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MAY 9-11, 2013 The following questions and answers are based on an oral presentation made by IRS and Treasury officials at the Tax Section’s Employee Benefits Committee meeting on May 10, 2013.

The statements contained herein cannot be relied on even though they are printed as statements of the IRS. The questions were submitted by ABA members, and the responses were given at such meeting after explicit statements that their responses reflect the unofficial, individual views of the government participants as of the time of the discussion, and do not necessarily represent agency policy. This report on the responses was prepared by designated JCEB representatives, based on the notes and recollections of the JCEB representatives at the meeting and on a review of audio tapes of the meeting. This report has not been reviewed by IRS or Treasury. The questions were submitted in advance to the agency, and it was understood that this report would be made available to the public.


1. § 1(f)(3) – Cost of Living Adjustments Beginning with the 2014 plan year, group health plans will be subject to the same annual limit on cost sharing to which high deductible health plans are subject in that year (Affordable Care Act § 1302(c)(2), implemented by 45 C.F.R. § 156.130, 78 Fed. Reg. 12,867 (Feb. 25, 2013)).

However, for 2015 and future years, the ACA’s out of pocket maximum for group health plans will be adjusted by HHS based on “the percentage (if any) by which the average per capita premium for health insurance coverage for the preceding calendar year exceeds such average per capita premium for health insurance for 2013.” 45 C.F.R. § 156.130(d),(e).

High deductible health plans are group health plans when offered by or on behalf of employers or employee organizations. However, the Internal Revenue Code requires annual adjustments to the out of pocket maximum for those plans to be calculated based on the cost of living adjustment determined under Section 1(f)(3) of the Code, which relies on the Consumer Price Index for all Urban Consumers. Consequently, the IRS and HHS adjustments are likely to differ.

If the HHS adjustment creates a higher out of pocket maximum than the IRS adjustment, must a high deductible health plan, which also is a group health plan, adhere to the IRS adjustment?

Proposed Response: High deductible health plans must adhere to the IRS adjustment. The U.S.

Supreme Court has held that It is a basic principle of statutory constructionthat a statute dealing with a narrow, precise, and specific subject is not submerged by a later enacted statute covering a more generalized spectrum. “Where there is no clear intention otherwise, a specific statute will not be controlled or nullified by a general one, regardless of the priority of enactment.” Morton v. Mancari, 417 U.S. 535, 550-551. “The reason and philosophy of the rule is, that when the mind of the legislator has been turned to the details of a subject, and he has acted upon it, a subsequent statute in general terms, or treating the subject in a general manner, and not expressly contradicting the original act, shall not be considered as intended to affect the more particular or positive previous provisions, unless it is absolutely necessary to give the latter act such a construction, in order that its words shall have any meaning at all.” T. Sedgwick, The Interpretation and Construction of Statutory and Constitutional Law 98 (2d ed. 1874).

Radzanower v. Touche Ross & Co., 426 U.S. 148, 153, 96 S. Ct. 1989 (1976).

IRS Response: A high deductible health plan that is a group health plan will generally be subject to both the out-of-pocket maximum for high deductible health plans under Section 223 and the outof-pocket maximum for group health plans under Section 1302(c)(1) of the Affordable Care Act (via Section 2706(b) of the Public Health Service Act). If two different out-of-pocket maximum levels apply to a plan, the plan complies with both if it complies with the lower out-of-pocket maximum. Thus, in the case of a high deductible health plan subject to the maximum out-ofpocket limit under Section 223 and the maximum out-of-pocket limit under Section 2706(b) of the Public Health Service Act, the plan must comply with the lower amount. In any event a high deductible health plan must satisfy the maximum out-of-pocket limit under Section 223 in order to be a high deductible health plan supporting an HSA.

216410924.6 2. § 72(p) – Collateral for Plan Loan

Assume that a participant has an account balance of $100,000 in his defined contribution account.

He requests and receives a loan of $50,000 that complies with Section 72(p) of the Code. Before the loan is paid back, the plan receives a qualified domestic relations order that awards the participant’s former spouse $50,000 of his account balance from the plan, to be paid from assets other than the plan loan. The qualified domestic relations order also provides, consistent with the terms of the plan, that the distribution should be made as soon as administratively feasible after the domestic relations order is determined to be a qualified domestic relations order. Can the plan make an immediate distribution to the alternate payee?

Proposed Response: No. The loan is required to be secured by the participant’s account balance.

A distribution of $50,000 to the alternate payee would result in the participant’s account balance equaling $50,000, all of which would be attributable to the outstanding loan. Accordingly, the alternate payee’s share of benefits must continue to serve as security for the loan until either (i) the loan is repaid or (ii) there are sufficient assets in the participant’s account to serve as security for the loan.

IRS Response: The Service representative disagrees with the proposed response. Section 72(p)(2)(A) provides that a loan is taxable unless it is secured by the participant’s account balance and the loan does not exceed 50% of the account balance, among other limitations. The most recent valuation of the accrued benefit is used to determine whether that 50% requirement is satisfied. Changes to the account balance after the inception of the loan are not relevant to whether those requirements are satisfied. Unless the loan is later renegotiated, renewed or modified, there would not be any problem with that distribution from the account. Notice 82-22 discusses the renegotiation, renewal or modification rule. The Service representative also noted that he was not authorized to speak for Department of Labor and that the Department of Labor may have a point of view on this issue.

3. § 401 – Benefit Election Following Reemployment

A participant retires prior to his normal retirement date and elects, with spousal consent, a joint and survivor option. He thereafter returns to work for three months, prior to normal retirement age, and his benefit is suspended during the time of his reemployment. Once he stops working, his benefit is recalculated to include a small accrual earned during this period of reemployment. Is a second annuity starting date, for which new elections for the survivor annuity must be offered, required for the accruals earned during reemployment?

Proposed Response: No. Treasury Regulation Section 1.401(a)-20, Q&A 10(d)(1) does not require a new annuity starting date for the accruals earned during reemployment.

IRS Response: The Service representative disagrees with the proposed response. Treasury Regulation Section 1.401(a)-20 provides very explicit relief from the second annuity starting date only for post-normal retirement age additional accruals. The regulations explicitly carve out prenormal retirement age additional accruals.

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A 401(k) plan has a matching contribution that is made on a plan year basis. An employee is erroneously excluded from making elective deferrals to the plan for the first two (2) months of the plan year. Under EPCRS, no correction for the missed deferral opportunity is required since the

–  –  –

Employee elects to contribute “0” or an amount that does not provide him with the maximum match from 03/01 to 12/31. Does EPCRS require the employer to provide a QNEC to the employee for the failure to provide the employee the opportunity to receive matching contributions on the deferrals that could have been made during the first 2 months of the plan year (using the ADP for the employees group)?

Proposed Response: Appendix B, Section 2.02(b), example 7, provides a sample correction using a plan that provides for matching contributions each payroll period. Since the matching contribution in this fact pattern is made on a plan year basis and not payroll period, and the employee had the opportunity to make the maximum deferral amount and thereby receive the maximum matching contribution, EPCRS does not require the employer to make a QNEC for the failure to receive the maximum matching contribution provided under the Plan.

IRS Response: The Service representative disagrees with the proposed response. The Service representative stated that this is not how the Revenue Procedure reads. The Service representative noted that this is a facts and circumstances issue and that if the plan were submitted under the Voluntary Correction Program, there might be a different result.

5. § 401 – Determination Letter Applications: Amendments Adopted After Plan Restatement Under the new determination letter filing procedures beginning with Cycle C (which began February 1, 2013) an employer requesting a favorable determination letter must submit a plan “restatement” and it appears that the employer cannot submit a working copy of the plan that includes all previously adopted amendments. Specifically, all references to “working copies” have been deleted from Rev. Proc. 2013-6. If a plan is restated on December 31, 2013 (near the end of Cycle C) and the employer decides to adopt a subsequent plan amendment on January 15, 2014 (prior to filing the plan on January 31, 2014 for a determination letter request), does the plan have to be restated again to include the subsequent January 15, 2014 amendment? If not, does a working copy of the plan have to be submitted with the filing application to include the January 15, 2014 amendment or will the Service accept the plan restatement and the subsequent January 15, 2014 amendment as a “stand alone” document?

Proposed Response: The Service will accept the separate amendment as a “stand alone” document without having it included in a “restatement” or working copy of the plan.

IRS Response: An amendment must be included in a restated document in order to be considered for a favorable determination letter.

–  –  –

An employer merges an acquired company’s pension plan into the employer’s plan. The acquired company’s pension plan received a favorable determination letter before it was merged into the employer’s pension plan, however, after receiving the determination letter, the acquired company adopted an amendment to reflect a change in law. The executed copy of such amendment cannot be located. When the employer submits the merged plan to the Service for a determination letter, the employer is not able to submit an executed copy of the relevant plan amendment since it cannot 4 16410924.6 be located. It is our understanding that the Service will not consider a request for a favorable determination letter unless the employer submits all executed plan documents back to the date of the last favorable determination letter or, in the case of a prototype plan that relies on a favorable opinion letter, the employer submits all executed plan documents and amendments back to the date of the plan’s initial adoption. How can the employer address this situation so that the Service will consider its request for a favorable determination letter?

Proposed Response: The Service will instruct its agents that they are authorized to consider determination letter requests where the requesting employer cannot produce executed plan amendments or plan documents for reasons beyond the control of the employer. The employer will be deemed to satisfy this condition if the employer provides a written certification to the Service that states that the employer undertook a reasonable process to locate the executed amendments or plan documents, the plan was administered in accordance with the relevant amendments and documents and the employer could not locate the amendments or plan documents due to the reasonable circumstances set forth in the written certification.

IRS Response: The Service representative disagrees with the proposed response. The applicant must submit documentation to show timely compliance with applicable law. If old documentation is not available that is still necessary, the sponsor has the option of treating it as a plan document failure and filing under the Voluntary Correction Program. In situations where the required documentation is not available, but a sponsor can provide contemporaneous insularly documentation supporting timely amendment then that is something that the sponsor would want to disclose in the determination letter application. Ultimately, it will be a facts and circumstances decision in the determination letter process whether that documentation is sufficient.

7. § 401 – Off-Cycle Determination Letters

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