Employee Benefits Legal Blog : Employee Benefits Lawyer & Attorney : Fox Rothschild Law Firm : Health Care, Retirement, ERISA : Philadelphia, New York, Northeast

A frequent complaint I hear about multiemployer pension plans is that employers cannot get information from plan administrators.  The primary problem has always been that ERISA requires plan administrators to provide information to participants, but contributing employers were not entitled to receive any specific plan information.  Employers could not get access to actuarial information, financial data or investment information.  Well that is about to change.

Under the new regulations, effective in April of 2010, multiemployer pension plan administrators are obligated to provide to participants, beneficiaries, employee representatives AND contributing employers, the following documentation if requested:

1. Periodic actuarial report (including any sensitivity testing) received by the plan for any plan year which has been in the plan's possession for at least 30 days prior to the date of the written request; and
2. Quarterly, semi-annual, or annual financial report prepared for the plan by any plan investment manager or advisor (without regard to whether such advisor is a fiduciary within the meaning of section 3(21) of the Act) or other fiduciary which has been in the plan's possession for at least 30 days prior to the date of the written request.

This new disclosure rule stops well short of requiring disclosure of all plan data, and contributing employers are still not listed as persons entitled to receive things like summary plan descriptions, plan documents or summary annual reports.  But it does now give participating employers some opportunity to get additional financial information about the plan.  A copy of the regulation is available here.

As with all information, having access to the information does not mean it will be easily understood.  And there is nothing in the changes that gives an employer the ability to question or challenge the investment decisions or financial information provided.  The new rules also do not apply to multiemployer welfare funds.  But at least now contributing employers should have an easier time finding out the inner workings of the pension plans to which they contribute. 

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The U. S. Department of Labor's Employee Benefits Security Administration (EBSA) announced new outreach and compliance assistance efforts for 403(b) pension plans subject to Title I of the Employee Retirement Income Security Act (ERISA).  The official word is that the initiatives are part of the agency's ongoing compliance assistance program to help employers, plan officials and service providers.

Like administrators of 401(k) plans, 403(b) plan administrators now must file basic financial and other compliance information annually with the government on a Form 5500 or Form 5500-SF (a simplified report that many small 403(b) plans can use).  Large plans (generally those with 100 or more participants) must include a report of an independent qualified public accountant with their Form 5500.  All Form 5500s beginning with the 2009 plan year must be filed electronically using the department's new EFAST2 system.

Field Assistance Bulletin 2010-01, Annual Reporting and ERISA Coverage for 403(b) Plans, is available here.  It provides a variety of questions and answers associated with reporting and coverage.  Additional guidance, including links to Field Assistance Bulletin 2007-02 (ERISA Coverage Of IRC § 403(b) Tax-Sheltered Annuity Programs) and Bulletin 2009-02 (Form 5500 Reporting by IRC § 403(b) Plans Covered by Title I of ERISA) is available here.  Finally, administrators should make sure to review a publication titled "Getting Ready for Changes In Filing Your Plan's Annual Return/Report Form 5500" that is available here.

If you need additional information about administration of your 403(b) plan, please contact your attorney at Fox Rothschild and we will be happy to assist.

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Employee contributions to retirement plan have to be treated as plan assets and submitted to the plan in a timely manner.  The old rule required that while employee contributions had to be segregated from the employer's general assets, there was limited guidance about how long the employer had to submit those withheld contributions to the plan.  There is a requirement that they be submitted in a "reasonable" time frame at the earliest reasonable date, not later than the 15 business days into the month following the month in which employee contributions were withheld.  But there was no "safe harbor" defining what would be reasonable.

Now, at least for small plans, there is a "safe Harbor" of 7 business days.  Employers that sponsor a plan covering fewer than 100 participants (small plans) will be deemed to be in compliance with the "earliest possible date" if contributions are remitted to the plan within 7 business days.  Any plan sponsor who remits the contributions within the 7-day window will be considered as having made a timely deposit.

This is important because plan participants assume employers put money into a 401(k) plan on the day it is withheld.  In a volatile stock market, timing can be everything.  Employee can claim that any delay in remittance was a breach of fiduciary duty because it hurt plan participants.  At least now, a plan sponsor can use the 7-day rule as a safety net to be able to confirm satisfaction of fiduciary responsibilities. 

The contributions don't have to be allocated within 7 days, only contributed to the plan.  The 7 business days are counted from the day amounts are withheld.  The effective date of the rule is January 14, 2010.  The safe-harbor period applies on a deposit-by-deposit basis, so failure of one deposit does not take the safe-harbor away for future deposits.  The 7-day rule also applies to welfare plans and cafeteria plans.  This rules does not apply to large (over 100 participants) plans.  They are still governed by the "15th-business day of the next month" guideline.

So if you are the sponsor of a small plan, I highly recommend that you review your administrative procedures to take advantage of the 7-day safe harbor and review with your plan service providers their procedures to ensure quick transmission of employee contributions.  Failure to comply does not necessarily mean that a fiduciary duty has been breached, but it is better to be "safe harbor" than sorry.

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In Notice 2010-6, which was published in early January, the IRS at long last provided guidance as to how taxpayers may voluntarily correct certain document failures that otherwise would cause a nonqualified deferred compensation plan to contravene the requirements of Internal Revenue Code Section 409A, triggering severe income tax consequences. The Notice also clarifies earlier guidance dealing with operational failures by nonqualified deferred compensation plans.
Susan Jordan and Seth Corbin of our Pittsburgh office have prepared an excellent summary that can be accessed here.

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Having spent the holidays catching up on some professional reading, I came across the IRS Fall 2009 issue of Retirement News for Employers which has some valuable information about .

Non-spousal rollovers were not available before the new Pension Protection Act provision, which became effective for distributions made after December 31, 2006.  After PPA, plans were permitted to allow non-spouse beneficiaries the option of rolling over distributions, but plans were not required to provide that option.  The Worker, Retiree and Employer Recovery Act of 2008 makes the non-spousal rollover provision mandatory for plan years beginning after December 31, 2009.
Plans will have to offer the rollover alternative to non-spouse beneficiaries receiving plan death benefits.

Plans are required to offer a non-spouse beneficiary the option to do a direct rollover (a trustee-to-trustee transfer) of an eligible rollover distribution to an inherited IRA.  Plan administrators are required to give all non-spouse beneficiaries a written notice explaining the direct rollover rules and the mandatory 20% income tax withholding rules for distributions not directly rolled over.  This explanation should be provided to the non-spouse beneficiary no earlier than 180 days and no later than 30 days before making the distribution.  The good news is that sample notices to non-spouse beneficiaries are available in IRS Notice 2009-68.

Rollover must be to inherited IRA.  The IRS makes clear that a non-spouse beneficiary can only roll over the distribution of an inherited amount into an inherited IRA. Under an inherited IRA, the designated non-spouse beneficiary:

1. cannot make any contributions to the inherited IRA;
2. cannot roll over any amounts into or out of the inherited IRA, but may do a trustee-to-trustee transfer into another inherited IRA in the original deceased account owner's name with the same beneficiary;
3. has the same basis in the inherited traditional IRA assets as the original deceased account owner;
4. may not combine the basis in this inherited IRA with the basis in his or her own traditional IRAs, or any of his or her other inherited IRAs;
5. will not owe taxes on the inherited traditional IRA assets until he or she receives distributions from the IRA; and
6. must begin receiving distributions under the beneficiary distribution rules.

So as we start out 2010, add model notice 2009-68 to your plan administration repertoire and use when necessary.  And if you have not looked at the new required amendments for 2010, consider reaching out to your plan professionals or legal counsel for information about what you might be missing.

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The United States Department of Labor (DOL) has issued revised version of their Employment Law Guide and the First Step Employment Law Advisor, which are both available online here.

Ordinarily I would shy away from talking about general labor and employment topics, but I think it is very important for plan sponsors who are also employers to be aware of important compliance issues.  Because of the significant interaction between employment laws and benefit laws, I find that I routinely have to be cognizant of various general employment issues that impact benefit offerings and administration of benefit plans.  The employment law guide does include topics for health benefits and retirement benefits and they do have good information about record keeping standards for benefit plans.  There is also a link to the Reporting and Disclosure Requirements for Employee Benefit Plans, a guide published in October of 2008 that lists all required documentation for benefit plans under federal law. 

In addition, the Guide includes information about FMLA, wage and hour requirements and various workplace standards and postings that can help employers self-audit their employment practices.  There are also links for OSHA requirements and immigration standards, as well as the whistle-blower laws and WARN laws. 

The First Step Employment Law Advisor is an interactive tool that allows employers (or potential employers) to create a customized "results" list of federal laws that apply to them.  While it does not cover state laws, I found the information provided for federal regulations to be fairly comprehensive and easy to understand.  It would be a good resource for any employer looking to verify their employment practices.

In sum, I guess this entry is simply a reminder of the importance of general compliance in all forms of employment practices, not just employee benefits.  If you are an employer and a plan sponsor, I think these guides would be worth a look.  Of course if the standards presented raise any questions or concerns about your benefit or employment practices, you can reach out to your attorney at Fox Rothschild for more detailed assistance.

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The Pension Protection Act (PPA) seems to have opened the market of investment options available for the qualified default investment alternatives (QDIA) and, in my opinion, encouraged the implementation of QDIA as a means of protecting plan participants who do not actively pay attention to their plans.  I am not suggesting that either target date fund or target risk funds are a superior option for a QDIA, but if a plan administrator is not familiar with these terms, it would be wise to investigate further.

A "target date" fund is designed to reallocate investments automatically as a participant comes closer to retirement age (end target date of retirement).  The idea behind these funds is that the investment will be managed with eye toward maximizing investment return with a changing risk level based on proximity to anticipated cash-out date.  They would be more conservative on risk the closer you get to the fund end date.  "Target risk" funds, however, are designed to expose the participant to a static risk level over the life of the investment and do not have a changing exposure to risk, but may change investments.  These funds typically have conservative, aggressive and moderate risk levels.

Unlike target date funds, which assume that the participant's level of risk should decrease as they get older, target risk funds assume that the participant themselves (or the plan administrator in the case of a QDIA) will diversify into other risk level funds as needed over the life of their investments.  For example, the assumption is that as a participant gets closer to retirement, they will shift their defined contribution allocation from "aggressive" to "moderate" or "conservative" of their own accord.  But which is better for QDIA purposes?  Should you choose a QDIA option that is risk specific or retirement age specific? 

Remember that a QDIA, to provide protection for fiduciaries, the final regulations provide four QDIA investment alternative mechanisms, rather than specific products.  An example of a product for each category is provided.

1. A product with a mix of investments that takes into account the individual’s age, retirement date, or life expectancy (for example, a life-cycle or targeted-retirement-date fund);
2. A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (for example, a balanced fund);
3. An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (for example, a professionally-managed account); and
4. A capital preservation product for only the first 120 days of participation. This eases administration, for example, in the case of workers that opt-out of participation within 90 days. After 120 days, the plan fiduciary must redirect the participant’s investment into the above three QDIA categories (unless the participant opted-out of the plan or redirected investments during the 90 days).

The QDIA does not have to constitute a single investment option (such as a target date fund), but could consist of several options (such as part aggressive, part conservative, part moderate target risk fund).  I think it is important for plan sponsors, in selecting appropriate fund options for QDIAs, to take into account the plan population and be aware of potential impact of each QDIA investment option.  The plan fiduciary must also prudently select and monitor an investment fund, model portfolio, or investment management service within any category of QDIAs.  For example, a plan fiduciary that chooses an investment management service must undertake a careful evaluation to prudently select among different investment services.

So it is possible that target date funds are best for your plan.  It is also possible that target risk funds are the better option.  But in any event, both should be considered as part of an informed fiduciary decision regarding QDIA options.  One may not be better than the other.  But plan sponsors should definitely make themselves aware of the positives and negatives of both if they are to be included (or excluded) from the QDIA.

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The Pension Protection Act ("PPA") created a number of notice and reporting requirements, and plan sponsors are starting to send out various notices to participants.  The Department of Labor ("DOL") is starting the process of issuing guidance and coming into its own compliance obligations.  But I think there is one provision that might have been overlooked because of the timing of the requirement.

The PPA requires that defined benefit plans must disclose actuarial information related to the funding status of the plans.  The PPA provides that this information must be posted on the employer’s intranet for all plan years beginning after December 31, 2007.  This would mean that the 2008 5500, normally due by October 15, 2009, should be posted now (assuming it was filed).  Employers that sponsor calendar-year defined benefit pension plans are now required to post the actuarial information included on the 2008 Form 5500.  Of course, this requirement only applies to employers who maintain an intranet site for employee communications and does not obligate employers to create such an intranet site.  So if you have a company intranet website, and a defined benefit plan, this requirement applies to you. 

The new rules provide that the information that must be posted is the identification, basic plan information and actuarial information included in the annual report.  It must be filed with the DOL (electronically) and must be available on the employer’s intranet site.  It does not appear that the statute obligates employers to post the entire 5500 including all schedules.  Rather it appears to be limited to the identification information in Part 1, basic plan information from Part 2, and the actuarial information in Schedule SB.  So while it would seem that service provider information on Schedule C might be relevant, it is not required to be disclosed.

Unfortunately the DOL has provided no guidance with respect to when employers must post the plan information, or in what format it must be posted.  However, the DOL has 90 days to post their version of the filing under the new rules, so it is probably reasonable to infer the same 90 days would apply to an employer.  Most likely, an employer can post the filing as a .pdf document and would be in compliance but there is nothing formal on that issue. 

The PPA also made some other changes to participant disclosure requirements for defined benefit plans.   One significant change is that it eliminated the obligation to provide summary annual reports.  However, it replaced that obligation with the 5500 posting requirement outlined above, and an annual funding notice requirement that describes the funding status of the plan.  So for employers, not only do we have to send notices regarding funding status, but we have to post the 5500.  Remember, this is for defined benefit plans, not defined contribution plans.

Granted, this posting requirement is not an epic change in comparison to some of the other requirements of the PPA.  But for plan sponsors committed to full statutory compliance, this is one that should not be overlooked.

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Whenever I consider trying a new restaurant, I check to see about reservations.  Some places list them as "preferred," "required," "suggested" or "not taken."  Even establishments that require reservations may not really require them, but the thought of having to plan in advance sort of kills the adventure of changing plans.  Well, when it comes to administration of benefit plans, reservations are not only a good thing, they are absolutely required.

In this case, I am referring to reservation provisions in plans that allow the plan administrator to suspend, modify, amend or terminate any particular plan or benefit provided thereunder.  A well-drafted plan document (and corresponding summary plan description) will include plain language reserving the right of the sponsor to change the plan and modify benefits which then allows for a defense to claims that a particular benefit is guaranteed to participants.  The general rule is that for a plan to be able to change things, it has to tell participants that it has the ability to make changes.

Recently, the U.S. District Court for the Southern District of Iowa looked at a case where a class of retirees claimed that their former employer violated ERISA by amending their health insurance plan to eliminate certain medical benefits.  The retirees claimed that their right to the benefits was "vested" because they believed it was promised they would never lose benefits.  After trial, the Court ruled that the existence of a provision in the company plan providing that it could be amended or terminated at any time acted as a bar to any claim that the benefits could never be modified.  If a plan specifically reserves the right to change, then it can't be denied the ability to change.  See Brubaker v. Deere & Co., 08-CV-00113.

A reservation provision does not automatically provide an unfettered ability to modify plans.  Certainly there are numerous cases providing that separately bargained agreements or contracts can provide a specific limitation to the ability of a sponsor to amend a plan (like collective bargaining agreements or supplemental retirement programs).  But reservations provisions do provide some measure of protection to plan sponsors from general claims that amendment is prohibited.  At a time when many employers are looking at changing benefit plan structures to control costs, I would certainly recommend checking first to see if the plan has reserved the right to make the changes in advance of any decision to cut benefits.  And if your plan does not include such a provision, it should be amended to protect the sponsor going forward.

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In late 2008, Congress passed the Worker, Retiree and Employer Recovery Act ("WRERA").  It included a waiver of required minimum distributions (RMDs) for retirement plans for calendar year 2009.  In some situations, RMDs were made anyway, either because plan administrator were not prepared to make changes or they were concerned about sticking closely to plan language.  Fortunately, the IRS has issued come guidance on how to handle the situation.  Notice 2009-82 provides relief for people who have already received a 2009 RMD this year.  Individuals now generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.

Remember, generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employer’s plan beginning with the year the account owner reaches age 70½.  The 2008 law waives required minimum distributions for 2009 for IRAs and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 RMDs to be rolled over into an IRA or another retirement plan. 
 
The notice also provides guidance for retirement plan sponsors.  It contains two sample plan amendments that plan sponsors may adopt or use to amend their plans to either stop or continue 2009 required minimum distributions.  Both sample amendments provide that participants and beneficiaries can choose to receive or not to receive 2009 required minimum distributions.  Also, both sample amendments allow the employer to offer direct rollover options of certain 2009 required minimum distributions.  Plan sponsors may need to tailor the sample amendment to their plan’s particular terms and administration procedures and must adopt the amendment no later than the last day of the first plan year beginning on or after Jan. 1, 2011 (Jan. 1, 2012 for governmental plans).

Notwithstanding the amendment, employers must decide what to do about RMDs before November 30, 2009.  Employers must decide whether to (1) suspend all RMDs for 2009 unless the participant affirmatively requests the distributions, (2) distribute all RMDs unless the participant affirmatively requests a waiver, or (3) continue RMDs for 2009 in accordance with the existing plan provisions without any participant choice.  Plan must be operated in accordance with the administrative procedures after November 30, 2009

So the action plan would be as follows:

1. Decide your administrative option
2. Select the Appropriate Amendment (if you are making a change)
3. Notify the Participants

Note that there is no inidication that RMD waivers will be permitted for 2010.

If you have questions about RMDs and your retirement plan, please contact a Fox Rothschild attorney for assistance.

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Susan Jordan, a partner in our Pittsburgh office, shares the following:

In a news release (IR-2009-94) on October 15, 2009, the IRS announced the cost-of-living adjustments to the various dollar limitations applicable to qualified retirement plans for 2010. Virtually all of the limitations remain unchanged from 2009.

1. LIMIT ON COMPENSATION: The maximum amount of compensation that may be counted for plan purposes remains at $245,000 for plan years beginning in 2010.
2. LIMITS ON CONTRIBUTIONS AND BENEFITS. The maximum limit on annual additions to a defined contribution plan is unchanged at $49,000. The maximum annual benefit which may be accrued under a defined benefit plan will remain $195,000 as in 2009.
3. 401(k) DEFERRAL LIMIT. For purposes of 401(k) plans, the maximum limitation on voluntary salary deferrals for calendar year 2010 is $16,500 as in 2009, while the limit on catch-up deferrals by those age 50 or older increases stays at $5,500.
4. IDENTIFICATION OF HIGHLY COMPENSATED AND KEY EMPLOYEES. Effective for plan years beginning in 2010, as in 2009, a Highly Compensated Employee is any employee who (a) was a 5% owner during the current or preceding year, or (b) who received compensation from the employer during the preceding year in excess of $110,000. The dollar limit used to define a key employee in a top heavy plan under IRC Section 416(i)(1)(A)(i) is preserved at $160,000.
5. SEP THRESHOLD. As in 2009, the compensation minimum for which coverage is required for a simplified employee pension plan (SEP) is $550.
6. TAXABLE WAGE BASE. As announced separately, for the first time since 1975, when the cost of living adjustments went into effect, Social Security and Supplemental Security Income benefits will not be increased for any cost of living adjustment. In such circumstances, the statute prohibits an increase in the maximum amount of earnings subject to the Social Security tax. Consequently, the Social Security taxable wage base for 2010 will be $106,800, as in 2008. For plan years which operate on a fiscal year basis, this wage base will be effective for plan years beginning in 2010.

* * * * * * * * *
We frequently are asked to provide the contribution formula needed to maximize contributions for an individual with compensation at or above the maximum limit. The formula remains the same as applicable in 2009, so for a calendar year profit sharing plan integrated at the Social Security wage base, the contribution formula needed to achieve the maximum permissible allocation for an individual with compensation of $245,000 or more is:
16.78473% up to $106,800, plus 22.48473% in excess of $106,800 (up to $245,000)

For a calendar year 401(k) plan integrated at the Social Security wage base and using the 3% safe harbor design, the profit sharing contribution formula which, in the aggregate (with a $16,500 deferral and $7,350 safe harbor contribution), will achieve the maximum permissible allocation for an individual with compensation of $245,000 or more is:
7.05004% up to $106,800, plus 12.75004% in excess of $106,800 (up to $245,000)

 

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Because I have previously made reference to certain required or notices for welfare plans, I would be remiss in not bringing up some requirements for retirement plans. 

First the notices.  Retirement plans have a number of annual notice requirements, so this should service simply as a reminder of what notices are due.  The annual Safe Harbor 401(k) Plan Notice is due not later than 30 days prior to the beginning of the next plan year.  So for calendar year plans, that would be by December 1, 2009.  Also due in that same time period is the Qualified Default Investment Alternative Notices that would apply to plans that have provided for default elections.  Finally, don't forget the 401(k) Plan Annual Automatic Enrollment Notices, also due 30 days prior to the beginning of the next plan year. 

If you have a defined benefit plan, you have to send a Defined Benefit Plan Annual Funding Notice within 120 days of the end of the plan year (or by April 30, 2010 for a plan year ending 12/31/09).  Participant Benefit Statements are due every three years or annually (depending on the election of the plan administrator), so you need to prepare those by December 31, 2009, if required.  Participant Benefit Statements for Defined Contribution Plans are due quarterly, and are timely if provided within 45 days of the end of the quarter.  For calendar year plans, they would be due February 15, 2010.

In addition to these notices, there are several required and optional plan amendments for defined benefit and defined contribution plans that may be applicable to your plan (or that you may have adopted).  If the plans were amended during the last plan year, don't forget to send a Summary of Material Modifications to participants to alert them to the changes.  If you have questions about what amendments were available or concerns about making sure you have adopted all appropriate amendments, contact your plan professional of your attorney at Fox Rothschild to set up a review of your retirement plan.

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If you are an employer participating in a multiemployer pension fund, the last few months have probably brought up discussions about underfunding or withdrawal liability.  Briefly, withdrawal liability is the amount of unfunded liability that an employer has to pay when they cease being a contributing employer to a pension fund.  If you are familiar with it, this case might interest you.

In Pittsburgh Mack Sales v. IUOE Local No. 66 (Case No. 07-3938, 2009), the Third Circuit Court of Appeals found that a union's agreement to indemnify an employer for withdrawal liability to a pension plan was valid and enforceable, vacating the lower court decision that the agreement would violate "public policy."  Factually, the collective bargaining agreements between the company and the union contained a provision that provided that the union would hold the employer harmless for any liability to the fund in excess of specified contributions. 

The company sold its assets to another entity and the pension fund assessed $413,000 in withdrawal liability.  The company demanded that the union hold it harmless and litigation ensued.  The District Court ruled in favor of the union under a theory that the indemnity provision was contrary to public policy and that ERISA laws governing withdrawal liability could not be defeated by contract.  The Third Circuit disagreed, stating there was no "well-defined and dominant" public policy that would justify overriding the contract provisions and that the parties could contract away responsibility for withdrawal liability.

This decision is interesting primarily because the tradition view of withdrawal liability under the Multiemployer Pension Plan Arbitration Act (MEPPA) is that the withdrawing employer is liable by statute, and payment is due under the terms of that statutory framework.  However, this decision appears to give rise to the possibility that, while the liability cannot be avoided by contract, a contract can be created that indemnifies employers for that withdrawal liability.  In other words, you cannot contract away the liability, but you can contract for someone else to pay the company back for the loss.

So next time you are in collective bargaining, consider asking for a similar provision.  This case says it might be worth asking.

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In an era where we all like to see statistic and trends, the Internal Revenue Service has obliged by publishing a list of common recurring mistakes it sees in large case audits of qualified retirement plans.  The mistakes were identified through submissions under the Voluntary Correction Program.  While this list mainly identifies concerns with qualified retirement plans, it also provides a pretty fair checklist of concerns for welfare plan administrators looking to ensure compliance. 

Common Mistakes Across All Retirement Plan Types.  This first list covers the general common problems associated with  both defined contribution and defined benefit retirement plans.  Note that many would apply to welfare plans generally:

1. Failure to timely amend the plan document for changes in the law;
2. Failure to follow the plan's definition of and limits on compensation for contribution purposes;
3. Failure to enroll eligible employees and/or to exclude ineligible employees;
4. Failure to meet the legally-required minimum distribution provisions in the plan;
5. Failure to follow the in-service distribution provisions in the plan;
6. Failure to use correct distribution forms, make timely distributions and file correct tax reporting on distributions;
7. Failure to follow the plan's vesting schedule;
8. Failure to retain records and maintain internal controls regarding administration of the plan;
9. Failure to follow the terms of a qualified domestic relations order (QDRO); and
10. Exceeding the legal maximums on contributions and benefits under the plan.

Common Mistakes for 401(k) Plans in particular.  A more detailed list is provided specific to  401(k) plans:

1. Failure to pass ADP/ACP nondiscrimination testing
2. Failure to to provide for minimum top heavy benefit contributions
3. Failure to Satisfy IRC 415 limits

Common Mistakes for Defined Benefit Plans.  For defined benefit plan, the list includes:

1. Benefit calculations based on inaccurate data;
2. Failure to provide the required notice when benefits are suspended; and
3. Premature or delinquent commencement of benefits.

To access the EPTA Audit Team Compliance Trends and Tips click here.  What is interesting about this link is that it also provides a link to the "Correcting Plan Errors" main page which has guides for identifying and correcting plan errors, including a 41 page guide to identifying and fixing common 401(k) errors.  Bear in mind that the IRS specifically disclaims providing legal advice and reliance on the guide is not a justification for avoidance of penalties and interest if a subsequent audit does reveal problems with the plan.  But as a starting point, plan administrators should at least consider this summary a checklist of useful things to look at and discuss with their plan professionals.

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Theresa Borzelli, a partner in our Roseland, New Jersey office provided me with the following:

On May 18, 2009, the IRS issued proposed regulations that will allow employers with safe harbor 401(k) plans who incur a substantial business hardship to reduce or suspend the safe harbor non-elective contribution. Prior to these proposed regulations, only the safe harbor matching contribution could be reduced or suspended as an alternative to terminating the plan, but the only way to suspend a safe harbor non-elective contribution was by terminating the plan.

The IRS is requesting comments by August 17 with a public hearing scheduled for September 23. However, plan sponsors may rely on the proposed regulations. Should the final regulations be more stringent than the proposed regulations, the more stringent regulations will be prospective only.

What It Means to Plan Sponsors

A Plan Sponsor with a safe harbor 401(k) plan utilizing the non-elective contribution design wishing to suspend or reduce contributions must:

• Incur a substantial hardship as described in IRC§ 412(c);
• Notify all eligible employees of the reduction or suspension at least 30 days prior to the effective date;
• Provide employees with a reasonable opportunity to change their contribution election within a reasonable period of time after receiving the notice;
• Amend the plan to provide that the ADP test will be satisfied for the entire plan year in which the suspension or reduction occurs using the current year method; and
• Test that the plan satisfies the safe harbor non-elective contribution with respect to compensation paid up to the effective date of the amendment.

The amendment must be adopted after May 18, 2009, and the suspension can be effective no earlier than the later of 30 days after the notice is provided to all eligible employees and the date the amendment is adopted.

The Notice

The notice requirement is satisfied if each eligible employee is given a notice that explains:
• The consequences of the amendment,
• The procedures for changing elective deferral elections and
• The effective date of the amendment.

Bottom line: Before you do anything, you want to determine the impact of suspending/reducing the non-elective contribution on your top heavy status. You could find yourself eliminating the safe harbor non-elective contribution only to be faced with making a top heavy contribution. At the same time, determine if you can pass the nondiscrimination tests on a current year basis.

What Should You Do Now?

1. Work with counsel to determine if you can satisfy the substantial business hardship requirements.
2. Determine if you will be subject to the top heavy minimum contribution.
3. Determine if you will satisfy the ADP/ACP tests using the current year method.
4. Ensure that you make the non-elective contribution for the period up to the effective date of the amendment including pro-ration of compensation.
5. If you decide to utilize the proposed regulations:
a. Draft and distribute the notice to participants,
b. Amend your plan,
c. Perform nondiscrimination testing and
d. Perform top heavy testing.

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In prior posts I have set out why I think it is essential that 401(k) plan sponsors pay more attention to fees being paid to service providers and why I think that the next great wave of fiduciary breach litigation will involve failure of plan sponsors to control plan costs.  In response to a prior post, someone told me that they were not worried because their employees understood 401(k) fees.  Well, I think you should still worry.

The TransAmerica Center for Retirement Studies published a fee study on June 19, 2009, that surveyed 3,466 employees and 596 employers, asking them questions about concerns regarding 401(k) fee disclosures.  What I found most interesting about the results is this: 92% of employers thought they had a clear understanding of fees and 73% believed that their employees have a similar understanding.  Yet only 29% of employees said they had a clear understanding, with 48% saying they were "unaware" and 23% saying they were not sure.  Taken on its face, that's roughly 71% of a plan population that does not profess to understanding fees.

Similar surveys in the past have also concluded that the majority of plan participants do not understand plan administration, do not feel plan limitations are adequately communicated and are unaware of plan features like vesting requirements and annual contribution limits.  At the same time, plan sponsors almost uniformly assert that their plan participants are well informed.  Plan sponsors cannot force participants to educate themselves about plan terms.  But they can certainly make sure terms (and fees) are well communicated and information is presented in plain, easy to understand language for those participants who do want to learn.

Communication to participants is almost always a key consideration when looking at ERISA litigation.  Good plan sponsors (which is to say the ones who seem to avoid lawsuits) routinely provide information to participants so they understand the commitment to appropriate plan administration.  So embrace that fiduciary duty and communicate.  It's a great way to keep participants happy and might help avoid lawsuits.

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With the continued discussion in Congress over responsibilities of divulging and monitoring 401(K) plan fees and expenses, one can lose sight of who has the responsibility for checking and who is actually a "fiduciary" for the plan.  Before the new rules are laid out, let's consider some of the key players in the process.

"Plan Sponsor."  This is the entity creating the plan.  It can be a company, a Board of Directors of a company or some other governing body, but ultimately this entity is the number 1 fiduciary of the plan.  It will be assumed that the plan sponsor has a fiduciary role, that is to "exercise discretionary authority over the plan assets."  Participants may direct their investments, but the plan sponsor is the entity who chooses the investment options and controls the cost.  Fiduciary? Yes.

"Plan Administrator."  This is the person or entity that controls and manages the plan.  Fiduciary functions may be delegated to others, but the Plan Administrator ultimately retains control over the plan.  The Plan Sponsor can act as the Administrator, or it can be a retained service provider.  But since it controls the assets, it has discretionary authority.  Fiduciary? Yes.

"Plan Trustee."  A Trustee holds, invests and pays plan assets.  If the trustee is empowered with authority to make discretionary decisions, it can be a fiduciary.  But often times a Trustee is merely empowered to act under the direction of the plan administrator or another fiduciary.  If the Trustee has no independent authority and can only act by direction, there may not be fiduciary status.  Fiduciary? Maybe.

"Plan Investment Committee."  If an investment committee is established for the plan, the committee acts to make investments within the investment program established by the sponsor or administrator.  For example, the administrator may approve investment into a certain class of funds, but the committee chooses the actual funds that will be offered.  Because the investment committee should only be making recommendations to the administrator or the sponsor, it is not directly controlling plan assets.  Fiduciary? Probably not.

"Investment Manager."  This person or entity is given specific investment instructions from the sponsor or administrator regarding authority to make investments.  The manager may not exercise its own judgment but should only act on the instructions given to it.  Fiduciary? Probably not.

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Seth Corbin, from our Pittsburgh office, brought the following to my attention:

Effective July 1, 2010, qualified plans that make loans to participants will no longer be required to comply with the detailed disclosure requirements under the Truth in Lending Act.  Prior to the Federal Reserve's changes to Regulation Z under the Truth in Lending Act, the disclosure requirements applied to qualified plans that made more than 25 loans per year and where the amount financed was $25,000 or less.

The Truth in Lending Act was enacted in 1968 to require creditors to disclose credit terms in a uniform manner.  The goal of the Act is that these required disclosures would allow consumers to more easily compare credit terms available to them and avoid unfair or fraudulent credit practices. Although both the Act and Regulation Z have changed over the years, employee benefit plans that have sufficient loan activity have had to comply with these consumer lending protections much like any institution offering commercial loans.

The Federal Reserve, in amending Regulation Z, has exempted qualified plans from complying with the Truth in Lending Act so long as the loan is made to a plan participant, is compromised of fully vested funds from that participant's account, and the loan is made in compliance with Internal Revenue Code Section 72(p).  Plan sponsors and administrators will still need to comply with both ERISA and the Internal Revenue Code with respect to plan loans.

A copy of the regulations can be found at here.
 

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Having written about same-sex marriage and civil unions in the past, I would be remiss in not mentioning that New Hampshire has become the sixth state to legalize gay marriage.  However, in a unique twist, the bill legalizing same-sex marriage exempted "church-related organizations that sere charitable or education purposes are exempt from having to provide insurance and other benefits to same -sex spouses of employees."

As previous posts have noted, this recognition does not automatically mean that same-sex spouses will be recognized as beneficiaries under plans governed by ERISA.  However, non-qualified plans will likely have to be administered with the same-sex spouse as a recognized "souse" or beneficiary once the same-sex union is performed.

The New Hampshire law also provides that couples in a civil union will automatically be assumed to be in a civil marriage, so plans providing benefits to civil union partners should be revised to recognize that this equates to legal spouse, at least for residents of the state of New Hampshire.

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Withdrawal liability is becoming a more interesting topic for employer participating in multiemployer pension plans.  Typically, these "union" defined benefit plans require employer contributions pursuant to a collective bargaining agreement and a "withdrawal" from the plan occurs when the employer ceases operations or ceases to have a contribution obligation (such as when the union contract expires or when the employer negotiates a new contract that excuses participation in the retirement fund). 

In these difficult economic times, two factors of a perfect storm are coming together creating extensive discussion about withdrawal liability.  First, negative market returns are increasing the amount of underfunding in these pension plans.  When an employer withdraws from an underfunded pension plan, withdrawal liability is assessed against that employer.  Briefly, withdrawal liability is an actuarial calculation that attributes a portion of the unfunded vested liability to the employer, meaning that the withdrawing employer has to take with them (and pay to the fund) that liability.  I have written previous posts about withdrawal liability and it is becoming more problematic.  Part 2 of the storm is the distress of employers.  In looking for costs savings and reductions in workforce, or even in terminating business, employers are seeing the possibility of withdrawing from these multiemployer funds as a possible way of controlling costs.

A question came up to me recently about when a withdrawal actually occurs.  This is important because withdrawal liability is determined based on the unfunded status of the plan in the plan year immediately preceding the year in which the withdrawal occurs.  So if the plan year ends 12/31/09, and you cease having a contribution obligation on 10/1/09, your liability is determined as of the value of the plan on 12/31/08.  But be careful because you can get caught between plan years and that can be a problem.  Here is what I mean:

Your collective bargaining agreement expires on 12/31/09 that corresponds with a 12/31/09 pension plan year.  Through negotiations with the union, you determine that in your next bargaining agreement, you are no longer going to contribute to the pension fund.  So as of 12/31/09 you would "cease having a contribution obligation" thereby effecting a withdrawal from the multiemployer pension fund.  But your date of withdrawal for computing withdrawal liability will not be 12/31/09.

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The IFEBP reports that for 2008, 20.7% of multiemployer pension funds were in safe status (more than 80% funded), 41.4% were in endangered status (65-85% funded) and a whopping 37.9% of surveyed plans were in critical status (less than 65% funded).  That's an awful lot of unfunded liability waiting to strike employers and potentially a big 2010 budget concern because these figures make it very likely that required contributions to these pension funds are going to skyrocket.

If an employer is participating in a multiemployer pension plan by way of a collective bargaining agreement, there are two things that have to be considered about budgeting for 2010 employee benefit cost concerns.  The Pension Protection Act ("PPA") of 2006 provides that plans certified as critical or endangered have to develop rehabilitation plans to correct their underfunding.  While the plan can limit benefit accruals and eliminate some types of benefits, the most likely target to improve funding is to increase employer contributions.  After the plan has been certified as critical, the actuary is going to recommend to the plan administrator a "required contribution level" that will be part of the rehabilitation plan and that recommendation is likely going to be made in 2009. 

Under the PPA, the employer and the union have to agree to adopt the new contribution as part of their bargaining agreement.  If no agreement is made, there is a 10% surcharge that the employer has to pay to the fund over and above the current contribution level.  This is a very broad summary of the impact and more detail is available in earlier posts, but generally employers should be anticipating that, if they are in a critical or endangered plan, the contributions for the remainder of 2009 are going to go up at least for the amount of the surcharge.  Plus, if your collective bargaining agreement expires before the end of 2009, or even in 2010, you can anticipate a higher required contribution.

This last paragraph is the true purpose behind this post.  In dealing with clients who are preparing their 2010 budget and trying to anticipate increased labor costs, I find that they could be overlooking this potential cost increase: the added expense of being in an underfunded multiemployer pension fund.  At the bare minimum, the cost associated with being in a critical plan is going to be 10% higher based on the surcharge.  Plus the surcharge is mandatory so there is not even room to negotiate it downward.  Add that to the uncertainty of the increased amount of the contributions due under the rehabilitation plan, and you have a potential time bomb of expense waiting to explode.

What should you do?  If you are contributing to a multiemployer pension fund, first find out what status it is.  Ask the plan administrator for verification of the funding levels.  If you have not received a notice with this information, ask for one.  If you have received a notice, ask your counsel what it means.  Second, find out what the time frame is for that plan to adopt a rehabilitation plan.  Ask if they trustees have started the process.  Ask if the actuary has made any recommendations with respect to increased contributions.  Third, if you are headed into negotiations with the union, make sure this issue is clearly discussed and get commitments about how funding increases will be treated against other costs.  Consider making wage increases contingent upon the impact of increased pension costs, or building in other concessions depending on required contribution levels.  Make sure you negotiate with the understanding that your pension costs will be going up (unless you are in that rare 20.7% of safe plans).

Above all, budget accordingly.  Don't let this cost increase come as a surprise.  There is no easy solution to this nationwide problem of underfunded plans.  But knowing what to expect can make dealing with it easier.

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Previously I wrote about the efforts of congress to provide requirements for additional disclosure of 401(k) fees.  They are at it again, this time through introduction of H.R. 1984, The 401(k) Fair Disclosure for Retirement Security Act.  Introduced on April 21, 2009, the Act requires additional disclosure of fees charged to 401(k) accounts.  This is not something that I think plan sponsors should fear, but there are some specific provisions of the Act that they should pay attention to.

First, the Act creates an affirmative obligation to disclose fees even where fee information is generally available from other sources.  Financial service providers would be required to disclose all costs and fees associated with each investment to both plan sponsors and participants.  A quarterly statement to participants will be issued listing the total contributions, earnings, returns and all fees subtracted from an account.  Before enrollment, participants would receive a statement listing the investment options including historical returns and fees assessed for each option.  In addition, financial service provides would have to disclose any financial relationship or potential conflict of interest with the plan sponsor.

Second, the Act requires that plan sponsors offer at least 1 low-cost index fund that tracks a broad market index.  Because index funds are not actively managed, it is assumed they would have lower costs and fees associated with their investment.  Some advisors have expressed concerns that this provision will be tantamount to a government seal of approval of index funds as an acceptable investment option.  However, this requirement does fit squarely in line with prior discussions over qualified default investment option which many plans have adopted.

Even if this Act does not eventually become law, I believe it illustrates how important it is for plan sponsors to be actively aware of the administration costs associated with their plans, and particularly the fees charged by service providers.  Sponsors should always be looking for the best service provider, but lower costs have to be a concern.  Plan sponsors would be wise to take this opportunity to review their plans and fees charged to make sure they are adequately disclosed, that they are being properly charged and that they are not excessive.

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Unfortunately, these difficult economic times increase the likelihood that employees will be moved to part-time employment.  From an employee benefits perspective, moving someone to part-time can have an impact on things like eligibility and vesting so employers and plan administrators have to be aware of the various requirements in the regulations and how they define "part-time."

First, there is the 1000 hours per year requirement in IRS Code Sections 410(a)(3)(A) and 411(a)(5)(A).  For retirement plans, this means that eligibility and vesting for a "year of service" are satisfied when someone works 1000 hours in the plan year.  So going to "part time" for retirement plan purposes would really be governed by the 1000 hours measurement and working more than 1000 hours in a year would still constitute a full year of service even if it was not a 40-hour work week.

On the other hand, not all benefit plans are under that same requirement.  Major medical plans are governed in part by the eligibility requirements of 105(h), and 105(h)(3)(B) permits exclusion for part-time employees without specifically defining "part-time."  The 1000 hours does not apply to these plans, but IRS commentary provides that part-time means someone who has customary employment of less than 25 hours per week.  So eligibility to continue to participate in those plans may be protected by working an average of 25 hours per week, which is more than the 1000 hours for retirement plans.

Add to that the confusion over Section 125 plan and Section 129 Dependent Care Assistance plans.  Like retirement plans, they are subject to discrimination testing, which would seem to require the 1000 hour measurement (Section 129 actually references 410(a) and the 10000 hours).  However, Section 79 life insurance plans follow the same definition as Section 105(h), which means they permit exclusion for part-time employees without considering the 1000 hours of service.  Add to this the new requirement for Section 403(b) plans (a type of retirement plan, unusually for non-profit institutions) that retains the 1000 hours but provides that the plan generally does not have to be offered to employees expected to work fewer than 20 hours per week and you can see where there would be some considerable confusion over what it means to be "part-time."

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Anyone who sponsors a defined benefit plan should be familiar with the minimum funding requirements of Section 302 of ERISA.  Basically, the minimum funding requirement sets forth the minimum annual contribution required to maintain the plan, and measures the funding standard account to determine if an accumulated funding deficiency has occurred.  It is in essence a snapshot of the general health of the plan as it relates to contribution is versus payments out. 

There is not necessarily a direct correlation between the required minimum funding and a general underfunding of the plan.  Plans can be underfunded (meaning without sufficient assets to pay all vested benefits) but still have a positive funding standard account balance.  The minimum funding requirement of Section 302 does not require the employer to eliminate all underfunding, only that they meet the required annual contribution.  This became very significant in the case of Cress v. Wilson (S.D. NY Dec. 2008).

In the Cress case, a class of Plaintiffs sued the trustees of a Northwest Airlines pension plan, claiming that by permitting the plan to become grossly underfunded, they breached their fiduciary duties.  The Court determined that in fact, the plan had met all of the funding requirements of Section 302 (meaning the minimum funding requirements were met) and that, since that was the required measure of funding in ERISA, no breach had occurred.

The Court did not suggest that the underfunding of the plan could not have occurred as a result of some other breach, but it does appear that, at least to this Court, meeting the annual funding obligation in a timely manner serves as some protection to plan sponsors if their plan is underfunded.  So make sure you make minimum funding obligations to the plan.

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I have previously written about several components of the Worker, Retiree and Employer Recovery Act and its impact of plan administration.  On January 29, 2009, the Congressional Research Service released its Overview prepared for Congress that summarizes the key provisions relating to the "Economic Crisis."  The entire report can be viewed here.

Some of the key provisions:

1.  Waiver of the minimum distributions, which suspends the minimum distribution requirements for 2009.
2. Extends the funding transition rule for Single-Employer plans under the Pension Protection Act to allow plans to use follow the transition rule even if the plan's shortfall amortization base was not zero in the preceding year.
3. For single employer defined benefit plans, it allows that, for the first plan years beginning between 10/1/08 through 9/30/09, plans may use the adjusted funding target attainment percentage of the preceding year (instead of the current year) if the preceding year is greater to avoid restrictions on benefit accruals.
4. For multiemployer defined benefit plans, it allows that, for the first plan years beginning between 10/1/08 through 9/30/09, plan sponsors may elect to use the same certified funding status for the plan of the prior year.
5. For multiemployer defined benefit plans, there is a three year extension provided to funding improvement or rehabilitation plans for endangered (10 extended to 13 years) or critical status (15 extended to 18) plans.

Certain other technical corrections are summarized but these 5 have the most impact on retirement plans.  I anticipate that the waiver of minimum distributions will get the most press, but clearly if you are dealing with an underfunded defined benefit plan, the other four provisions may significantly impact how you handle your 2009 funding obligations.

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For the first time since 2006, the IRS has updated its Employee Plans Compliance Resolution System (EPCRS) which is the program instituted to encourage plan sponsors to identify and correct operational failures in plan administration and documentation.  The purpose of this program is to incentivise employers to find and correct deficiencies and errors voluntary.  There are three types of programs.

Self Correction Program (SCP) provides sponsors with the opportunity to correct operational failures or errors without making a formal request to the IRS.  While the sponsor does not receive approval from the IRS for the correction, there is an assurance from the IRS that the plan will not be disqualified for an error that has been correct under SCP.  Insignificant errors can be corrected at any time.  Significant errors must be corrected by the last day of the second plan year following the plan year in which the error occurred.

Voluntary Correction Program (VCP) adds the component of receiving IRS approval of the correction action taken.  In the VCP process, the plan sponsor submits a formal proposal of the correction method intended to be used and pays the required fee.  Once the IRS and the sponsor agree as to the appropriate corrective mechanism, the IRS issues a Compliance Statement confirming its approval.  This compliance statement is what makes the VCP preferable to sponsors concerned about errors.

The Audit Closing Agreement Program (Audit CAP) comes into play when an IRS audit reveals an operational error.  Since the error is not voluntarily disclosed, there is a penalty that has to be paid, but Audit CAP provides for negotiation of the penalty.  These three options apply to operational failures, such as failure to satisfy ADP or ACP tests, vesting errors annual limits errors and improper exclusion of an employee.

The Voluntary Fiduciary Correction Program (VFCP) is a little different and is not necessarily part of the EPCRS.  It provides for a correction of fiduciary errors and non-operation deficiencies.  These include things like making delinquent contributions, purchases of assets from parties in interest and benefit payments based on improper valuation of assets.  Like the VCP, the VFCP requires payment of a fee and submission of a formal request for correction.

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As of the end of last week, both the House and Senate passed the Worker, Retiree, and Employer Recovery Act of 2008, which is now awaiting the President’s signature. This new tax law temporarily suspends the requirement for taxpayers age 70-1/2 and older (and their beneficiaries) to make annual minimum distributions from their retirement plan accounts.  Qualified retirement plans, including 401(k), 403(b) and 457 plans, and individual retirement accounts and annuities ("IRAs"), are subject to annual required minimum distributions under Internal Revenue Code section 401(a)(9).

The Act provides relief for the 2009 calendar year for defined contribution employer-sponsored qualified retirement plans (including 403(b) plans and 457(b) plans maintained by a government employer) and IRAs by waiving the minimum distribution requirement for 2009 for participants and beneficiaries.  Persons who reach age 70 ½ in 2009 will need to take their first distribution by December 31, 2010.  Participants who reached 70 ½ in 2008 still must take their required minimum distribution under the normal rules, unless IRS waives them (which would have to occur very soon if it is going to happen at all). Beneficiaries taking minimum distributions under the 5-year rule get an extra year to complete the payments.

The new law also provides relief for single-employer plans by allowing employers to "smooth" the value of pension plan assets over 24 months instead of having to apply the mathematical average that Treasury requires.  This change will soften the accounting of 2008 plan losses.  Plan years that started between October 1, 2008 and October 1, 2009 may elect to retain their status from the previous year.  As before the new law, plans in endangered or critical status must adopt a funding improvement or rehabilitation plan, respectively.  While a plan is in critical status, employers obligated to contribute must make additional contributions not required for plans in endangered status, but are relieved from the obligation to make general funding contributions. Under the new law, the election to freeze a plan's status would delay the need to respond to any lack of progress under the terms of the funding improvement or rehabilitation plan until the following plan year.

The Act also includes some clarification for non-spouse rollovers.  Under the PPA, individual non-spouse beneficiaries are now allowed to rollover amounts from a tax-qualified plan, 403(b) annuity or governmental 457 plan directly to an IRA beginning in 2007.  The IRA is then treated as an inherited IRA for purposes of the minimum distribution rules.  The IRS has interpreted the PPA provision as permitting but not requiring plans to provide such a rollover opportunity.  The technical corrections in the Act would clarify that tax-qualified plans are required to allow non-spouse rollovers and provide direct rollover notices as a condition of plan qualification.  The correction would be effective for plan years beginning after December 31, 2009.

Assuming the Act is signed by the President, we expect additional clarification from the IRS as to the actual impact. However, the changes to required minimum distributions definitely seems like it will benefit older participants and will likely be enacted as written.

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At a time when the financial markets are obviously seething, plan participants can tend to be desperate for guidance about whether or not to move their money or change their retirement portfolio.  They may turn to the plan sponsor for guidance about how to better position their retirement plan allocations.  Plan sponsors should try to avoid giving such guidance to remain protected against fiduciary liability claims.

ERISA Section 404(c) provides an exception to fiduciary liability for plan sponsors involved in participant-directed account plans.  It specifically provides that when a participant exercises control over the assets in his or her account, no person who otherwise is a fiduciary shall be liable for any loss, or by reason of any breach, that results from such participant's exercise of control.  In short, a plan fiduciary would not be liable for actions taken by the participant in a participant directed account if the participant took them on their own.

Rendering investment advice can give rise to a claim of fiduciary status if it is determined that it influences the decision of the participant to make a specific investment or elect a particular investment option.  29 CFR 2509.96-1 sets forth the distinctions between "rendering investment advice" and "investment education."  It is important to recognize that "education" is simply explaining the options and impact of each choice.  "Advice" is suggesting which option is preferred for the individual participant and can give rise to claim of fiduciary duty as t the person who renders the advice, including the plan sponsor.

In this market, it would probably not be a bad idea to increase "education" to participants and invite the plan professionals in to discuss the plan investment options with participants.  But I would caution plan sponsors to not engage in direct discussions about how participants could better manage their portfolios as this would likely be "investment advice" that takes them out of the 404(c) protections.

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As we have previously discussed, performance based bonus plans are subject to Section 409A and have to be compliant by January 1, 2009.  Employers who have permitted deferral elections to be made in these plans using the "six month" rule under 409A(a)(4)(B)(iii) should review these decision because of changes made to the definition of "performance-based" compensation.  If bonus deferral elections are expected in 2009 using the six-month rule but it turns out these bonuses are ineligible, the last chance to make the deferral election will be 12/31/08.

The "performance-based" compensation rule generally gives an exception to the requirement that a deferred election for compensation earned in a taxable year must be made no later than the close of the prior taxable year.  If the compensation qualifies as performance-based, the deferral election could be made at any time up until 6 months before the end of the current performance measurement period.  The final 409A regulations provides that compensation will be considered "performance-based" even if it will be paid regardless of the satisfaction of the specified measurement criteria if due to the service providers death, disability or a change in control event. 

This is important because of the impact of Revenue Ruling 2008-13 on 162(m) bonus plans.  2008-13 held that bonus plans that pay at a target in the case of involuntary termination or retirement do not result in deductible performance-based compensation even when bonuses are actually paid based on meeting specific goals.  So even if your bonus plan meets the 162(m) requirements, it may have to be changed in light of the 409A definitions of disability and change-in-control.

If this is all Greek to you, have your executive compensation counsel take a look at your bonus plans and make sure they comply.

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On July 26, 2007, the IRS published final 403(b) regulations providing updated guidance on administrative requirements for these plans.  The earliest applicability for these requirements is January 1, 2009, which is just around the corner.  Below is a summary of some of the primary areas that these regulations touch.  In broad terms, 403(b) plans are now going to have to look a lot more like 401(k) plans and will be held to more stringent administrative requirements.

First, plan documentation.  The final regulation take the position that all 401(b) annuity contracts and custodial account constitute a single 403(b) program that is required to have a written plan document that coordinates tax compliance generally and compliance with 403(b) specifically.  Some things that have to be coordinated include maximum contribution provisions of Code Section 415(c), maximum employee deferrals under 402(g), loan limits, anti discrimination rules, transfer of assets, hardship withdrawals and allocation of responsibility for compliance with tax rules.  So now there must be a plan document and it must encompass the entire operation of the plan.

Second, catch up contributions are now coordinated.  The final regulations confirm that plan participants who are eligible for both lifetime and age 50 catch-up contributions in the same tax year must first exhaust the lifetime catch-up before making an age 50 catch-up contribution.  Also, Revenue Ruling 90-24 is repealed.  Under current law, "90-24 Transfers" are governed by IRS Revenue Ruling 90-24, which permits transfers among 403(b) vendors without sponsor.  The new regulations change this approach.  Under the new regulations, the sponsors and vendor are required to enter into an agreement prior to allowing any "90-24 Transfers."  This new rule does not affect transfers or exchanges among investment funds within a single investment vehicle but would affect transfers among investment providers or different contracts or custodial accounts offered by a single provider.  Moreover, the new rule will only affect the "90-24 Transfers" and do not affect distributions upon termination of employment or otherwise.

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In the 80s and 90, many employers instituted cash balance plans as a means of providing richer benefits to employees with a shorter service time.  These types of plans had two prime benefits to employees: they allowed for faster accrual of benefits and they expressed the benefits in a lump sum value.  The problem was that they clearly appeared to provide younger workers higher benefits than older workers because the benefits earned by younger employee (shown as retirement annuities).  Naturally litigation ensured.

Last week, the 9th Circuit Court of Appeals affirmed that these plans do not discriminate against older workers.  This is the fifth Court of Appeals to reach this conclusion and with the pro-employee 9th Circuit signing on, this appears to be the tail end of any challenge.  To quote the Court, "although a younger worker's total accrued benefit at retirement age will be greater under the cash-balance formula than an older worker's if both started at the same time, the difference is due to the time value of money rather than age discrimination."  This follows the 7th Circuit's 2006 decision that confirmed nothing in federal law suggests opposition to younger workers having greater opportunity to save for retirement because they have more time left to work.

As part of the Pension Protection Act of 2006, Congress did protect cash balance plans from age discrimination suits which may lead to an increase in their use.  At a time when employees have seen their 401(k) account balances hammered in a down market, the security of this benefit structure would certainly be more attractive.

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In an article published today on CNN.com, the National Federation of Independent Business' reports that the monthly index of Small Business Optimism fell one point to 88.2, which shows a continued decline.  One particular cost concern area was the increasing costs of health care.  This is consistent with other articles I have read about the concerns small businesses have with providing benefits to employees.  Of course I have also read a variety of article and surveys about employees and their concerns over dwindling benefits and wages, so there is uniform frustration on the topic.

Recently I have written about the importance of auditing 401(k) fees, but the same holds true for other benefits offered.  Too often I see employers overlook the importance of developing a welfare benefits package tailored to their employee base, and they overlook the wide variety of cost control options that can be used to provide benefits.  There is an assumption that the old standards, like premium purchased insurance, is the best way to go and the only thing employees are interested in.  Potential long term savings are forfeited in favor of avoiding the short term costs of a benefit plan review and audit.

Take high deductible health plans.  Depending on who you speak to, they are either a boon or a bust.  But an HDHP can certainly reduce health care costs.  There are more retirement plan options then an off-the-shelf 401(k) plan purchased from an institution.  Life insurance and disability insurance can be structured in increasing more cost-effective ways.  But employers AND employee have to buy into the options.  In this economy, I think it is even more important for employer to undertake a critical analysis of the benefits packages they offer and find ways to not only control costs, but also to tailor those packages to their employee base.

Attorneys can be good source of counseling on these issues because they work with a variety of service providers that offer a wider variety of options.  I personally work with benefit plans that use all types of structures and my job is to make sure what the employer and the benefit professional put together is legal.  Consider your lawyer as a benefits "counselor," a logical starting point for the discussion of managing benefits costs.  The long term results should prove to be worth it.

 

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Keeping up with the variety of 401(k) fee litigation cases that have been filed is somewhat difficult.  I know that there are fee litigation cases pending in the 2nd, 3rd, 6th and 7th Circuits and there are new cases filed every day.  From the perspective of a plan sponsor, the variety of the actions can be confusing because they cover the gamut of potential claims.  Plus they have loads of legal terms and ERISA procedural fights.  But I think I can pare them down to a couple of basic claims

First, there are cases against plan sponsors.  Typically these are class action type case where participants are suing plan sponsor for breaches of duty associated with failures to disclose fees to participants.  These cases can cover everything from claims that fiduciaries permitted excessive fees to claims that plan sponsors engaged in prohibited transactions with service providers by having service agreements benefiting the sponsor and not the participants.  My opinion is that these cases pose the greatest problem for employers as plan sponsors because they are most commonly based on "standard" service contracts or fee agreements that are not fully reviewed or understood by the employer.

A second set of cases are ones brought against service providers.  These are claims brought against entities that manage money, manage investment options or provide service to the plans participants.  Often the plan sponsor is brought into the case as a defendant as well.  However, there are cases where the plan sponsor, in its capacity as a fiduciary, is pursuing a service provider for excessive or unwarranted fees as exercise of its own fiduciary duty to the participants.  Again, the driving force here seems to be a claim for excessive fees, or at the least, a fee taken in excess of the contracted rate.

Continue Reading...

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File this under things I did not know.  Apparently there is a mechanism to take loans from your 401(k) plan through use of a debit card, but not for much longer.  The ReservePlus card, established 5 years ago, provides 401(k) loans through a Visa debit card.  It allows plan participants to take loans out at prime plus 2.9% interest.  On July 16, legislation was introduced in the Senate to ban the debit card after a hearing because it was too likely that participants would abuse the card.  The legislation would also limit 401(k) participants to three outstanding loans from their account at a time.  The bill was referred to the Senate Finance Committee for consideration.

Remember that in most cases, an employee can borrow up to fifty-percent of their vested account balance up to a maximum of $50,000. If the employee has taken out a 401k loan in the previous twelve months, they will only be able to borrow fifty-percent of their vested account balance up to $50,000, less the outstanding balance on the previous loan. The 401k loan must be paid back over the subsequent five years with the exception of home purchases, which are eligible for a longer time horizon.

A couple of things about this caught my eye.  One, I had no idea that card existed so that was interesting.  Two, giving a quick read through the code I did not see any regulations that particularly limited 401(k) loans other than what I listed above.  As a follow up, I located an article about this law that suggested that this was the first time since 1980 that Congress has introduced legislation to limit 401(k ) loans.  I'll try to keep an eye on this to report how it turns out. 

 

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When both the Wall Street Journal and the USA Today include articles about employee benefit plans, you know it must be good.  It turns out that the Department of Labor's new proposed rules for disclosing 401(k) plan fees is getting some significant airtime.

For a copy of the proposed regulations, click here.  Generally, they are consistent with the DOL's efforts to make sure participants are adequately advised of the costs associated with 401(k) plans and how they are administered.  Effective for plan years beginning on or after January 1, 2009, plans would be required to provide investment-related information in a comparative chart or similar format.  In the proposal, the department developed a model chart for complying with this requirement, while giving plan fiduciaries the flexibility to design their own charts or comparative formats.  The proposed regulations would also require plan fiduciaries to disclose basic information about the plan and its investment options, such as what options are available under the plan, how to give investment instructions, investment returns and fees and expenses, and how to obtain more detailed information.  This information would be given to participants on a regular and periodic basis.  There is some discussion about providing access to a website address to obtain this information and also additional requirements with respect to distributing this information.

These proposed regulations should not come as a surprise as they DOL has long been concerned about excessive fees being passed on to participants without providing them the ability to effectively compare and contrast options.  Since fees and costs will now have to be on full display, please administrators would be wise to use this opportunity to have their plan's evaluated to determine if the fees charged are competitive.  You can bet that will be the next question participants will want to have answered.

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The Pension Protection Act left open certain areas of pension plan administration to further amendment. We are beginning to see proposed regulations that would fill in the gaps created by the PPA. The first of these regulations are proposed by the Pension Benefit Guaranty Corporation (PBGC). These proposed regulations modify parts of the multiemployer pension plan withdrawal liability rules under ERISA. These new rules may alter the amount of withdrawal liability that would otherwise be assessed to an employer withdrawing from a multiemployer pension plan, depending on the adoptive options taken by the plan Trustees.

The proposed regulations, which are based on the statutory changes made by the Pension Protection Act of 2006 (PPA), present 4 key items:
* there is a mandated adjustment to the withdrawal liability calculation for multiemployer plans that are in “critical status”
* there is a “Fresh Start” rule that applies to calculations
* there is a limited exception that allows an employer to delay making withdrawal liability payments until a final decision is rendered by a court or arbitrator
* there is a change to the allocation of a plan’s total unfunded vested benefits (UVBs) among employers in a mass withdrawal.
Comments on the proposed regulations are due by May 19, 2008, and the regulations would be effective as of the approved date unless otherwise stated.

Withdrawal Liability Calculations for Critical Status Plans
As most employers participating in multiemployer funds have now become aware, the PPA introduced new rules for multiemployer plans whose funding is in “critical status.” Part of the relief provided under the PPA allows “critical” plans to reduce “adjustable benefits” and also requires contributing employers to pay a surcharge equal to 5% of contributions (10% after the first year the plan is in critical status). The PPA requires that such adjustments must be disregarded in determining a plan’s UVBs, and the employer surcharge is not taken into account in calculating an employer’s allocable portion of UVBs for purposes of determining withdrawal liability. The proposed rule expands the definition of “nonforfeitable benefits” and “unfunded vested benefits” to include adjustable benefits that have been reduced while the plan is in critical status. The proposed rule also provides that the employer surcharge would be subtracted from both the numerator and denominator of the allocation fraction used to determine an employer’s withdrawal liability. This change will impact how withdrawal liability is calculated, but it may not necessarily decrease overall withdrawal liability for plans. These changes are effective for withdrawals occurring during plan years beginning on or after January 1, 2008. Continue Reading...

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I happen to be working a distress termination of a single employer defined benefit plan for a company that is not in bankruptcy or insolvent and it struck me that in the current economy, there might be more employers that will have to deal with this issue.

There are four statutory tests for determining "distress" for the purposes of distress terminations: (1) liquidation in bankruptcy or insolvency proceedings, (2) reorganization in bankruptcy or insolvency proceedings, (3) inability to pay debts when due to continue in business unless a distress termination occurs, and (4) unreasonably burdensome pension costs due solely to a decline in employment.  While options 1 and 2 are considered the most common, options 3 and 4 may become more commonplace.

There are a couple of interesting hurdles to options 3 and 4 in a distress termination.  First, the determination is made by the PBGC, in its discretion, based on information provided by the plan sponsor.  The second hurdle is that the distress tests must be applied to the members of the control group of the sponsor, not just the sponsor itself.  That means that a troubled subsidiary may not be able to terminate its own plan if the parent is not equally distressed. 

When an underfunded plan terminates in a distress termination, the plan effectively goes into receivership. The PBGC becomes the trustee of the plan, takes control of any plan assets, and assumes responsibility for liabilities under the plan. The PBGC makes payments for benefit liabilities promised under the plan with assets received from two sources: assets in the plan before termination, and assets recovered from employers. The balance, if any, of guaranteed benefits owed to beneficiaries is paid from the PBGC's revolving funds.  Following a distress termination, the plan's contributing sponsor and every member of that sponsor's controlled group is liable to the PBGC for the excess of the value of the plan's liabilities as of the date of plan termination over the fair market value of the plan's assets on the date of termination. The liability is joint and several, meaning that each member of the controlled group can be held responsible for the entire liability.

Not surprisingly, the PBGC is not particularly receptive to distress terminations and will carefully scrutinize applications for termination where the sponsor is not in bankruptcy.  But if the choice is between bankruptcy and terminating the pension plan, sponsors should consider whether distress termination is a viable option to keep the company itself in operation.

 

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Notwithstanding the provisions of the federal Defense of Marriage Act, I believe that the availability of non-spouse beneficiary rollovers in Section 829 of the Pension Protection Act of 2006 serves as a sort of "unofficial official" recognition of the desire of plan participants to provide beneficiary status to same-sex partners and the need for plans to deal with this issue.  What follows are some general observations about how they work.

The rules provide that a non-spouse beneficiary of a participant in a qualified plan may make a direct rollover of the deceased participant's account balance to an inherited IRA (effective for distributions after December 31, 2006).  An inherited IRA is an individual retirement account established specifically with reference to the decedent and the decedent's name must be included in the title.  So it would be something like "Jane Doe as beneficiary of John Doe."  Once the inherited IRA is established, the direct rollover is the ONLY means of moving money from the qualified plan to the IRA.  There cannot be a cash distribution and then and rollover contribution within the 60 day window.

The rollovers are exempt from the stranded direct rollover requirements, such as the mandatory 20% withholding on amounts not directly rolled over, and there is no need to issue a 402(f) rollover  notice.  Generally, the inherited IRA will be required to follow the same distribution rules of the plan from the which the rollover was made.  Non-spouse rollover provisions are required for 2008 plan operations however the PPA does not require that a plan amendment be made until the 2009 plan year.  It is interesting to note, though, that the plan does not have to be specifically amended to provide for the non-spouse rollover, but it has to be documented (possibly through board resolution) that the option is available.

I think administration of this provision will prove interesting to plan administrators, particularly where there are multiple potential beneficiaries, such as children raised by same-sex partners.  The more options participants are given to change and designate beneficiaries, the more likely they are to make mistakes.  I think administrators would do well to put in place some extra measure of confirmation from the participant of a non-spouse beneficiary if participants choose that option. 

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Taking advantage of the extra day, the Department of Labor proposed a new "safe harbor" rule for small plan contributions on February 29, 2008.  The proposed regulation addresses small plan (under 100 participants) contributions and the timing of these contributions.

Under the current regulations, participant contributions to a plan that are paid to the employer or deducted from payroll are due as of the earliest date such amounts can reasonably be segregated from the employers general assets, but in any event not later than (1) for retirement plans, the 15th business day of the month following the month in which the employer received the payment from the participant or would have otherwise paid the amount in cash to the participant; (2) for welfare plans, 90 days after the employer receives the amount withheld.

The difficulty has always been that following these regulations provided no assurance that the timing of the contribution from the employer was "reasonable."  The "no later than" language has left open the discussion that "sooner" was required to be a sound fiduciary.  This new proposed safe harbor provides that, at least for small plans, amounts deposited within the 7th business day after receipt of the withholding by the employer will be treated as reasonable.

Participants may generally assume that contributions made to a plan are deposited in their account almost immediately.  In this time of market volatility, plan sponsors have to be wary of making sure contributions are made in a timely manner.  While this new proposed regulation only applies to small plans, this new 7-day rule could be considered as an acceptable rule of thumb for larger plans.

The proposed regulations are open for comment until April 29, 2008, and will be final upon publication.  The DOL has clarified that it will not assert an ERISA violation against any small plan sponsor that adheres to this rule prior to its final effective date.  For a copy of the Federal Register provision, please click here.

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