EBECatty

Thank you all.

I would appreciate any thoughts on the following two situations: Employer wants to adopt a new PS plan in 2023 retroactively to the 2022 plan year (today's timing I realize is bad, but in theory). If the employer timely filed its 2022 tax return on March 1, 2023, and did not request/receive an extension, can the employer on, say, August 1, 2023, adopt a plan effective January 1, 2022, and contribute and deduct a 2022 PS contribution on August 1, 2023? The employer would have to amend its 2022 return, but is it permissible? Employer wants to adopt a new PS plan in 2023 retroactively to the 2022 plan year. The employer did receive an extension until September 15, 2023, to file its 2022 tax return. The employer filed its 2022 tax return on July 1, 2023. Then, on August 1, 2023, the employer adopts a new plan effective January 1, 2022, and makes a contribution on August 1, 2023, that it would like to deduct for 2022. Can the employer amend its 2022 return to claim the deduction?

My experience may not be universal, but among other things: The 990 reporting, usually done by someone not administering the plan, is complicated with amounts credited, vested, taxed, distributed, or reported in prior years potentially all happening in one year. The participants do not see the value in receiving distributions to pay taxes, only to wait several years (or more) to actually receive a benefit, particularly where they leave employment before payment is made and they have been taxed on money that remains available to their former employer's creditors. Depending on the plan type, to calculate the taxable amount in a given year they may need to do present value calculations with unknown variables. As Carol notes, with other plan types, tax is imposed on vesting, then again on later earnings upon distribution. While not double-taxed, it's another set of calculations/recordkeeping. If any of this is done incorrectly or overlooked for a year because no one thought to look for amounts vesting (but not due) in a given year, tax returns must be amended, etc. 409A. Inevitably one of the employees will ask to accelerate payment after several years of paying taxes with no benefit. If you don't calculate the participant's estimated tax rate, or if you simply use the supplemental rate, and the participants are highly paid, they will owe more in tax when they file their return than was distributed to them on vesting/taxation. They will be unhappy. Usually a separate bonus will be paid to make them whole. Payroll software, or the people using it who may not be used to working with the above issues, can make it difficult to accurately reflect all of the above. Again, not all of these are always problems, but together they can make what would otherwise be a very simple plan design (contribution, earnings, vest, pay, withhold, tax, report) far more complicated. Just my two cents.

I have been involved with a few of these for clients - all put in place prior to my involvement - and every one of them has regretted it. I understand the logic behind the plan design, but from a taxation, withholding, 990, payroll reporting, recordkeeping, etc. standpoint it's a real pain.

Rev. Proc. 2015-32 is only for non-Title I plans. Notice 2014-35 covers Title I plans, and does not include similar language.

I think this is where my original conclusion was heading. I was confused because the IRS relief says, essentially, if you follow DFVCP, we will not penalize you. And DFVCP suggests it's still available after receiving an IRS notice, it just isn't clear which notice. I still don't see a clear statement confirming that, once the CP283 notice has been issued, the IRS relief program is no longer available. But it does seem counterintuitive that you would be able to avoid penalties that are already assessed (and not just proposed).

I've having a difficult time finding a clear answer on whether DFVCP may be used to eliminate IRS penalties for a late 5500 after the IRS has already imposed a penalty. The available IRS late-filer relief guidance does not seem to address this squarely. It says that IRS will waive penalties if, among other things, the filer complies with DFVCP. The DFVCP FAQs say an "IRS late-filer letter" will not disqualify a plan from using DFVCP, but it doesn't address a situation where the IRS has already imposed a penalty. There has been no correspondence from the DOL on the late 5500. My initial reaction is that using DFVCP now probably would not automatically waive the IRS penalties already imposed (but that it may be a good idea to minimize further DOL liability) and that a separate reasonable cause statement would need to be filed with the IRS requesting abatement of the penalties. Am I off base? Relatedly, the penalty is imposed on a Letter CP283, which I have understood to be specific to a 5500-EZ. The plan at issue files a 5500-SF reporting around 50 participants. Is this the typical form letter for a non-EZ Form 5500?

This is a very difficult situation that does not lend itself to easy answers. Owning 51% of a subsidiary on its own is not enough to form a controlled group, but the various stock exclusion and other rules can easily change that outcome depending on how the other 49% is owned. Even if not a controlled group, the JV could be covered under the hospital's benefits but would form multiple-employer plans (both retirement and welfare). Medical JVs in my experience are often affiliated service groups, which combines the employers for retirement and some other Code purposes, but not all welfare purposes, so you could have a single-employer retirement plan and a MEWA for medical benefits. Watch out if the hospital is self-insured; running a self-insured MEWA can be a crime depending on the state. If the other 49% owners also have separate medical practices, those could be ASGs as well, expanding the affiliated group to those practices. The hospital is probably tax-exempt, whereas the JV probably is not, so you may need different plan types depending on whether the hospital's plans are only permitted for tax-exempt organizations.

It's called subrogation and is very common. Some states prohibit insurers from subrogating, so often fully insured health plans are prevented from doing so. Self-insured health plans are not subject to state anti-subrogation laws, so usually can subrogate more freely. The plan materials (plan document, SPD, etc.) should address the plan's subrogation rights. Usually, personal injury lawyers will send ERISA document requests to the group health plan sponsor at the outset to confirm whether the plan can subrogate.

A 401(k) plan has a safe harbor match that satisfies both the ADP and ACP safe harbors. They are looking at adding after-tax employee contributions to accommodate backdoor Roth. 1.401(m)-3(j)(6) says: (6) Plan must satisfy ACP with respect to employee contributions. If the plan provides for employee contributions, in addition to satisfying the requirements of this section, it must also satisfy the ACP test of § 1.401(m)–2. See § 1.401(m)–2(a)(5)(iv) for special rules under which the ACP test is permitted to be performed disregarding some or all matching when this section is satisfied with respect to the matching contributions. 1.401(m)-2(a)(5)(iv) says, in part: (iv) Matching contributions taken into account under safe harbor provisions. A plan that satisfies the ACP safe harbor requirements of section 401(m)(11) or 401(m)(12) for a plan year but nonetheless must satisfy the requirements of this section because it provides for employee contributions for such plan year is permitted to apply this section disregarding all matching contributions with respect to all eligible employees. Is it correct that, if an HCE makes after-tax contributions, the only two options are: Rely on the ACP safe harbor for the matching contributions only (and avoid testing the match entirely) but then run the ACP test on after-tax contributions only (in which case ACP would likely fail); or Include the match amounts in the ACP test (in which case ACP has a good chance of passing) but then would have to run the full ACP test, including matching contributions, thereby losing the safe harbor as to the match component (even if the match would have met the ACP safe harbor on its own). In other words, it seems like if they want to include the match amounts in the after-tax ACP test, they would have to run ACP on the match too.

This is posted in "409A Issues" and applies only to nonqualified plans.

My understanding of the DOL's position is that once a 5500 is filed it can only be amended (and not re-filed through DFVCP). I guess it doesn't hurt to try, but I'm not sure it will be an airtight defense to any proposed penalties.

B needs a new TPA. You are correct on all accounts.

I'm with C.B. Zeller and stainedglass on this one. fmsinc, your memo says forgiveness is reported on Form 1099-C but does not provide a cite for that position. The link you provide does not mention a Form 1099-C either. Although it's frustratingly difficult to find a clear statement, Rev. Rul. 2004-37 says: Not every indebtedness that is cancelled results in the debtor realizing gross income by reason of discharge of indebtedness within the meaning of sections 61(a)(12) and 108(a). “Debt discharge that is only a medium for some other form of payment, such as a gift or salary, is treated as that form of payment, rather than under the debt discharge rules.” S. Rep. No. 1035, 96th Cong., 2d Sess. 8 n.6 (1980), 1980-2 C.B. 620, 624 n.6. The Bloomberg BNA portfolio takes the position that cancellation of an employee loan is compensation, citing Rev. Rul. 69-465, which also states that an employer's forgiveness of an employee's loan is "compensation" although it doesn't specify where to report. As C.B. Zeller notes, a typical employer-employee relationship would not seem to fall under any category of "Who Must File" a Form 1099-C. To the extent the employer is not reporting or paying FICA on the forgiveness, I'm not sure how that position would be tenable either. Would be interested to see any guidance to the contrary.

A few thoughts off the cuff, probably not exhaustive and definitely not fully formed: Does this convert $3/hour for everyone (whether they choose the $4 to the plan or $3 in cash) into a CODA? It's essentially giving everyone a $3/hour raise, with some subset of people electing to defer it into the plan (as an elective deferral subject to 402(g) limits, etc.) and some taking it in cash. If so, does that make the additional $1/hour going into the plan (for those who elect it) a match? If someone chooses to defer $3/hour into the plan, the employer makes an additional $1/hour contribution, which cannot be a PS contribution without violating the contingent benefit rule (i.e., you cannot offer $1 in profit sharing only for participants who contribute $3 in deferrals). Not sure how you would draft the match formula ("a $1 match on every $3 deferred, but only if you choose the option offered by the employer and capped based on the participant's hours of service during the year"?) or who would be designated as the employees eligible for the match. Presumably most people who choose the plan contributions will skew toward HCEs, which could affect ADP and ACP and match coverage if the extra $1 is treated as a match. The employer will still get a deduction, either for contributions to the plan or compensation paid via payroll, but employer-side FICA would surely increase as a result of people choosing cash over employer contributions.

Depends on whether you were right the first time...

Thanks for sharing your expertise, Brian. Very helpful. It sounds like the moral of the story is to use the same plan year for everything where possible.

I meant the regulation Brian cited (apologies).

Thank you both. My immediate concern was making sure the cafeteria plan year ran on the same policy year as the group medical plan because, as far as I can tell, there is no general mid-year election change rule that would accommodate adding, dropping, switching plans, etc. (outside of significant coverage changes, cost changes, spousal coverage, etc.). But it sounds like aligning those (medical is a non-calendar year here) could cause other headaches as HSAs, DCAPs, and FSAs are involved as well. Peter, I read the regulation you cite on different years as being limited to FSA components, not pre-tax premium deductions more generally, so would not necessarily apply to different policy years for, say, medical and life insurance. Am I mistaken?

Is there a preferred (or possible) method to selecting a cafeteria plan's plan year where the underlying benefit components do not all run on the same period (e.g., life insurance is on a 1/1-12/31 plan year, but medical/dental are on a 7/1-6/30 plan year)? Or would you need multiple plans?

With a few more filters the number of plans gets much lower. For example, applying filters for Codes 2J (401(k) feature) and 2T (total or partial participation direction) for plan assets above $300 million (where ~90% of litigation occurs per their infographic) and the 2021 form year, the result is a little over 3,000 filings. Not an exact count, but maybe closer to the universe of plans that may actually be sued.

Agreed. My overly simplistic response was simply to make sure we're drawing the right distinction between a trust as a business owner vs. a trust as business/employer/foundation on its own.

Expanding on some of the responses above, there's an important distinction between a trust as an owner of a business entity vs. a trust as a business entity. Many kinds of trusts (estate planning vehicles, ESOP trusts, etc.) can own a business entity that is organized as a corporation, LLC, etc. In that case, the owner is a trust, but the operating business/employer is a corporation, LLC, etc. Some states allow the business entity itself to be a type of trust (often called "business trusts" or something similar). In these instances, the operating business itself is organized as a trust (instead of a corporation, LLC, etc.) and is the employer.

Try Chief Counsel Advice 200813042, which addresses this issue pretty extensively in the context of post-termination insurance renewal premiums for retired agents: POSTU-140193-05_WLI02 (irs.gov)

In a controlled group, they could leave accounts behind, but once the other entity leaves the seller's controlled group those employees would have a distributable event. So, unless they did a plan-to-plan transfer to the buyer's plan, the former employees could keep their balances in the seller's plan or roll them out like any other terminated employee. Paul, I've seen similar situations before as well. On occasion we handled with a self-directed brokerage account in the buyer's plan and a plan-to-plan transfer. That obviously won't work if the buyer does not have/want a plan.