The following questions are designed to refresh, and to fine tune, your benefits expertise. Some of the answers (which are found below) may surprise you.
1. Failed QACA.
Assume that a 401(k) plan is perfectly designed to implement a Qualified Automatic Contribution Arrangement (QACA) within the meaning of Internal Revenue Code (“Code”) section 401(k)(13). A perfectly designed QACA is deemed to pass, and is exempt from performing, the average deferral percentage test (“ADP Test”). In operation, a QACA must provide a timely notice to plan participants each plan year. For the 2009 plan year, the plan fails to provide such a timely notice. Which of the following is true:
- a. For the 2009 plan year, the 401(k) plan cannot rely on the QACA exemption from ADP testing and must perform the ADP test.
- b. For the 2009 plan year, the 401(k) plan cannot rely on the QACA exemption from ADP testing and is ineligible to perform the ADP test unless the ADP test has been included in the plan document.
- c. For the 2009 plan year, the 401(k) plan cannot rely on the QACA exemption from ADP testing and is ineligible to perform the ADP test.
2. HIPAA/Wellness Program.
Health Insurance Portability and Accountability Act (“HIPAA”) nondiscrimination provisions generally prohibit a group health plan from denying an employee eligibility for, or charging an employee more for, benefits based on a health factor. Health factors can include medical conditions, evidence of insurability and disability. Which of the following would violate these HIPAA nondiscrimination provisions:
- a. An employment policy which provides that an employee who smokes will be fired.
- b. A group health plan waives the annual deductible for medical coverage if an individual who has suffered a heart attack enrolls in a disease management education program.
- c. A group health plan offers a reward to participants in a group health plan who complete a health risk assessment.
- d. All of the above.
- e. None of the above.
3. Termination/Rehire.
Under which of the following scenarios can a participant in a defined benefit or money purchase pension plan begin receiving an early retirement benefit with the understanding that he eventually will be rehired by the plan sponsor?
- a. The participant will return to work no sooner than 6 days after his pension payments begin.
- b. The participant will return to work no sooner than 6 weeks after his pension payments begin.
- c. The participant will return to work no sooner than 6 months after his pension payments begin.
- d. All of the above.
- e. None of the above.
4. Defined Benefit Plan/Suspension of Benefits.
A defined benefit pension plan participant begins to receive her pension on November 1, 2006. Consequently, November 1, 2006 is her “Annuity Starting Date.” Pursuant to plan terms, the plan stops making monthly pension payments to the participant on January 1, 2008, when she is unexpectedly rehired to work, full time, for the plan sponsor. On October 1, 2008, when she again terminates employment with the plan sponsor and all of its affiliates, which of the following is always true:
- a. The plan need not offer the participant a new Annuity Starting Date (and therefore a new benefit election with a fresh start on payment options) for benefits earned prior to November 1, 2006.
- b. The plan need not offer the participant a new Annuity Starting Date (and therefore a new benefit election with a fresh start on payment options) for benefits earned on and after January 1, 2008.
- c. Both “a.” and “b.”.
5. Non-Qualified Deferred Compensation (409A) Wrap Plans.
Assume the CEO of your Company, who earns in excess of $900,000/year, participates in the Company’s tax-qualified defined benefit pension plan. The benefit the CEO can receive from the pension plan is severely limited by Code section 401(a)(17) (which limits compensation that can be considered under a tax-qualified plan) and by Code section 415 (which limits the size of the benefit that can be provided under a tax-qualified plan). The Company wants to design a program that will compensate the CEO, over a period of years, for amounts that cannot be paid to the CEO from the tax-qualified retirement plan due to these limits. As you know, Code section 409A governs the design of most such “make-whole” programs, because they fall within the definition of non-qualified deferred compensation. Which of the following “make-whole” non-qualified deferred compensation plan designs is not specifically sanctioned by Treasury Regulations interpreting Code section 409A:
- a. Plan A is based on a non-qualified plan formula that looks just like the tax-qualified plan formula, except that:
- i) the compensation used in the formula is not limited by Code section 401(a)(17); and
- ii) the non-qualified plan formula amount is reduced (“offset”) by amounts payable from the tax-qualified plan.
- b. Plan B is based on a non-qualified plan formula that looks just like the tax-qualified plan formula, except that:
- i) the size of the benefit in the non-qualified plan formula is not limited by Code section 415; and
- ii) the non-qualified plan formula amount is reduced (“offset”) by amounts payable from the tax-qualified plan.
- c. Plan C is based on a non-qualified plan formula that looks just like the formula for Plan B (the stand alone, non-qualified plan described in “b.” above), except that it is reduced (“offset”) by amounts payable from Plan A (the stand alone, non-qualified plan described in “a.” above).
BENEFITS QUIZ ANSWERS
Answer To Question 1 (Failed QACA):
The correct answer is “c.” Proposed Treasury Regulation section 1.401(k)–1(e)(7) generally prevents a “failed” QACA from implementing ADP testing. Such a failed QACA would be a candidate for the IRS correction program outlined in IRS Revenue Procedure 2006-27 (Employee Plans Compliance Resolution System). See, also, Treasury Regulation section 1.401(k)– 1(a)(4)(iv) (Qualification of plan that includes a nonqualified cash or deferred arrangement).
Answer To Question 2 (HIPAA/Wellness Program):
The correct answer is “e.” An employment policy (as opposed to a group health plan) is not governed by HIPAA. Providing increased benefits to individuals who have an adverse health factor (for example, individuals who have suffered a heart attack) is considered “benign discrimination” and does not violate the HIPAA nondiscrimination provisions. If an individual is rewarded for taking a health risk assessment, but the health risk assessment does not require the individual to meet a standard related to a health factor, the program is not subject to HIPAA nondiscrimination provisions. See, Department of Labor Field Assistance Bulletin No. 2008–02 for more information.
Answer To Question 3 (Termination/Rehire):
The correct answer is “e.” If a participant has a prearranged agreement to be rehired by the plan sponsor, the participant has not terminated employment. If the participant has not terminated employment, he or she cannot begin to receive early retirement benefits from a defined benefit or money purchase pension plan. See, e.g., the preamble to Department of Treasury proposed regulations regarding Distributions from a Pension Plan under a Phased Retirement Program, in which the Department of Treasury states that the proposed regulations “specifically do not endorse a prearranged termination and rehire as constituting a full retirement.”
Answer To Question 4 (Defined Benefit Plan/Suspension of Benefits):
The correct answer is “a.” The plan may (but is not required to) offer the participant a new annuity starting date for benefits she earned prior to November 1, 2006. Similarly, if the participant had attained her normal retirement age under the plan on November 1, 2006, the plan could (but would not be required to) offer her a new annuity starting date for benefits she earned on and after January 1, 2008. If, however, the participant had not attained her normal retirement age under the plan on November 1, 2006, the plan would be required to offer her a new annuity starting date for benefits earned on and after January 1, 2008. See, e.g., Treasury Regulation section 1.401(a)–20 Q&A 10(d).
Answer To Question 5 (Non-Qualified Deferred Compensation (409A) Wrap Plans):
The correct answer is “c.” Designs similar to Plan A and Plan B are specifically sanctioned by IRS Treasury Regulations. See, e.g., Treasury Regulation section 1.409A–2 (a)(9) (Nonqualified deferred compensation plan linked to qualified employer plans or certain other arrangements). The formula for Plan C is not specifically sanctioned by Treasury Regulations. Treasury officials have commented informally that, in operation, the Plan C design (with one nonqualified plan “wrapping” or being offset by benefits provided under another non-qualified plan that the Company sponsors) could result in prohibited acceleration and or prohibited subsequent deferral of non-qualified plan benefit payments. Treasury officials informally have indicated that one way to render compliant the design described above for Plan C would be to make the time and form of payment from Plan C identical to the time and form of payment from Plan A.
