EBECatty

I think I'm asking a slightly different question. For example, the standard method to provide HCIs subsidized COBRA post-termination (on a discriminatory basis) is to pay the subsidy as taxable income or impute income for the amount paid. I'm asking whether the same concept can apply to ongoing employees. To take a more stark example, say the employer paid nothing in premiums for any employees (allowing employees to pre-tax entire cost) but then paid the HCIs only a taxable supplement in the exact amount of the premium. Do you have a 105(h) discrimination issue at all in that case?

Say an employer has a self-insured group health plan. The same plan coverage, waiting period, benefits, etc. are offered to all employees. If HCIs paid, say, 10% of the cost of coverage and non-HCIs paid 50%, we would violate 105(h). If the premium payments by employees remained the same (10% and 50%), but the employer imputed taxable income to the HCIs equal to 40% of the premium, does this solve the 105(h) problem? I know the typical solution in post-termination or COBRA subsidization is to make the premium payment or subsidy taxable. Does this same solution carry over directly to the continuing employment scenario? Alternatively, the HCIs' base salary could be increased, but the employer wants to avoid having to increase base salaries for optics and other reasons. Appreciate any input.

Under the 409A exemption for stock rights, an "option": means the right or privilege of an individual to purchase stock from a corporation by virtue of an offer of the corporation.... If you have an otherwise exempt option (i.e., it meets all the substantive exemption requirements of nonqualified stock options) but the option is to purchase employer stock from the majority shareholder of the employer, do you still meet the 409A exemption? The definition in the 409A regs is carried over from Section 421. Also, Section 83 has rules governing the purchase of employer stock from another shareholder in connection with the optionee's performance of services for the employer. It treats the transaction as being routed through the employer for tax purposes. I see no cross-reference or carryover of a similar concept under the 409A regs. Thoughts? EDIT: On further reflection, because the tax treatment is already fixed under Section 83, could the option be issued directly from the employer, then the controlling shareholder could have the same number of his shares redeemed by the employer upon the optionee's exercise? That avoids dilution of the minority shareholders, which was the original goal.

I've seen a few prior threads on this but wanted to get current input. A plan's loan policy allowed 15 year loans for primary residences. Loans longer than 15 years (but assume still reasonable) were made. Plan sponsor is fine with amending the loan policy to allow longer primary residence loans (both for outstanding and future loans). Section 6.07 of EPCRS (including current version now in 2018-52) allows for correction of loans in violation of 72(p)(2)(B) and (C), but here the primary residence exception applies and allows for a reasonable loan term. No violation of (B) or (C). VCP would seem to be required, but 6.07 only mentions correction by re-amortizing, which isn't the plan sponsor's preferred course because the original term is permissible under 72(p). I suppose the alternative is to retroactively amend to conform to prior operations under the more generic VCP provisions of Section 4.05. Section 2.07 of Appendix B allows certain retroactive amendments under SCP. Section 2.07(2) allows a retroactive amendment under SCP to add loans to a plan whose terms did not allow them. But it does not mention amending under SCP to extend the term of an otherwise permissible loan. Is VCP required to retroactively approve the longer term? if so, would Section 4.05 be the appropriate section? Try SCP and document file stating that extending the loan term seems more analogous to SCP under Appendix B? Thanks in advance.

Thank you both. No state or local law would require it either. Just wanted to confirm the general rule under 401(a)/457(b)/gov't plan rules.

Would appreciate someone confirming the thought process here. Governmental 457(b) plan document terms do not require spousal consent to name a non-spouse beneficiary. The only other relevant requirement would be 401(a)(11), which requires spousal consent as part of naming non-spouse beneficiary for exception of QJSA/QPSA requirements. Section 401(a)(11) does not apply to governmental plans or 457(b) plans. No requirement for spousal consent to name non-spouse beneficiary. Correct?

Thank you all. As a follow-up, my understanding is the P.S. 58 rates were replaced by Table 2001, but I still see references everywhere to P.S. 58 rates. Are people just referring to the current rates (wherever they are reflected) as P.S. 58 rates such that the term "P.S. 58" has just become shorthand for "the current IRS rates on cost of insurance"?

Say a PS plan holds a life insurance policy. The participant was properly taxed on the cost of insurance each year. Cash value is $100,000 and death benefit is $1,000,000. The plan is the beneficiary of the policy. I understand under 72(m)(3) that if the participant dies the plan gets the $1,000,000 death benefit and pays it to the participant's PS plan beneficiary. The [edit; typo] taxable tax-free distribution to the beneficiary is $900,000 ($1,000,000 in proceeds less $100,000 in cash value). If the participant buys the policy from the plan while the participant is alive, and the values are the same as above at the insured's death, does the life insurance beneficiary get all $1,000,000 in proceeds tax-free under 101(a)? Or do you still need to exclude the cash value from the tax-free portion because the policy originally was purchased by a qualified plan? In other words, is the only relevant variable policy ownership at the time of death? The $100,000 of (taxable) cash value within the plan in the first scenario is being "replaced" with the $100,000 of cash the participant uses to buy the policy in the second scenario, so there is still a taxable distribution from the plan of $100,000. But there would only be one "bucket" of $100,000 that is potentially taxable ($100,000 from the plan) instead of two (one of $100,000 in cash value within the plan taxable upon distribution; another separate $100,000 that could have been used to buy the policy and potentially taxable upon death). Estate tax is by no means my strong (or semi-strong) suit, so I may be missing something here, but it seems like you get a slight benefit by buying the policy out of the plan.

FWIW, this is from the ABA Employee Benefits Committee IRS Q&A in May 2009: 32. § 409A – Short-Term Deferral Exclusion If a payment satisfies the short-term deferral exception to Treasury Regulation Section 1.409A-1(b)(4), may the parties subsequently adjust the amount and timing of payments? Proposed Response: Yes. If the short-term deferral exception applies to the original arrangement, then such arrangement is excluded from Section 409A. The original arrangement may therefore be modified provided that the modified arrangement also qualifies for exception to Section 409A under the short-term deferral rule. IRS Response: Yes, but other tax doctrines such as constructive receipt continue to apply.

Right, actual ABP will vary slightly, but the numbers in our particular case aren't a concern. Appreciate your time and insight.

Thanks. The situation involves an ESOP and 401(k), which I understand you generally cannot aggregate for coverage testing, but must aggregate when determining average benefits percentages. So say Plan 1 is the 401(k) and Plan 2 is the ESOP. In that case, FL gets 10% in 401(k) and CA gets 5% in 401(k). In the ESOP, all FL employees are excluded by explicit plan terms, and all CA employees are covered and get 5% in the ESOP. Everyone has received an allocation in their respective plans, and everyone's average benefit percentage is 10%.

If you have helpful thoughts, please feel free. Other feedback if the design is as noted above--two plans with each participant in each plan getting an allocation, each using ABT?

It's a proposed design change for a number of issues that are larger than this one, including two plans as noted in the follow-up, but potentially losing the ability to use ABT for coverage could pose a problem.

Issue is actual, but classifications are hypothetical.

Thanks. Follow-up Q: What if the same employer has two plans. Plan 1: Both CA and FL are eligible and get allocations. Assume it uses every participant in a separate group. Everyone will get an allocation, so should be fine to use ABT (no zero allocations so no exclusion by name). FL participants get 10% of comp; CA participants get 5%. Plan 2: Only CA is eligible; FL is excluded altogether from the plan. Also uses every participant in a group. All CA participants get a 5% allocation in plan 2. All participants get an allocation, so should be fine to use ABT. Combining both plans for ABT purposes gives everyone 10% and allows the plans to pass the numerical benefit percentage test. Okay to pass coverage using ABT?

Maybe I'm dense. Either way the document would say "every participant is in a separate group." I guess I'm just not seeing the distinction between saying "FL gets 5%; CA gets 8%" (which you seem to agree is okay because no one gets 0%) compared to "FL gets 0%; CA gets 8%" (which you say is not okay). The plan document terms have not changed.

Giving an objective class 0% still doesn't enumerate anyone by name. What is different about giving all classes something vs. giving some classes something?

Would your answer change if all members of a reasonable and objective class get zero? That way you are not singling anyone out by name, nor excluding anyone by name. Say in my example CA gets 5% and FL gets 0%. Assume it passes all numerical compliance tests.

PensionPro, that was my thought process as well. The regulations speak of a classification established by the employer identifying the employees benefiting under the plan that is objective under the circumstances. Here, if the employer identifies "everyone in FL" as a classification and "everyone in CA" as another, that seems to meet the objective business criteria test pretty easily. But technically you are still allocating individually. I guess that's why I'm asking if you have to identify the classifications somewhere in the plan document; in that case, you could only use ABT if you had separate groups in the plan document with at least two employees in each group. Another take would be that you have allocated individually to each person for purposes of (a)(4) and the definitely determinable requirements, but are using different (e.g., CA vs. FL) objective groups of employees who benefit under the plan to pass ABT. Here's the regulation: (b) Reasonable classification established by the employer. A classification is established by the employer in accordance with this paragraph (b) if and only if, based on all the facts and circumstances, the classification is reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan. Reasonable classifications generally include specified job categories, nature of compensation (i.e., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable classification.

Thanks--I realize now my original post wasn't clear. The question is can they use ABT for coverage testing even if allocations are based on separate classifications. Not concerned about (a)(4).

Say you have a PS plan with each participant in his/her own group for allocation purposes and you want to run average benefits testing. I'm aware of the apparent IRS position that every participant in their own group is not a reasonable classification because it may have the effect of excluding an employee by name. I understand that position if the employer is allocating completely individual rates, including some zeros, with no consistent objective basis (e.g., we like Ann so she gets 5%, but we don't like Ben, who does the same job, so he gets 0%). However, if the actual allocation itself is still made on a reasonable, objective, business-criteria basis (and the group is nondiscriminatory) can you use ABT? For example, an employer has two locations and every participant works at one or the other, say Florida and California. The plan says every participant is in a separate group for allocation purposes. The employer makes the "official" allocations individually, but everyone who works in Florida gets the same percentage allocation, and everyone who works in California gets the same percentage allocation. Is this still a reasonable classification for ABT purposes despite the plan document saying everyone is in their own group for allocation purposes? In other words, do the "reasonable classifications" for ABT testing need to be explicitly stated in the plan document, or are the "reasonable classifications" based on actual practice?

I considered putting a call into DOL to see if anyone was willing to provide informal guidance, although I doubt their answer will be "just keep it." The portion we think may be plan assets attributable to employee premium payments is in the six figures, so it's definitely worth poking around. Appreciate your input.

Thanks Luke. No VEBA involved. The employer is, and always has been, tax-exempt so there shouldn't be any tax benefit issues as they never "benefited" from the original premium payments. Sounds like there may not be an easy answer other than to find some way to allocate a decent approximation of the plan asset portion.

Thanks. We've considered the options in your first paragraph, but are reduced to making a barely-informed guess for several reasons (different entities issuing paychecks without breakdown of deductions; records destroyed in storms; etc.). At best we would be returning it to some employees from some point in time with no records of who paid how much in premiums and for how long. In other words, we know that some portion is plan assets, but any guess as to how much and how it's allocated is almost arbitrary at this point. I'm not sure sending out checks to a subset of former employees for random amounts is any more prudent than keeping the money. Both the employer and related entity where some former employees work are tax-exempt. I agree it doesn't resolve the Title I issue, but it's not going back into, say, an owner's pocket.

I'm hoping someone can provide a helpful suggestion for an odd set of facts. Employer had Trigon/Anthem health insurance for many years. It never received shares in the demutualization process; they found their way to the state unclaimed property fund, which eventually sold them for cash, and just recently distributed the cash to the employer. Problem is, the employer terminated all its employees several years ago. Some now work for a related entity over which the employer has no control. The employer (getting the demutualization proceeds) has no employees, no group health plan, etc. At least some, but not a lot, of the demutualization proceeds were from employee premium payments. Many were from the 1990s and payroll records have been lost/destroyed. The DOL guidance doesn't seem to squarely address the situation. There are cases where funds from a terminating welfare benefit plan are transferred to another welfare benefit plan covering the same employees, but I can't find anything where the plan was out-and-out terminated and no employees remain. Regs say upon termination of a welfare benefit plan, the remaining assets will be distributed in accordance with the plan. Here it was just a group health and dental policy. Is it a reversion if the employer takes the money back? Subject to excise tax? A PT? Is the only option track down former employees and give them a check for an arbitrary amount? Can we give the money to the other related employer to use toward these employees' current premiums/benefits? Appreciate any thoughts.