TSA plan with issues.

[Lori H]

They have had a 403(b) since about 1992. Its an Alzheimers Day Care center with less than 60 employees. Initially the plan was set up as NonERISA deferral only. Well, around 1995, the center started giving the employees the option of taking a $150 monthly payment towards health insurance. Alternatively, if they did not need the insurance, the employer just put the $150 in a TSA contract for them. At this time the plan would have become an ERISA plan and should have started filing 5500's. They didn't. I know how to go back and fix the missing 5500 situation, DFVC, pay the $1500 sanction and file the 5500's. That's no problem. My issue is with the employer contribution. Obviously there are some discrimination issues....or are there. Just for argument sakes, if the participant was given the option of having the funds go towards the cost of health insurance or towards the TSA, would it really be a discrimination issue? My thinking is yes and that you can not have a stipulation as such associated with a plan. If so, then how is the employer contribution defined within the confines of the plan? How does the employer go back 14 years or so and determine who should have received a contribution and who should not have. Currently, the employer only contributes on behalf of one employee, the director of the center, and the $150 a month is now $250 monthly. There are about another half dozen or so employees deferring into the plan and not receiving an employer contrbution.

The agent on this plan is VERY worried that he may get sued and/or have an E&O situation here. I guess if they did NOT want to follow the government procedures for correcting the plan defects, they could just shut the plan down and hope the statute of limitations runs it course. Obviously I would never formally advise them of that course of action, but it would seem that the government would not even be aware of the existence of the plan at this point in time.

I suspect with the new document regulations and the more extensive reporting requirements, there are a slew of TSA's that are now finding themselves in similar situations.

[mbozek]

I am confused. In you posts on another forum you stated that there were never any HCEs and the contributions were made to the TSAs. Under the IRC employer contributions cannot discriminate in favor of HCEs against the non HCEs. There is no discrimination if some non HCEs get contributions and other Non HCEs do not. ther is no discriminaton testing for salary reduction.

The only tax issue is whether the employees who elected to receive health insurance instead of cash had imputed income due to constructive receipt for the value of the health insurance because they had a choice between the health ins and cash for which the s/l for taxes is 3 years. Also if the employer contributions for opting out of health ins. were included in the employees taxable wages which was then contributed to the TSA there cannot be any discrimination issue because the contribution were made by salary reduction which is not subject to any ADP testing and the plan would be exempt from ERISA.

You need to retain tax counsel to fully reivew all of these issues to make sure that the plan complies with the IRS regulations by December 31, 2009.

[Lori H]

That is correct, I am under the impression that the plan never had HCE's, but if you have some participants receiving employer funds who are NOT deferring and others who are deferring but not receiving employer funds, would you not have an issue where the plan was not benefiting all eligible participants? For example, if an employee has been working for 90 days and does not need the insurance coverage, so the employer starts putting money set aside for the insurance into the TSA for that participant and the TSA does not state how or eligibility for employer money, would that not be an issue if some employees were receiving employer money and others were not?

The employer contributions to the TSA were not included in the employees income.

[mbozek]

That is correct, I am under the impression that the plan never had HCE's, but if you have some participants receiving employer funds who are NOT deferring and others who are deferring but not receiving employer funds, would you not have an issue where the plan was not benefiting all eligible participants? For example, if an employee has been working for 90 days and does not need the insurance coverage, so the employer starts putting money set aside for the insurance into the TSA for that participant and the TSA does not state how or eligibility for employer money, would that not be an issue if some employees were receiving employer money and others were not?

The employer contributions to the TSA were not included in the employees income.

If the employer contributions were included in the employee's w-2 and then contributed to the plan there is no discrimination. If the employer contributed $150 per month for some Non HCEs but not others there is no discrimination if no contributions were made for HCEs.

Availability to participate in a salary reduction 403b plan requires that eligiblilty to make salary reductions be available to all employees who are scheduled work for more than 20 hours a week.

I cant emphasize more strongly that you need to retain tax counsel to review these issues including the constructive reciept issue discussed above and the requirement to adopt a written plan document so that your plan will be in compliance with the 403b regs by Dec 31.

[Lori H]

Thank you for your responses.

The plan has never had an HCE, the director who is the highest paid, made $72K last year.

The employees never had an option to take as earnings the $150 that was designated as either employee health coverage or as a TSA contribution. It went into one or the other, therefore I don't think the constructive receipt issue comes into play nor discrimination issues with some employees getting employer contributions while others do not. They may wish to double check the constructive receipt issue with tax counsel, but it appears as if they only have delinquent filing issues.