EBECatty

Thank you all--appreciate the input.

401 Chaos, thanks, and you're correct it's intended to be a variation where there would otherwise be an employee equity investment. The employee would essentially "buy in" by deferring pre-tax (or receiving employer contributions) into the plan, and would "sell" by getting cashed out in the sale transaction. All other scenarios that don't involve a liquidity event for the equity owners would give the participants a small interest return. The group would be limited to those who have influence and would otherwise invest their own funds into the employer if feasible (which it isn't here for a few reasons).

Thanks XTitan, and good point. I suppose you could make the amount of the other payment events the lesser of the fixed interest rate or the employer stock value to control for that.

I'm hoping to get input on an atypical nonqualified plan design. Say you have a standard NQDC plan that allows for employee deferrals, employer contributions, etc. All distributions would be in a lump sum on the earliest of termination, death, disability, or change in control. The participant would have no control over investments in their account. However, the amount of the payment would differ based on which event triggers the payment. Termination (for any reason), death, or disability would result in a payment of the participant's account plus a specified and reasonable rate of interest. But a change in control would result in a payment of the participant's account plus a rate of return based on the increase/decrease of the employer's stock over the period of the employee's participation in the plan. So, for example, a participant is in the plan for five years and has an account balance of $100,000, then retires. The payment amount would be $100,000 with a prespecified interest rate of, say, 5% applied over the five years of participation. But if the same participant is employed at a change in control, the payment amount would be $100,000 increased (or decreased) by the increase (or decrease) in the value of the employer's stock over the five years preceding the change in control. The 409A Handbook has an example in the anti-toggling section stating a "toggle" between amounts is compliant because it doesn't change the time or form of payment. I don't see anything else that immediately jumps out at me as impermissible, but would appreciate any thoughts.

Generally this language means an amount includible in income due to a violation of 409A. An amount is includible under 409A only if there is a violation. See 409A(a)(1). That said, any amount paid out under a NQDC plan to which 409A applies will generally be wages anyway, but not under the provision following (23).

Seems to be answered by the COBRA regs. This is Treasury Regulation 54.4980B-5, Q&A 4: Q-4: Can a qualified beneficiary who elects COBRA continuation coverage ever change from the coverage received by that individual immediately before the qualifying event? A-4: (a) In general, a qualified beneficiary need only be given an opportunity to continue the coverage that she or he was receiving immediately before the qualifying event. This is true regardless of whether the coverage received by the qualified beneficiary before the qualifying event ceases to be of value to the qualified beneficiary, such as in the case of a qualified beneficiary covered under a region-specific health maintenance organization (HMO) who leaves the HMO's service region. The only situations in which a qualified beneficiary must be allowed to change from the coverage received immediately before the qualifying event are as set forth in paragraphs (b) and (c) of this Q&A-4 and in Q&A-1 of this section (regarding changes to or elimination of the coverage provided to similarly situated nonCOBRA beneficiaries). (b) If a qualified beneficiary participates in a region-specific benefit package (such as an HMO or an on-site clinic) that will not service her or his health needs in the area to which she or he is relocating (regardless of the reason for the relocation), the qualified beneficiary must be given, within a reasonable period after requesting other coverage, an opportunity to elect alternative coverage that the employer or employee organization makes available to active employees. If the employer or employee organization makes group health plan coverage available to similarly situated nonCOBRA beneficiaries that can be extended in the area to which the qualified beneficiary is relocating, then that coverage is the alternative coverage that must be made available to the relocating qualified beneficiary. If the employer or employee organization does not make group health plan coverage available to similarly situated nonCOBRA beneficiaries that can be extended in the area to which the qualified beneficiary is relocating but makes coverage available to other employees that can be extended in that area, then the coverage made available to those other employees must be made available to the relocating qualified beneficiary. The effective date of the alternative coverage must be not later than the date of the qualified beneficiary's relocation, or, if later, the first day of the month following the month in which the qualified beneficiary requests the alternative coverage. However, the employer or employee organization is not required to make any other coverage available to the relocating qualified beneficiary if the only coverage the employer or employee organization makes available to active employees is not available in the area to which the qualified beneficiary relocates (because all such coverage is region-specific and does not service individuals in that area). (c) If an employer or employee organization makes an open enrollment period available to similarly situated active employees with respect to whom a qualifying event has not occurred, the same open enrollment period rights must be made available to each qualified beneficiary receiving COBRA continuation coverage. An open enrollment period means a period during which an employee covered under a plan can choose to be covered under another group health plan or under another benefit package within the same plan, or to add or eliminate coverage of family members. (d) The rules of this Q&A-4 are illustrated by the following examples: Example 1. (i) E is an employee who works for an employer that maintains several group health plans. Under the terms of the plans, if an employee chooses to cover any family members under a plan, all family members must be covered by the same plan and that plan must be the same as the plan covering the employee. Immediately before E's termination of employment (for reasons other than gross misconduct), E is covered along with E's spouse and children by a plan. The coverage under that plan will end as a result of the termination of employment. (ii) Upon E's termination of employment, each of the four family members is a qualified beneficiary. Even though the employer maintains various other plans and options, it is not necessary for the qualified beneficiaries to be allowed to switch to a new plan when E terminates employment. (iii) COBRA continuation coverage is elected for each of the four family members. Three months after E's termination of employment there is an open enrollment period during which similarly situated active employees are offered an opportunity to choose to be covered under a new plan or to add or eliminate family coverage. (iv) During the open enrollment period, each of the four qualified beneficiaries must be offered the opportunity to switch to another plan (as though each qualified beneficiary were an individual employee). For example, each member of E's family could choose coverage under a separate plan, even though the family members of employed individuals could not choose coverage under separate plans. Of course, if each family member chooses COBRA continuation coverage under a separate plan, the plan can require payment for each family member that is based on the applicable premium for individual coverage under that separate plan. See Q&A-1 of § 54.4980B-8.

I've skimmed this before (or something like it). If I recall, the individual executives all pay a small fee/"premium" into a pool of similarly situated executives. If one of the executive's employers goes bankrupt and they forfeit deferred comp, the "premiums" paid go to cover that person's payments. It does not secure the employer's payment to the employee.

If you're talking about a firm that is paid a fee to recommend investments to someone else, I don't think so. The test is whether capital is a material income-producing factor, i.e., does the company have to use its money to make more money. My impression is that a "bank or similar institution" refers to a company that uses money to make more money by, for example, loaning its money to another business who repays it with interest. I don't think a "similar institution" would be any company in the financial field; I would interpret the "similar institution" along the lines of other non-bank lenders (e.g., payday lenders, factoring companies, etc.). A financial advisory firm presumably wouldn't be using its own money to make more money. Rather, its income production would consist of the fees received for the personal services of its employees making recommendations to its clients.

See IRS issue snapshot here: https://www.irs.gov/retirement-plans/hardship-distributions-from-401k-plans Excerpt (bold in original): Hardship distributions other than elective deferrals Beginning in 2019, hardship distributions may be made from: Elective deferrals Qualified nonelective contributions (QNECs). Qualified matching contributions (QMACs) Earnings attributable to any of these. See IRC § 401(k)(14)(A). Funds attributable to employer discretionary and matching contributions (other than QMACs and QNECs) may be distributed under more lenient hardship rules, provided that “hardship” is sufficiently defined, consistently applied, and the distribution does not exceed a participant’s vested interest. See Rev. Rul. 71-224. A plan does not have to use the criteria set forth in Reg. § 1.401(k)-1(d)(3), discussed above, for making hardship distributions of these funds, but as a practical matter most plans do in order to avoid having two administrative and review procedures.

I agree. I've had several "interesting" situations and have found the IRS generally reasonable where the proposed correction makes sense and you can demonstrate the underlying error did not arise of out abuse/bad faith. Once you get through the 18+ month wait, that is.

We have some ESOP clients who only permit transfers to their 401(k) plan. The logic is the same as an employer who doesn't permit in-service withdrawals. It's a less-common option in my personal experience, but I don't think it's necessarily a drafting "error" that needs to be "fixed" (unless it truly was an error and they meant to allow a choice from the beginning).

BenefitJack, part of what makes this topic confusing (to lesser minds like mine, at least) is that so much of the guidance is in the context of other types of arrangements, so it's like trying to figure out what it's not before you can figure out what it is. Notice 2018-88 didn't create a new rule for exempting premium reimbursements only from 105(h). See 1.105-11(b)(2) ("However, a plan which reimburses employees for premiums paid under an insured plan is not subject to this section."). If you look at Notice 2018-88, footnote 47 and its related text reference 1.105-11(b)(2). So, even prior to Notice 2018-88, I don't think there was any problem reimbursing only retired HCEs for health insurance premiums on individual coverage. This would be different if the employer continued to pay or reimburse only retired HCEs' (and not non-HCEs') premiums for post-retirement coverage under the employer's self-insured group health plan, which may require imputing taxable income, but that same concern would not apply under 105(h) if the employer was reimbursing retired HCE premiums under an insured plan. Under the ICHRA final rules, I agree these "employer payment plans" (if you Ctrl+F it will take you to a few mentions) are "account-based group health plans" under those rules. However, the preamble discussing the impact on retiree-only HRAs says the following: "The Departments received a number of comments on retiree-only HRAs in response to the proposed rules. Although the final rules do not modify the rules for retiree-only HRAs, the Departments note that the market requirements do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year.[95] Therefore, a retiree-only HRA need not satisfy the requirements of any integration test, including the same terms requirement." So, even though a retiree-only HRA reimbursing only premiums for insured plans is an "account-based group health plan," there's no need to comply with the same terms requirement of the ICHRA rules or the ACA market reforms requiring integration. The final rule also refers to ICHRAs as HRAs intended to meet the integration rules; retiree-only HRAs do not need to meet these rules.

Presumably you would be using the universal availability exclusion for anyone eligible to defer into the 401(k). So, regardless of the 403(b), I think the issue is can you permissibly say that once you have become an HCE at any time you are forever excluded from the 401(k)? FWIW, I think it's fine. I've done this in a 401(k)/nonqualified plan context where we permanently excluded anyone who ever became an HCE, regardless of later status. (Unrelated, but we were satisfied based on the demographics that the nonqualified plan would keep top-hat status and wanted this rule for administrative ease.) I don't recall extensive research, but we were comfortable with it, assuming, like you do, that if a non-HCE was somehow excluded you would still pass coverage in the 401(k). The class is easily identifiable and can only move one way once in their career.

Under section 4.02 of EPCRS, you can self-correct insignificant errors while under examination. See below. Not sure reallocating an entire year would qualify as "insignificant." If these won't work, I think you'll have to use Audit CAP. .02 Effect of examination. If the plan or Plan Sponsor is Under Examination, VCP is not available. SCP is available only as follows: (1) Insignificant Operational Failures. While the plan or Plan Sponsor is Under Examination, insignificant Operational Failures may be corrected under SCP. (2) Significant Operational Failures. If correction of significant Operational Failures has been substantially completed (as described in section 9.03) before the plan or Plan Sponsor is Under Examination, the Plan Sponsor may complete correction of those failures under SCP.

Thanks Luke. The ICHRA regulations are helpful (at least in determining categories). Based on those and some more research, it seems: This could be called an "employer payment plan" but is included in the broader group of "account-based group health plans" defined in the ICHRA regulations. HRAs fall under the same category. It may be a matter of semantics if they both end up in the same place. But after reviewing it does seem the arrangement would properly be called a "retiree-only HRA" (albeit one that covers only premiums). It's not technically an "individual coverage HRA" as defined in those regulations because its goal is not to be integrated with other coverage. It's a retiree-only HRA so does not need to be integrated. The ICHRA preamble makes it clear that it is not changing the rules for retiree-only HRAs that do not require integration. Therefore, no need to follow all the rules generally applicable to ICHRAs. It is not subject to the nondiscrimination rules under 105(h) as it's only reimbursing premiums. Notice 2018-88 confirms the exemption. So participation can be limited to executives only. It's exempt from Part 7 of ERISA because it covers fewer than 2 active employees. It would be subject to ERISA's plan document and SPD rules and ERISA's fiduciary/enforcement provisions. It would not need any disclosure or filing. It may be exempt as a "top hat" welfare plan under 2520.104-24, so would only need to provide plan documents to the DOL upon request. Or, in this case, it will be limited to well under 100 participants so will not require a 5500 in any event. It will be subject to limited aspects of COBRA.

I'm having trouble finding a clear answer on the precise definition of an arrangement. Say a mid-size employer has a written policy, or a series of individual agreements, that applies to executives (say VP or above) who retire with 10 years of service at age 55 or later. Once they retire, the employer will reimburse them up to a fixed dollar amount per month for the retired executive's personal payment of individual health insurance premiums. Reimbursement will last until Medicare eligibility. Substantiation is required. No other medical benefits are provided; just a capped premium reimbursement for a fixed amount of time. What, exactly, is this? An HRA or something less? For purposes of ACA market reforms and related guidance, it's called an "employer payment plan," and the guidance seems to draw a distinction between an HRA and an employer payment plan. (In any event, if limited to retirees only, it's not subject to the market reforms.) The guidance makes it clear that this arrangement is a "group health plan," but it's not exactly clear to me what that would require given the exemption from the market reforms and lack of penalties. Does this need an ERISA plan document, SPD, 5500 if covering 100+ participants? COBRA rights? Any input appreciated.

I have seen "B" and a variation of "A," both in tax-exempt 457(b) and nonqualified plans. Some employers will allow the employee to direct investments until they reach pay status. Then they take a snapshot of the balance and pay out that amount over, say, 120 monthly installments. The employer will no longer keep the money invested, or maybe keep it invested in a money-market fund, so it's no longer at risk. Or maybe the employer will pass along the interest to the employee (i.e., the account balance while in pay status is "directed" into the money-market fund or accrues interest at prime). Others will let the participant continue directing their investments while in pay status. In that case, the installment formula we use is: (total account balance immediately before installment payment) / (remaining number of installment payments). That way the payments fluctuate with the account balance. I've never heard any concern that the formula is no longer "substantially equal" just because it can vary with investment experience.

I've had success with VCP in a similar situation. The client had prior year ACP testing and a discretionary match. They had one bad year and made no match. The next year they went back to their typical match, and the non-HCE rate for the prior year was 0%. It would have resulted in a refund to all HCEs of about $500,000. We submitted through VCP and asked to retroactively change testing to current year. It was approved. The plan operated in accordance with its terms (and the client certainly didn't like the results) but the IRS allowed the change. It wasn't abusive; kept money in the plan; arose from an unintended set of circumstances; etc. Here, it sounds like there was at least poor communication and an election that the client didn't fully understand. I would give it a shot.

I follow this much. My question has to do with filing them (or, in my case, 5498 reporting IRA contributions) on the same day as the tax filing (and IRA contribution) deadline. Usually there's a month and a half between the contribution deadline (April 15) and the 5498 filing date (end of May). I don't see how it's possible to provide and file accurate forms by the same day as the contribution deadline. It seems that the 5498 filing deadlines should be extended until the end of August to keep the same month and a half preparation period, but I don't see anything that has extended the 5498 filing deadline beyond July 15.

I was curious about the 5498 deadline too. IRA contributions can now be made until July 15...but the 5498 filing deadline is also July 15. I don't see where there has been any lag time like there typically is after the normal April 15 tax filing deadline. It seems both deadlines (contributions and 5498 filing) are now both extended to the same day.

I think there's a potentially important distinction. EPCRS says to treat the corrective distribution as described in Rev. Proc. 92-93. Section 3, dealing with distributing elective deferrals following a 415 violation, says the payment is a "corrective disbursement" and not a "distribution of accrued benefits" and therefore not subject to spousal consent, 72(t) penalties, and other code "sections governing distributions of accrued benefits." Say the participant died, leaving his/her estate to a surviving spouse, but named a child as the plan's beneficiary. For a "corrective disbursement" that is not a "distribution of accrued benefits," I think the proper payee is the participant's estate (and flowing through to the surviving spouse).

Thanks--that was my reaction as well. Any thoughts on 1099-R code. Per the instructions, code 4 doesn't get "used with" Code E, and Code E says no other codes are "used with" it. But these seems to pretty clearly fall under both of them. If forced to pick one, I suppose I would use E.

415 violation was in 2018; participant died in 2019; distribution would be made in 2020.

If a plan needs to make a corrective distribution due to a 415 violation in a prior year, but the participant has since died, to whom is the distribution payable? The participant's estate? And is it reported on a 1099-R as Code 4? EDIT: Code 4 in addition to Code E. Or just E? Still not clear to whom it is payable.

I had one like that as well. It was a straightforward non-amender and we had the compliance letter in under two weeks. The two that took much longer were individualized requests that didn't have a pre-approved correction under EPCRS.