taxable wages to the employee. Amounts contributed to a health savings account pre-tax by an employee under sec. 125, IRC (cafeteria plan), are taxable wages for Wisconsin.

JDuns- I thought the EEOC had backed off the Erie decision, but haven't followed it--did they come out with something new?

Notice 2004-50, Q/A 24 effectively permits prorating the minimum deductible for periods longer than 12 months. Allowing proration also for periods less than 12 months (e.g., for single coverage, permitting a $500 deductible for a six month short plan year) seems logical, but is not addressed in the Q/A. Consequently, I don't think "short" proration is permitted. Is there any consensus on the issue? Can anyone provide any items addressing the issue, one way or another?

Yes. Notice 2004-2 Q/A 19, 2nd to last sentence: "Contributions to an employee's HSA through a cafeteria plan are treated as employer contributions."

Has anyone out there drafted a deemed IRA provision for a plan? If so, how did you address the 2003-13 guidance suggesting the Listings of Required Modifications for IRAs be added to the plan? Following is a link where I address the issue in more depth. http://benefitslink.com/boards/index.php?s...t=0entry93487

Has anyone out there drafted a deemed IRA provision for a plan? If so, how did you address the 2003-13 guidance suggesting the Listings of Required Modifications for IRAs be added to the plan? Following is a link where I address the issue in more depth. http://benefitslink.com/boards/index.php?s...t=0entry93487

Beyond the trustee issues, I see a significant problem in the Rev. Proc.'s suggesting the extensive Listing of Required Modifications for traditional/Roth IRA must also be included. Why would a small employer subject themselves to all that? Following is a link where I address the issue in more depth. http://benefitslink.com/boards/index.php?s...t=0entry93487 Has anyone out there drafted a deemed IRA provision for a plan? If so, how did you address the 2003-13 LRM guidance?

Thanks for the link. After reviewing the IRS Rev. Proc. 2003-13 sample amendment to add deemed IRAs, I'm apprehensive about offering them. Section .02 requires that in addition to the sample amendment, the plan must contain language satisfying Code §§ 408 or 408A, then refers to the Listing of Required Modifications for IRAs. The LRMs are fairly extensive. Does this mean that a plan offering deemed IRAs has to contain everthing from the appropriate LRM? Even if inapplicable provisions could be stricken, it seems like an awful lot of language to add to the plan document. I don't think the employer would be very excited about my suggesting a 5 page amendment to replace the current deemed IRA paragraph. Has anyone out there drafted a deemed IRA provision for a plan? If so, how did you address the 2003-13 LRM guidance?

It might be a little late to chime in, but Everett Morland's last post nails the right PLR. I have found very little commentary on PLR 9104050; anyone have any reason to believe the IRS has changed position or the law affecting has changed since it was issued? I found the following thread which also covers the issue, which may be of interest: http://benefitslink.com/boards/index.php?s...st=0entry7743 125 plans offer a choice between cash and certain nontaxable benefits ("qualified benefits" under § 125(f)). The key is in realizing 457/403(b)/401(k) contributions are not nontaxable, but merely tax-deferred--they are taxable in the future. (The reason 401(k) deferrals may be offered in a 125 plan is because it is specifically provided for in Section 125(d)(2)(B).)

I'm currently reviewing a governmental 457 plan with deemed IRAs, but don't know how successful they are with participants. The language is pretty sparse; just appears to take the relevant language from Code Section 408(q). I agree that there seems to be little advantage to the employer to offer deemed IRAs and am considering recommending to the employer dropping them. Have you found any articles discussing advantages/disadvantages in offering them?

After pursuing the matter up several supervisory levels and getting the bank's legal department to sign off, the bank agreed to accept the attorney's beneficiary designation, and treated the 3 siblings as 1/3 beneficiaries each. Bank admitted no wrong, and required beneficiaries to sign an indemnification in case the IRS challenged the treatment. I do believe the veiled hints that the bank violated fiduciary duties may have helped the bank come to its decision. I think it's the right result, but a lot of work (and about 8 months of uncertainty) could've been avoided. I agree, in retrospect, would've been better for the original attorney either to have completed the form or reviewed it afterward, but when the IRA owner says he'll handle things himself, there's not much else you can do. Thanks to all who gave suggestions.

To Pensions in Paridise: Why, yes, I have in fact "seen a form filled out which says "See Attachment."" This particular form did NOT have that language in the blank spot--that's the whole issue. A blank, with nothing on the form saying "if this is left blank, X is the default", should have been a red flag to the bank officer. (The default language re: going to the estate if blank was in a document that apparently was not provided to the IRA owner.) I did not mention that in the IRA certificate holder that was given to the account holder, there were two photocopies--one of an unrelated woman's driver's license and one of her social security card. All the more reason I suspect the bank screwed up; imagine the fraud potential and bank liability there. In response to your opening statement, an estate attorney was consulted. The attorney drafted the appropriate language. All that needed to be done was for the IRA owner to give the language to the bank and the bank officer complete the form properly. (My initial post indicated the IRA owner handled the paperwork in person; what I did not specify was that the bank officer filled in the form for the owner at his instructions.) As for not bringing the attorney to the bank, the IRA owner trusted the bank officer (of course, this is the same officer one who gave him another's driver's license and social security card information) to effectuate the instructions his attorney prepared for him and which he took to the bank. Don't know why you're so hostile to the thought the bank officer could have screwed up, but would appreciate it if you could keep your repressed anger to yourself.

Does anyone else think the Service totally ignored the last part of Code Section 223©(1)(A), reading "and which provides coverage for any benefit which is covered under the high deductible health plan", in the revenue ruling concerning prescription drug coverage with HSAs? I could buy the description of the legislative history, but the plain language of the statute would allow prescription drugs to be reimbursed in a non High Deductible Health Plan as long as the eligible individual's HDHP didn't cover prescription drugs. Am I missing something? If not, any suggestions for responding to the revenue ruling? (At least we've got transitional relief until Jan 2006.)

Does anyone know of any guidance on what fees on investments would be permissible in HSAs? Could a broker act as an intermidiary agent, sigining individuals up for HSAs and registering trade, but using a 3rd party bank or other financial institution to make the trade? If so, would fee splitting be permitted?

Is there any required or approved format for an employer to make the request for estimated withdrawal liability? Any reason a short letter to the plan sponsor wouldn't suffice?