Kirk Maldonado

Do the instructions provide any guidance?

Linda: Creative and interesting theory. Unfortunately, I think that you would have trouble under ERISA justifying "purchasing" coverage when the maximum reimbursement is the amount of your premiums.

Section 125.

JCatt: I'm aware of a lot of litigation involving annuity contracts issued by EL with respect to terminating DB plans, but I hadn't heard about anything involving participant-directed DC plans. Do you have a cite to that case. P.S. A few years ago, I did a fair amount of research, and found a paucity of cases imposing liabilitly upon DC plans that offered investments that went sour.

I agree with QDROphile.

IRC401: The DoL is taking the position as a result of an audit. (The PWBA is not involved in the audit, to the extent of my knowledge. It is apparently being handled by another part of the Dol.) They are raising a number of issues (not all of which have merit), including the fact that, if participants forfeit amounts (because they don't submit claims for the total amount in their reimbursement accounts), those participants must be made whole (by an additional payment from the employer to the participant). Needless to say, that could cause problems under the cafeteria plan rules. Unfortunately, the regulations read as if they were written by a labor attorney, not a benefits attorney. Accordingly, they are ambiguous. The issue relates to the Service Contract Act, which, as I understand it, requires that employers pay the "prevailing wage" to employees working on federal contracts. Because there could be a forfeiture of amounts in the account, that could cause the total amount paid to the employee to be less than the prevailing wage, so goes the argument of the DoL. One factor that the DoL hasn't yet recognized is that, because the employees receive the reimbursements tax-free, they could forfeit a sizeable portion of their account balances and still end up with more after-tax dollars.

I disagree with EAKarno. Representatives of the IRS have repeatedly stated in public forums that the excess amounts must be taken into the participant's income; they may not be directly transferred to a nonqualified plan. Search the back issues of the BNA Pension Reporter, and I'll bet you will find those statements.

Has anybody had to address whether contributions to dependent care expense reimbursement account and medical care expense reimbursement account (that are part of a cafeteria plan) satisfy the requirements of the Service Contract Act? The DOL is taking the position that because the participant will forfeit some or all of the amount in the account if the participant does not submit a sufficient amount of claims (pursuant to the "use it or lose it" rules of cafeteria plans), that violates the Service Contract Act. The applicable regulation dealing with benefit plans in general (29 CFR Section 778.215) does not expressly mandate this result. Also, I think that it is significant that the regulation dealing with contributions to tax-qualified retirement plans (29 CFR Section 778.214) does not require that the contributions be fully vested immediately, only that the contributions be irrevocable. Thus, it seems that as long as the forfeited amounts are required to remain in the cafeteria plan (e.g., used to increase benefits for all participants for subsequent years), the Service Contract Act should be satisfied. Nevertheless, I can understand why the DOL is asserting its position. Does anybody have any views on this matter?

I disagree that it is a bad idea, if the plan is drafted so that the employee can elect how to invest the money. If they make the decision, they have to live with it, and nobody else will have any liability for their own investment decisions. I disagree completely with the paternalistic attitude that participants can't make their own investment decisions; you have to protect them from themselves.

I seem to recall that the final regulations expressly deal with this issue, but I just can't recall how they resolve it.

RJM: Are you comfortable with the position that the limitation you described does not violate any laws prohibiting age discrimination?

I agree with MoJo. (I practice in California, so I (unfortunately) see this issue quite frequently.)

One technique is to have a higher matching contribution made with respect to employee contributions invested in company stock. For example, you could have a 150% match if the amounts are invested in company stock and 100% if the amounts are invested elsewhere. Because this is a plan design issue, it is outside of the fiduiary responsibility rules of ERISA.

AndyH: Thank you for soliciting my input. I genuinely appreciate the comment, but I must confess that I can't add anything of value to the thread. While I am conversant with the different actuarial cost methods, I don't get involved in the small plan market at all. My fees are far too expensive for employers who view plans as a tax shelter devices. Also, a lot of the planning involves number crunching, which is done most economically by an actuary.

Do both plans have the same EIN, or is the same EIN used for both plans?

Use the excess funds to pay the legal fees associated with finding out what to do with the excess funds.

I seem to recall that there is a discussion of what expenses are covered in the CCH Pension Plan Guide, which discussion is much more detailed thatn Publication 502.

I seem to recall that there is a subsequent court decision that concludes, contary to the decision in Firstier Bank, N.a., Omaha V. Zeller, that there is no prohibited transaction in these circumstances.

Card: I'm not sure that works if the typical term of employment is less than five years.

Pay the fees to you as compensation for finding out the answer to the question (a la Dogbert)?

KLSusac: What is "OCA Frequently sked Questions?"

Why don't you just give the guy a raise big enough to cover his loan?

PAX: When you were referring to a "bona fide employee benefit plan" were you referring to giving hugs?

While I agree that you should communicate the risks, I'm not sure that provides any degree of protection if the company becomes insolvent and everybody loses their benefits. If the court determines that the plan improperly covered some individuals, there will be liability for the breach of fiduciary duty, and the prior disclosures will not prevent any person from being liable.

MoJo: I seem to recall that there is conflicting authority as to whether or not state escheat laws are preempted by ERISA. Couldn't this entire problem be avoided by careful plan drafting? For example, couldn't the plan document state that if a married participant designates his spouse as the beneficiary, then that designation is automatically revoked if they get divorced?