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

Last week, we upgraded our software and changed our document management system.  For non-computer savvy people like me, it was a real challenge.  The trainer told me that whenever I did something that caused an error, I should write down what I did and ask him to explain to me what went wrong and how to avoid it in the future.  This struck me as an interesting piece of advice that could also be good for plan sponsors and plan administrators when it comes to compliance so when I finally was able to get access to the internet, I decided to write my thoughts about it.

I have written before about fiduciaries and their responsibility to act diligently and to make informed decisions.  It is essential that fiduciaries document the steps they took in reaching decisions related to plan operations.  The process for choosing advisors, service providers or investments should all be documented so that there is a record of how the decision was reached to demonstrate diligence.  Similarly, when mistakes are made, there should be a record of how they were identified, how they were corrected and what steps are being taken to make sure they do not happen again. 

When it comes to benefit plan administration, there are several "corrective mechanisms" available to fix mistakes.  Sometimes the best mechanism is to document the procedure being implemented to prevent them from happening in the future.  Things like written policies and procedures can be a boon to both show diligence and to also adjust future administration.  Memorializing how and why the actions were taken give us a roadmap in case a mistake occurs so we can look back and see where a wrong turn might have been made.  It is very difficult to fix a mistake if you can't identify why it happened or what practice or policy was ignored.

I think this will become even more relevant the closer we get to full PPACA compliance.  Plan sponsors are making decisions about how to count employees, what coverage to offer and how to measure hours.  Undoubtedly, mistakes will be made.  There should be a record of how conclusions were reached for each of these issues so that there is both proof of diligence and a reference point for correction if necessary.  Mistakes can be fixed, but it is usually easier (and less costly) to fix things if there is a record to look back on.

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In previous entries, I have written about what happens when you can't locate a spouse for waiver purposes, about how to deal with missing beneficiaries or even how to review QDROs.  Well, every now and then a new case comes around that throws in a new twist, so let's consider when a spouse really ceases being a spouse.

In Gallagher v. Gallagher, the Massachusetts District Court was asked to consider a case between the son a deceased participant and his not-quite-ex wife.  In 1989, Mr. Gallagher separated from his wife and entered into a separation agreement and continued to pay spousal support to his estranged wife.  But the participant never actually finalized the divorce.  He had not spoken to his estranged wife for several years and in 2005, the participant changed the beneficiary designation on his 401(k) plan to his son.  He then passed away in 2011 and his estranged wife and son instituted litigation over who was the appropriate beneficiary.

The Court ruled that even though the participant's intention to change his beneficiary was clear, since he was not actually divorced, he could not alienate his "spouse" and she was entitled to the account balance.  The spouse was still a "spouse" until legally she was no longer a spouse. 

So the lesson for plan administrators is don't assume an estranged spouse is no longer a proper beneficiary or that they have no claim under the plan.  Unless you see a divorce decree confirming the termination of the "spouse" status, don't do anything to adversely impact that spouse's claim to benefits.  Just because a participant says they are divorced, get proof.  In this case, if the plan had disbursed the money to the son, it might have had to pay it again to the spouse because it did not check.  So don't assume a spouse is not a spouse until you get proof.

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In case you are completely overwhelmed with PPACA compliance issues, I decided to write about my other favorite topic: withdrawal liability.  When employers who contribute to a multiemployer defined benefit retirement plan cease to have a contribution obligation, they can be assessed withdrawal liability, which can be a very big number and can really come as a surprise to a business if they did not plan for it.  It usually stays with the business and is not a personal liability for the owners.  But it can be if they are not careful.

In Central States Southeast & Southwest Areas Pension Fund v. Messina Products, LLC, the 7the Circuit Court of Appeals recently reversed a lower court decision that absolved Mr. and Mrs. Messina of any personal liability for the withdrawal of their company from the pension fund.  The Messinas owned a piece of property individually (not as a business entity but personally) that they rented to their business.  The 7th Circuit found that the rental property was a "trade or business" under common control and so the Messinas were liable as if they were sole proprietors of the business.  The Messinas argued that the real estate was a passive investment, and not an active trade or business, but in the absence of any operating documents or agreements, the Court disagreed.     

There are many cases that deal with individual liability for sole proprietors so this decision is not completely novel.  But it should serve as a reminder to any business owner that has a business that contributes to a multiemployer pension fund that it is extremely important to address these ownership issues in advance.  The definition of "trade or business" for withdrawal liability is unique and should not be assumed to be the same as in tax or common law.  So don't get caught unprepared and personally liable.  Structure and plan in advance to avoid a withdrawal surprise.

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I frequently am asked by plan sponsors and plan administrators about how to respond to a request for "plan documentation."  Under Section 104(b)(4) of ERISA, a plan administrator is obligated to provide certain information when requested by a participant or beneficiary.  This documentation includes the summary plan description, the latest annual report (if the plan files one) and any bargaining agreement, contract or trust document under which the plan is established.  Sounds fairly simple, right?

Well, under 502(c), there is a $110 a day penalty for failing to provide the documentation within 30 days when requested, so there is some timeliness requirements to the response, and there is some penalty associated with no complying with the request.  104(b)(4) allows for their to be a reasonable charge for copies if requested.  But who can request them?  The term "participant" or "beneficiary" is not cleanly defined in these sections.  Well, generally, we know that a participant or beneficiary is someone who participates in the plan or is entitled to benefits under the terms of the plan.  But it may also be someone who has a "colorable claim" to benefits.  Say perhaps an ex-spouse who thinks they are entitled to life insurance benefits.  Or perhaps a step-child who thinks they meet the definition of a dependent.  So it is important to consider who is requesting the information and not just their actual status, but their possible status as well.

Also, the request can come from an attorney.  There is an old DOL opinion letter that suggests that since the statute says the request has to come from the participant or beneficiary, a request from an attorney does not trigger the obligation to comply.  But more recent case law has considerably blurred that line so that a request from an attorney for a participant or beneficiary made in good faith should elicit a response.  Further, while the statute says the request has to be made to the "administrator," an employer, as plan sponsor, should not assume that it is free from compliance because it has outside administration.  Lots of cases have been litigated over whether that "fiduciary" status is sufficient to require an employer to provide documentation.  Simply put, the risk associated with penalties and litigation over failing to provide documentation seem to clearly favor erring on the side of giving documents when requested.

So plan sponsors (and administrators) should collect the required documentation, keep it in a nice folder and be prepared to send it out on request.  Set an reasonable fee in advance and apply it uniformly.  Make sure to comply within 30 days and err on the side of providing the documentation to anyone with a colorable claim to participant or beneficiary status.  And if you have any questions, contact your attorney at Fox Rothschild for guidance.

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When the Supreme Court decides not to take a case, that is generally not news.  But in the case of the Court's decision to decline a review of Walker v. Federal Express Corp., there should be some mention of its impact on claims under ERISA.  Usually, when I am defending a claim made against a plan or a plan administrator, I see that the Plaintiff has thrown in a claim for "breach of fiduciary duty" as a sort of catch-all argument.  Frequently, this claims is is coupled with some type of claim for failing to provide documents or for having defective notices.  But these types of claims may survive under ERISA, as the underlying decision in Walker illustrates. 

Factually, the case involved a claim for benefits under a life insurance policy.  In addition to the claim for benefits under Section 502(a)(1), the plaintiff included a claim for breach of fiduciary duty under Section 502(a)(2) for either failing to provide a conversion notice, or in breaching a duty to the participant by not giving benefits.  The Sixth Circuit Court of Appeals affirmed the decision of the Court from the Western District of Tennessee, finding that the relief available under Section 502(a)(2) for breach of fiduciary duty is not relief available to an individual.  It is relief that should be limited to the plan as a whole.  By not hearing the case, the Supreme Court has effectively left the 6th Circuit's decision intact. 

It is also important to note that this leaves intact the Appeals Court's decision that nothing in ERISA requires a life insurance plan fiduciary to issue a separate conversion notice beyond what is contained in the summary plan description, but that is not what I focus on here.

Certainly, other jurisdictions have had similar decisions and much has been written about relief available under 502(a)(2) and equitable remedies available under 502(a)(3).  But my point here is that making a claim for "breach of fiduciary duty" means something more than just disagreeing with a plan administrator's determination.  It has specific statutory and administrative limits.  So if you are a plan fiduciary facing an allegation that you have breached a fiduciary duty, your first consideration might be whether the requested remedy is even available.  I am not suggesting it is a good idea to engage in breaches of duty, but a claim for breach is not a blank check for a claimant.  It is a very specific claim that has very specific remedies and very specific limits.  Make sure that if you are a fiduciary, you are aware of your fiduciary obligations as well as the remedies so you don't further compound problems with your plan administration by giving the wrong thing. 

For more information about being a well-informed fiduciary, or to arrange for fiduciary training, please contact your attorney at Fox Rothschild.

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Between talk about the "fiscal cliff" and "shared responsibility,"  it makes me wonder how plan sponsors and fiduciaries are going to manage to keep their plans looking the same way for an entire plan year.  It seems like every day new issues are presented that might require employers to have to change their benefits plans.  Unfortunately, most time when people talk about changing plans, they overlook some of the rules relating to changes, particularly notices to participants. 

ERISA has a rule about "summary of material modifications" that provides that notice of plan changes have to be distributed to a participant within 210 days of the end of the plan year that the change is effective.  This applies to welfare plans and retirement plans alike.  For group health plans, if the material modification is a material reduction in benefits, the summary has to be distributed 60 days after the effective date of the reduction.  PPACA gives us a rule that provides that if a health plan makes a mid-year plan change that changes one of the terms in their summary of benefits coverage, the plan has to give a notice to participants 60 days prior to the effective date of the modification.  The notice of the changes would satisfy both the SMM requirement and the SBC notice requirement.  So you might have to issue a notice in 60 days or not depending on the change. 

Retirement plans have notices too.  Not only do the SMM rules apply, but there are special rules about notice requirements like a 30-day advance notice of amendments to 401(k) plan to eliminate matches or a 60-day advance notice of an intent to terminate a plan.  So mid-year changes to retirement plans can trigger an obligation to provide notices to participants prior to the change.  In the case of either welfare plans or retirement plans, failure to provide proper notice could constitute a breach of fiduciary duty, which creates its own potential liability.

The point is that changes can be made to plans mid-year or end of year, or both, be they retirement or welfare, and that plan sponsors can modify their plans to fit their changing needs.  But it is imperative to know the timing restrictions and notice requirements in advance of making those changes so you don't run into problems.  Don't assume, ask an expert. 

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Each year, the IRS announces cost-of-living adjustments affecting dollar limitations for various retirement plans.  Some of the key changes to limits for 2013 (as well as some that did not change)are:

1. The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is increased to $17,500.
2. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $5,500.
3. The limit on annual contributions to an Individual Retirement Arrangement (IRA) increases to $5,500.
4. The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $17,000 to $17,500 for 2013.
5. The limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $200,000 to $205,000. For a participant who separated from service before Jan. 1, 2013, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2012, by 1.0170.
6. The limitation for defined contribution plans under Section 415(c)(1)(A) is increased to $51,000.
7. The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C) and 408(k)(6)(D)(ii) is increased from $250,000 to $255,000.
8. The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $165,000.
9. The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $115,000.

Plan sponsors should make sure that their administrators are aware of these changes.  There are some other changes that may impact your 2013 plan administration so now is a good time to review your company retirement plan to make sure it is administered in accordance with these 2013 limits.

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Previously I wrote about restrictions on hardship distributions for recovery from Hurricane Sandy.  The administration apparently had similar concerns and the Internal Revenue Service has announced that 401(k)s and similar employer-sponsored retirement plans are getting special relief to permit loans and hardship distributions to victims of Hurricane Sandy and members of their families.

To qualify for this relief, hardship withdrawals must be made by Feb. 1, 2013.  Under the special relief, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply and the normal restrictions associated with hardship distributions (such as demonstrating no other sources of relief are available) will not apply.  Distributions are limited to those in the geographical area defined by the IRS in Notice 2012-44.  The relief further provides that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.

Although plans are be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features, the plan would still need to eventually be amended to account for the special relief given.  In addition, the plan can ignore the limits that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter.  If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in the announcement.

So if your plan does not allow for hardship distributions, or if it does with limitations, this relief period provides plan sponsors with a way to permit participants to withdraw funds to aid in recovery from the hurricane.  For guidance on plan amendments, please contact your attorney at Fox Rothschild.

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In the excitement over the presidential election, it might have been overlooked that voters in the states of Maine, Maryland and Washington voted to approve same-sex marriages.  As more states recognizes same-sex marriages and civil unions, it is important to for plan administrators and sponsors to be keenly aware of the ongoing conflict between federal and state law related to these relationships. 

First, let's review retirement plan concerns.  Qualified retirement plans are generally governed by ERISA and various corresponding tax regulations.  All of these regulations are subject to the impact of the federal Defense of Marriage Act.  While this Act is subject to various disputes right now, it is still the law so it has to be followed.  The net effect is that when considering the term "spouse" in your qualified plans, it does not include a same-sex partner, married or otherwise.  So any provision in a plan that provide for benefit to a "spouse" would not apply to a same-sex spouse even when married under state law.  For example, consider a defined benefit plan distribution that requires spousal consent for distribution.  A partner in a same-sex marriage is not required to obtain spousal consent because in the eyes of the plan, he or she has no spouse.  Similarly, any spousal rights that may accrue as a result of the death of the participant under the terms of the plan would not accrue to the same-sex partner. 

Second, when we look at welfare plans, all of the dependent coverage definitions in the plan referring to "spouse" would not automatically include the same-sex spouse.  Certainly a plan can add coverage for same-sex partners, but doing so does not grant them the federal protections of things like COBRA (which would not apply since the dependent would not be recognized as a spouse under federal law).  Cafeteria plans cannot provide benefits to same-sex partners, which means that employees cannot pay that portion of their health coverage attributable to same-sex partners with pre-tax dollars.

This is not to say that plans, retirement or welfare, cannot be amended or designed to recognize and benefit same-sex spouse.  What is does mean, though, is that plan administrator have two particular concerns.  One, if the plan administrator does decide to recognize same-sex partners as spouses, it has to be very careful to administer benefits in accordance with federal law.  Second, the plan administrator has to be very careful to make sure that it is not providing benefits improperly because of lack of diligence.  Plan administrators should be very careful about enrollment of participants, particularly in states recognizing same-sex marriage and domestic-partners.  Participants have to be advised of the distinction between state and federal law and how benefits may or may not be administered for their same-sex partners.

Finally, there are tax concerns.  Because the amount of the benefits for the same-sex partner are disallowed for federal tax purposes, the employers' withholding responsibilities are calculated based on the total gross compensation that includes the value of the benefits to the same-sex partner and has to take into account that the premiums paid are not using pre-tax dollars.  Plus the level of withholdings for state purposes might be different from the withholdings for tax purposes.  An employee in a same-sex marriage could be "married" with two dependents for state tax withholding purposes, but "single" with no dependents for federal tax purposes.  So employers can no longer assume all withholdings based on a single W-4 for same-sex couples.  They have to be wary of these distinctions between state and federal taxes.

So plan sponsors, as both keepers of benefit plans and employers paying taxes have to be cognizant of the impact of adding coverage for same-sex partners.  Changing laws require attention to detail, which in turn avoids problems in the future.  For assistance in dealing with this issue in your plans, or your payroll, ask for assistance from your attorney at Fox Rothschild.

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Earlier this week, Hurricane Sandy hit and caused some serious damage to the eastern seaboard.  There will be a lot of time spent sorting out how to pay for damages, and I expect that some folks may end up having to look for assistance in paying for repairs and clean up.  It might be that their retirement plan savings are the place to locate that needed money so let's take a look at rules regarding "hardship distributions."

The IRS has a very good FAQ for Hardship Distributions, but here are some of the basics:

1. A retirement plan may, but is not required to permit hardship distributions.  So there are no distributions unless the plan permits them.
2. The plan has to set a specific criteria for distributions and making a determination of a hardship.  There has to be a set way to apply for and get approval for the distribution and the rules of the plan have to be satisfied.
3. The IRS generally defines a hardship as "an immediate and heavy financial need" and the most common examples are medical expenses, purchase of a principle residence, tuition, funeral expenses AND "certain expenses for the repair or damage of the employee's principle residence."
4. Employees must have taken all other available distributions and loans from the plan prior to receiving the hardship distribution.
5. Employees cannot make elective deferrals to the plan for 6 months after receipt of a hardship distribution.
6. Hardship distributions are generally limited to the amount of the employee's total elective contributions (less any previous withdrawals).
7. Hardship distributions are generally includable in gross income and may be subject to taxation as an early distribution of elective deferrals.

There are no rules relating specifically to natural disasters, so general hardship distribution rules apply.  Congress might pass some special acts that allow for post-disaster withdrawals and special treatment, but until they do that, the plan's hardship distribution rules apply.  Generally speaking, hardship distributions may be available to an employee to cover the costs of repair or recovery from a natural disaster, provided the plan permits it and they have no other available financial options.  It is not designed to be the first source of money.  Instead, it should be the option of last resort.  Bear in mind, there can be negative tax implications from the distribution.

So to conclude, victims of natural disasters may be able to obtain distributions, but likely as a last resort, and certainly not without some negative implications.  For more information about amending your plan to include for these distributions, or for assistance in administering these distributions, please contact your attorney at Fox Rothschild.

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This might sound like the start of a bad joke, but I had the opportunity to speak with a room full of accountants last week about fiduciary liability.  It was not as boring as it sounds because of some really good questions raised about what constitutes sufficient diversification in defined contribution plans.  Specifically, they asked me what a fiduciary is required to offer that would satisfy the obligation to diversify.

First, bear in mind that ERISA Section 404(a)(1)(c) requires that a fiduciary diversify the investments of the plan so as to minimize the risk of large losses.  Fair enough, but how do we do that?  So then we look to the regulations.  29 CFR 2550.404(c)-1(b)(3)(i)(B) tells us that a plan has to offer the opportunity to "choose from at least three investment alternatives:

1. Each of which is diversified;
2. Each of which has materially different risk and return characteristics;
3. Which in the aggregate enable the participant or beneficiary by choosing among them to achieve a portfolio with aggregate risk and return characteristics at any point within the range normally appropriate for the participant or beneficiary; and
4. Each of which when combined with investments in the other alternatives tends to minimize through diversification the overall risk of a participant's or beneficiary's portfolio.

Notice that items 2, 3 and 4 consider "risk"  This is because in a defined contribution plan, the "risk" is born by the participant, not the plan sponsors.  So we offer diversity, but we have to offer diversity in consideration with the risk, not necessarily the type of investments.  It is not enough to just offer a stock fund, a bond fund and a treasury securities fund.  You have to consider the risk of each investment option and provide a meaningful way for participants to balance the risk amongst the investment options.

It is not a matter of just choosing 3 different options, or 10 or 100.  We have to show that we made a meaningful and prudent determination of the risk of each investment option offered and allowed for a diversification of risk within the participant's portfolio through a diversity of options with varying degrees of risk.  We don't have to make them avoid risk, but we have to give them alternatives with varying degrees of risk so they can diversify (if they want to).  So when deciding how many investment options to offer in a defined contribution plan, fiduciaries have to consider risk not just types of investments and offer diversity.  Otherwise, the lack of risk diversity will violate ERISA rules.

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When I was in law school, I vaguely remember learning about "springing" interests.  They pop up when some event occurs that creates some claim to the property or trust.  Well, in some instances, fiduciary status can spring up based on whether you actually exercise discretion over plan assets.  In other words, you might not intend to be a fiduciary, but as soon as you exercise discretion, you are one.

Consider the recent decision in Borroughs Corp. v. Blue Cross Blue Shield of Michigan.  In this case, the plan was self-funded and Blue Cross was acting as the TPA under a service agreement.  The service agreements with Blue Cross provided that the amounts sent each month to pay benefits were specifically NOT plan assets.  Unbeknownst to the plan, Blue Cross was taking a little bit of the money each month as a service fee so the plan sued for breach of fiduciary duty.  First, the Court said that even though the contract said otherwise, the amounts transferred were plan assets.  You could not contract away the fact that the money coming from the plan to pay benefits is a plan asset.  Then the court held that because Blue Cross exercised discretionary authority over those assets (meaning it decided to take a little as a fee), it was a fiduciary.  Finally, the court concluded that using plan assets to pay yourself a fee that only you determine and know about is a prohibited transaction and a breach of fiduciary duty.

The fiduciary status sprung from the possession of plan assets and the use of discretionary authority.  The same thing can happen to anyone that comes into possessions of assets of a plan if they begin exercising discretionary authority.   For example, a lawyer that has money from a plan in an escrow account to be used to pay a settlement is in possession of plan assets.  If he or she just distributes it as directed by the plan, no exercise of discretionary authority and no fiduciary status.  The assets are still plan assets, but the non-exercise of discretion eliminates the fiduciary status.  But if the lawyer takes some money out of the account for any purpose other than what the plan directs, then there is an exercise of discretion and fiduciary status springs to life.

This is why it is very important for plan sponsors, plan employees and plan service providers to be keenly aware of the actions they are taking when they have plan assets under their control.  If you act with direction from a fiduciary without your own discretion, you tend to stay away from fiduciary status.  But if you start to make decisions related to the distribution of those assets, fiduciary status springs upon you.  So it is always important to know (1) if you are dealing with plan assets and (2) are you exercising authority over those assets.  Being aware of these two things is the first step in avoiding having fiduciary status arise unexpectedly.  And if you have questions about your status or whether you are dealing with plan assets, ask for assistance from your attorneys at Fox Rothschild.

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Frequently I am asked about the possibility of giving "something extra" to employees because of a long work history or because of special circumstances and the employer wants to do something special for them.  Unfortunately, they sometimes look to the benefit plan and that might mean bending the benefit plan a little or giving some extra benefit beyond what the plan provides.  This can be in the form of modifying eligibility or providing extra payments.  But the problem with that can be that changing plan terms for special treatment of a particular participant can create a variety of issues that frustrate good plan administration.

A recent decision out of the third circuit considered a case where an employer left an employee on their health plan during leave even though she was not eligible for coverage.  The plan paid a large amount of money in benefits for this person and then sought reimbursement from a stop-loss carrier.  The court determined that the stop-loss carrier was not liable for the reimbursement claim because the benefits were outside of what was required by the plan.  While not addressed by the court, it would stand to reason that since the plan should not have paid, paying those claims in the first place would be a breach of fiduciary duty.  And what if someone else came along and wanted the same dispensation?

A recent fourth circuit decision relating to severance plans looked at a claim for discrimination made by a former employee alleging that male employees were given extra severance as opposed to female employees.  While the crux of the decision related to whether Title VII applies to severance from employment, the facts plead suggest that some male employees were in fact given something beyond what the plan called for generally.  Similarly, I recently read a seventh circuit case that dealt with a claim by a former employee complaining that he was not offered the same continuation of health coverage that other employees received as part of their severance, which was provided coverage outside of normal COBRA continuation.  He claimed he was the victim of discrimination as well.

The point is that the plan has terms and the terms have to be followed.  Even if your plan is self-funded, you have to treat all participants equally under the terms of the plan.  Once you start giving special benefits to individual participants, you invite claims by any participant who does not get the "extras."  Being flexible in eligibility or benefits invites claims that the plan is being administered in an "arbitrary and capricious" fashion, which is something all plan sponsors should want to avoid.  So being nice can prove to be problematic.  Don't be flexible in applying plan terms because, when it comes to plan administration, bending the rules is the same as breaking them.

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Frequently benefit plan fiduciaries have to rely on experts for advice relating to plan administration.  Legal counsel, actuaries, investment advisors, appraisers and the like are essential components of the administration of benefit plans, but they are not fiduciaries.  And fiduciaries are subject to the "Prudent Man Rule" when satisfying their fiduciary obligations.

The good news is that generally courts don't look at the results of a decision so much as the process.  Fiduciaries who use experts for advice and counsel properly can sometimes be insulated from breach of fiduciary duty claims because they made diligent efforts to reach a conclusion, even if it was ultimately a bad decision.  For example, numerous court cases have found that making a bad investment is not a breach of fiduciary duty if the fiduciaries satisfied their fiduciary obligation to properly investigate the investment before they made the decision.  The process is reviewed, not the outcome.  So investment losses are not necessarily a breach if the investment decision was made properly.  As one judge noted "the test of prudence- the Prudent Man Rule -is one of conduct and not a test of the result performance of the investment.  The focus of the inquiry is how the fiduciary acted in his selection of the investment and not whether the investment succeeded or failed."

To rely on experts, fiduciaries are charged with the obligation to provide accurate and complete information, and to properly review and become familiar with recommendations and advice.  It is not enough to rubber stamp the recommendation of a fund advisor.  Fiduciaries have to understand why the advice was given and evaluate whether it was based on accurate information (and sometimes accurate assumptions).  Similarly, choosing experts is a component of the evaluation process and a decision to use a particular expert should be based on a thorough review of the need for the expert and their credentials.

Fiduciaries need not become experts themselves, and can rely on expert advice when making decisions.  Reliance on experts is an essential component of administering a plan, but it starts with choosing good experts and giving them complete and accurate information.  Year-end reviews are always a good time for fiduciaries to look at their processes for making decisions.  Consider reviewing how your plan uses experts, and who those experts are, to make sure you can verify the processes for their selection and using their advice.  Put checks and balances in place to make sure they get accurate information.  And above all, ask questions.  Fiduciaries may not have to be experts, but they always have to be prudent.     

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When dealing with withdrawal liability, employers frequently question how it is calculated and the answer is usually "by an actuary."  One key to to understanding the actual calculation is to understand that it is an estimate of the value of the assets and liabilities of the pension plan from which you are withdrawing.  But how the "estimate" is reached can be of some discussion and the 7th Circuit Court of Appeals recently determined that the actuary's best estimate is the one the plan should use.

In Chicago Truck Drivers Helpers and Warehouse Workers Union (Independent) Pension Fund v. CPC Logistics Inc., the Court was asked to a look at a calculation of withdrawal liability by a withdrawing employer.  The arbitrator had ruled that the liability was overstated by about $1million, and the plan appealed that decision.  The key to the case is that to figure out whether or not the plan met its annual minimum funding requirements, an actuary uses a “funding" rate assumption, which is an estimate of the interest rate for tax purposes.  However, there is also another possible rate, called the "blended" rate that can be used for determining withdrawal liability.  Depending on which is used, the withdrawal liability calculation can be very different.

The factors used when making a determination under the "blended" rate are different that the factors used to calculate a "funding" interest rate because of the difference between short and long-term assumptions and rates for annuities.  If the short-term interest rates used in determining the "blended" rate exceed the long-term interest rates used to calculate the "funding" rate, an exiting employer's withdrawal liability assessment would be less.  So the rate used could definitely have an impact on the withdrawal liability allocation.  The trustees, based on advice from their actuary, should then adopt the rate that they believe best represents the plan's experience.

in this particular plan, the trustees of the plan instructed the actuary to use which ever rate would generate higher withdrawal liability allocations when making withdrawal liability computations, which happened to be the "funding" rate.  The result of using the higher "funding" rate was that the employer had a withdrawal liability of almost $3.4million.  The arbitrator determined that because the higher rate was used, the employer was charged almost $1million more than it should have.  The Court agreed, finding that when making calculations, an actuary is obligated to use the "best estimate" of a plan's anticipated experience.  Since the "blended" rate was, even according to the actuary, the correct interest rate to use, it had to be used even if it resulted in a lower withdrawal liability allocation.

This case shows how actuarial computations can vary based on certain assumptions and it explains the distinction between minimum funding computations and withdrawal liability computations.  It also should serve as a reminder that, because the withdrawal liability rules do not provide a specific set of assumptions that must be used, the "best estimate" rule requires trustees and actuaries to give serious thought to their decisions related to what interest rates to apply when computing withdrawal liability.  And it also gives withdrawing employers an additional piece to review when considering whether to challenge a withdrawal liability allocation. 

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For employers that withdraw from a multiemployer pension plan, it is now very common that they encounter withdrawal liability.  Challenging withdrawal liability requires undertaking a very specific procedural process and it is generally weighted in favor of the plan.  One of the primary problems with challenging a withdrawal liability determination is that the assumptions used by the fund (or more specifically, the fund actuary) need only be reasonable.  What is "reasonable" can be a tricky question.  But at least one Court has determined that "reasonable" should at least mean "consistent." 

Earlier this month, the Seventh Circuit Court of Appeals looked at the case of Chicago Truck Drivers Helpers and Warehouse Workers Union (Independent) Pension Fund v. CPC Logistics Inc.  The Appeals Court affirmed the District Court's affirmation of an arbitrator's decision that the fund had over-allocated withdrawal liability to CPC as a withdrawing employer.

 When CPC withdrew from the Fund, it was allocated withdrawal liability and challenged that allocation.  The matter went to arbitration and the arbitrator was asked to consider the assumptions used by the Fund when allocating liability.  As it turned out the actuary used two different sets of assumptions, one for calculating withdrawal liability, and the other for determining the annual minimum funding obligation of the the plan.  While the formulas may be different, both formulas use an interest rate assumption and, in this case, the actuary used two different interest rate assumptions.  The rate assumption used to calculate withdrawal liability resulted in a higher allocation that it would have if the lower funding assumption rate was used.  The Court said that because ERISA requires that the computation of withdrawal liability be based on the actuary’s best estimate and reasonable assumptions, using two rates for two different calculations seemed "unreasonable."

This not to suggest that all withdrawal liability calculations should immediately be challenged or that it would always be unreasonable to use two different interest rate assumptions.  But as withdrawal liability becomes a more common problem in the multiemployer world, it is important for both plan trustees and participating employers to be aware of this "reasonable" requirement.  Defending a claim for withdrawal liability is often as complex as calculating with withdrawal liability in the first place, but, based on this decision, it appears that the consistency in interest rates the plan uses in its formulas is something that should be considered.

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A retirement plan participant can designate a beneficiary other than a spouse, but a waiver is required.  Many plans have specific provisions that provide for the order in which distributions will be made in the event a specific beneficiary is not designated.  For plan administrators, the rules about beneficiary designations require strict adherence to the plan documents, which can mean that those who think they have a right to benefits may not in fact have those rights and that leads to litigation.

Such was the case in Herring v. Campbell, a recent case decided by the Fifth Circuit Court of Appeals.  In this case, a plan participant designated his wife as his primary beneficiary with no secondary beneficiary.  His wife died before he did, but he made no other beneficiary designation.  When he died, the plan distributed his account balance in accordance with the plan rules, to his surviving siblings.  Of course, he happened to have step-children, who sued the plan administrator for not giving them the money.  The plan rules provided that in the absence of a beneficiary designation, surviving children get a the distribution before the deceased participant's siblings.

The Court upheld the plan administrator's interpretation of the definition of "children" to mean biological or legally adopted children.  Step-children did not meet this definition so they were not entitled to the benefits.  The step-children argued that they had been "equitably adopted" but the Court found that this concept applies only to those seeking to require a parent to recognize a child, not a benefit plan making distributions.  So in the end, the Court decided that the plan had properly distributed the benefits to the siblings and excluded the step-children.

So when considering the distribution of benefits from a participant's account, the participant certainly can designate step-children as beneficiaries by an affirmative designation.  And step-children can become "children" through adoption, which would give them "child" status when considering plan distribution rules.  But, as we see in this case, unless a "child" clearly satisfies the plan's definition of beneficiary (that is if they are in fact children under the definition of the plan), they will not be entitled to a distribution as a beneficiary.

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Over the last few days, I have had various meetings with a number of very good benefit professionals to discuss the state of the union (at least as it relates to employee benefit packages).  Whether they were health or retirement plan service providers, or even legal counsel, we all seemed to agree that we may have reached the tipping point where rules and regulations have finally overwhelmed plan sponsors.  It is now almost impossible for an employer to keep track of all the changes and necessary forms, notices and revisions required for complete plan administration on an entirely "in-house" basis.  On the other hand, when the economy is tight, employers are loath to spend the money.

The simple truth is that it is no longer "reasonable" for plan sponsors to avoid having specialists assisting them in dealing with their benefit plans.  Under ERISA Section 404, a plan fiduciary has an obligation to act with the "care, skill, prudence and diligence" that a reasonably prudent person would act in similar circumstances.  But that standard is the base line, not the top limit.  The proliferation of specialists in the benefits marketplace almost mandates that the definition of "reasonable" under ERISA expands to include the use of these specialists.  Thus, we should anticipate that real prudence is doing more than just the minimum, and real diligence means doing more than just enough to get by.  The increasing specialization of service providers requires that fiduciaries diligently seek out experts who add value and they have to retain those specialists to provide services to the plan, and ultimately to maximize the effectiveness of the plan for the benefit of the plan beneficiaries. 

Consider the new fee disclosure rules.  Now fiduciaries have to review, understand, digest and report how fees are charged and have to show efforts to minimize those costs to plan participants.  PPACA requires us to compare, contrast and explain our plans and rationalize our actions to participants.  Employers who fail to engage professionals to assist because of concerns over cost are begging for more expensive future problems.  The cost of non-compliance will always be much higher than what compliance would have cost in the first place.  When I am going through and audit with a regulatory agency, it is hard to justify problems with a plan by explaining how the employer did not want to pay for expert guidance in the first place.

Also, there is the benefit of having assistance in long-range planning.  Reactionary decisions in this area are always more costly than a well-thought out approach.  You would not start a business on a whim with no plan.  You should not approach your benefits packages any differently.  Sure, professionals, like benefits attorneys or consultants, cost money.  But there is return on that investment in the form of more efficient, more effective and more compliant benefits packages.  Plus, having these retained professionals provides a security that, as a fiduciary, you are acting with diligence, care and prudence by not going it alone.  In the end, that is what benefit professionals are there for....to provide assistance with compliance and adherence to the regulations.  Earnest fiduciaries seek out good professionals and engage them to help with plan administration so that they are can truly be called "prudent."

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I recently spoke at a seminar where the question was raised about a plan sponsor's obligations to act where they see a participant has made foolish investment choices in their self-directed accounts.  Is there a fiduciary obligation to tell a participant that they have made an unwise investment choice?

Well, those short answer is no, there is not.  That is the nature of defined contribution plans.  There is a fiduciary obligation to provide appropriate diversity and sufficient options for investment.  And there is a responsibility to provide some type of educational component to participants.  But a plan sponsor should not substitute their own opinions with respect to appropriate retirement investing for the choices made by participants.  Fiduciaries have to operate on the assumption that participants have made an election based on their own goals and objectives.  The best that a fiduciary can do is limit the investment options in a plan to those strategies that meet the acceptable diversification criteria outlined in ERISA.

That said, there are times when a fiduciary can make an investment election for a participant and, if done properly, the fiduciary is protected from claims of breach of fiduciary duty.  Such was the case in Bidwell v. Univ. Medical Ctr., a recent decision from the 6th Circuit Court of Appeals.  In this case, the plan administrator elected to change the default investment from a stable value fund to a target date fund.  Participants in the stable value fund were notified that unless instructed otherwise, the plan administrator would move their account balances to the target date fund.  Two participants claimed they did not receive notice and brought suit for losses they sustained because of the transfer.

The Court upheld the district court's determination that a breach of fiduciary duty had not occurred because the safe harbor for qualified default elections protects the plan administrator if a participant fails to make an affirmative investment election.  Not just the initial election, but subsequent elections like this.  If notice is provided, a failure by the participant to affirmatively elect means the plan administrator can apply the appropriate default election, even to funds already invested.

So participants can pick whatever options are available, and plan administrators have to make appropriate options available.  At the same time, plan administrators are protected if they have qualified default investment options in place to cover those participants that don't make appropriate elections.  Choosing the default investment option, providing appropriate notice and properly diversifying options are all things a plan administrator must do to protect participants.  But you also have to let them make their own choices, ideally with some educational assistance.  And don't be afraid to ask your plan professionals for assistance in making sure your plan has the right pieces.

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I happened across an article today from ABC News recommending to participants ways to improve their 401(k) account performance.  As I read it, I was struck by how many of the ways suggested relate directly to the fiduciary obligations that plan administrators must satisfy.  So let's consider their suggestions:

1. Review Your Quarterly Statements.  This reminds us of our obligation to communicate to participants, but it also reminds us of our obligation to review fees and expenses paid by the plan to make sure they are reasonable.  With the 404(a)(5) disclosures due by August 30, this means that participants will have a chance to give a closer look at these charges.  So good fiduciaries should do the same.

2. Check Morningstar Ratings for Fund Performance.  This should serve as a reminder that fiduciaries have to not only diversify the investments in the plan, but also to make sure the investment options are appropriate.  Fiduciaries have to review the risk and reward variations of investment options and have to make sure the investment options are offered in accordance with the investment policy statement for the plan.  Fiduciaries also have to monitor performance of these options to see if alternative investment options should be offered.

3. Review Plan Documents.  Fiduciaries should certainly review plan documents on a regular basis and have to make them available to participants.  More importantly, fiduciaries have to make sure the plan is administered in accordance with those documents, so it is essential that we know what is in them, what they require and that we have processes in place to make sure the plan is consistently administered.  Plus they have to be amended as needed to comply with new regulations.

4. Volunteer to Serve on the Plan's Governance Committee.  Not all plans have adopted an administrative committee.  But it is not a bad idea to have more than one person involved in the plan administration process as a means of better evaluating the plan.  An "investment committee" is an easy way for fiduciaries to establish a set process for reviewing and evaluating plan performance, fees and charges and investment options.  Including a plan participants on that committee (beyond merely managers) might be a good opportunity to learn more about the goals of the plan's end users.

5. Get Educated.  Fiduciaries have an obligation to provide educational opportunities to plan participants.  Fiduciaries do not tell participants where to invest, but the help them learn how to maximize their returns in conjunction with their own risk tolerances.  Consider going beyond the on-line tools many service providers offer and actual conduct in-person educational sessions.  The more participants understand investing, the more effective the plan will be.

Fiduciaries are charged with administering plans for the sole benefit of participants and to act to maximize the benefit to them.  Looking at what participants can do to make their plans better should serve as a reminder to fiduciaries of what they have to do to make that possible.  If you use your plan professionals to make sure you meet these 5 objectives you will go a long way toward maximizing the effectiveness of your plan and minimizing your risk of fiduciary breaches.

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Although it is not yet in effect, or fully defined, Section 2716 of the Public Health Service Act was revised under PPACA to provide that the anti-discrimination provisions of IRS Code Section 105(h) would apply to insured health plans.  While we are waiting for these regulations to be written, I thought it would be beneficial to review how the discrimination testing provisions in the Code generally apply.

Section 105(h) prevents a self-insured health plan from "discriminating" in favor of highly compensated employees, either with respect to eligibility or benefits provided.  Since it only applies to self-insured plans, employers sponsoring insured health plan are generally not concerned with limiting eligibility to obtain that coverage.  While the new rules for insured plans have yet to be written, 105(h) as it sits presently generally provides that unless the plan benefits 70% or more of all employees (or 80% of the 70% who are eligible), it would be discriminatory.  There are certainly other factors to keep the plan qualified, but for the purposes of this review, I am focusing on this eligibility and "benefit" issue.  Section 125, that creates cafeteria plans, contains a provision that provides that 105(h) applies to them as well.

This is slightly different from the discrimination provisions for retirement plan.  Under Section 401(a)(4), a qualified retirement plan cannot discriminate in favor of highly compensated employees.  Then, in Section 410(b), there is a requirement that the plan benefit a percentage of employees who are not highly compensated which is at least 70% of the highly compensated employees benefiting under the plan.  Instead of looking at "all employees," retirement plan testing looks at ratios of highly compensated to non-highly compensated employees.  Similar concerns, but not exactly the same.

I am not intending this to be a definitive analysis of discrimination testing, but rather I think it is important for employers to know that there are more than one set of rules for discrimination testing for employee benefit plans.  Employers who have insured health plans, but also offer retirement plans, may be familiar with 401(k) plan testing and might incorrectly assume that 105(h) testing (when implemented) would be the same.  But it is not exactly the same.  So, assuming the rules for non-discrimination for insured health plans follow 105(h) as it is presently written, it is important be be aware the distinction exists.  Just because your retirement plan passes testing does not mean that your insured health plan will be non-discriminatory simply because it has the same eligibility rules and comparable participation.

When the new rules for 105(h) compliance finally come out, we can do a deeper analysis.  But for now, remember: same, but different.  And don't hesitate to ask you lawyers at Fox Rothschild for help if you have questions about discrimination testing in any of your benefit plans.

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While waiting for the Supreme Court to decide about PPACA, don't forget about the retirement plan fee disclosure requirements due August 30, 2012.  Retirement plan sponsors have to be prepared to make appropriate disclosures to plan participants.  So let's review the requirements and prepare an action plan.  

408(b)(2) requires certain service providers to report to retirement plans their fees and expenses.  Plan sponsors should receive those disclosures from their service providers by July 1.   But the next step is what is critical.   All participant-directed ERISA plans (like 401(K) plans) need to provide the 404(a)(5) disclosure to people with accounts.  This is the responsibility of the plan administrator, or the person designated by the plan administrator.  The disclosure has to include the following information:

• Plan-related information, like an explanations of investment instructions and options, transfers, beneficiary designations, names of service providers.
• Administrative expenses, explaining general fees and expenses that may be charged against individual accounts and how they are allocated.
• Individual expenses that were charged to the participants account for the reporting period, including how the charge impacted actual returns and performance over time
• An Internet website address that is sufficiently specific to provide participants and beneficiaries access to information
• Glossary of terms to assist participants in understanding the designated investment alternatives or an Internet website address to such a glossary

I have been told by some professionals that they expect the average 404(a)(5) notice to participants to be anywhere from 6 to 8 pages long.

Plan sponsors should not assume that their 401(k) service provider will automatically handle the 404(a)(5) notice distribution.  Plan administrators should consider using the following as a minimum checklist for compliance:

1. Make sure you have a list of all service providers for your plan, and whether they are required to make disclosures
2. Make sure you have 408(b)(2) disclosures from all service providers required to report to the plan
3. Make sure you know who will be preparing and sending the 404(a)(5) notice
4. Make sure you have a system to review and approve the content of the notices before they are sent
5. Make sure you have someone familiar with the requirements to verify the content of the notices
6. Make sure you have set up the required contact point who will handle questions from participants

It is not enough to just send the 408(b)(2) disclosure to participants and assume it satisfies the 404(a)(5) notice requirements.  They are two different things and while they might have some of the same information, each participant has to get a statement tailored specifically to them.  Don't be afraid to ask for help from your service providers and if you are confused, ask questions.  This is going to be a major required undertaking and all plan sponsors (even for small plans) should focus on getting it right.

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Some time back I wrote about the Supreme Court's decision in Cigna v. Amara and pointed out that terms in a summary plan description (SPD) have to match terms in the plan document.  The issue in Amara was that the benefit calculation set out in the SPD was not included in the plan document and so there was considerable discussion about whether it constituted a "plan term."  The Court seemed to pretty clearly conclude that since the SPD was only a summary, the plan document was where we would have to look for the actual terms controlling the operation of the plan.

In March of this year, the 9th Circuit looked at a similar case, Skinner v. Northrop Grumman Retirement Plan B, and sort of agreed, but in another way.  In Skinner, the benefit calculation was described in the plan document but not the SPD.  The 9th Circuit found in favor of the plan when it determined that silence in the SPD did not mean it was not a plan term.  So it appears that if it is in the SPD but not the plan document, it is not really a plan term, and if it is in the plan but not the SPD, it is a plan term but not properly summarized. 

Justice Scalia, in his concurrence in Amara, clearly suggests that because Congress defined both an SPD and plan document in ERISA, it is expected that both will exist.  But an SPD is nothing more than a summary of the terms of the plan, and provided that summary is written in plan language and includes the right statements, it satisfies the SPD requirements.  There is nothing that specifically precludes the plan document and the SPD from being the same document as long as the one document meets the requirement for both.  Section 104(b)(4) of ERISA requires a plan administrator to furnish an SPD and any "trust agreement, contract or other instruments under which the plan is established or operated."  It does not say they have to be separate.  So your plan document and SPD could be one in the same or separate.

Depending on your plan, and whether it is subject to separate trust regulations, you might want to consider incorporating both documents, or you might be better served having two.  But if you have two, make sure the terms in rights and remedies set out in the SPD are included in the plan document.  If it is only in the SPD, then it is not a plan term.  If it is in the plan document, it should be in the SPD but it is still a plan term.  If the SPD and plan document are rolled into one, then make sure you spell that out clearly and then they should all be considered as plan terms.

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I can't find my spouse!  Believe it or not, benefit plan administrators hear that statement on a regular basis.  Plans with qualified joint and survivor annuity options ("QJSAs") can be faced with a dilemma when a participant is seeking a distribution in a form other than as a QJSA without spousal consent and the participant also asserts they cannot get that consent because their spouse has "disappeared."  If the spouse refuses to consent, then there is no distribution.  But what if they really have no idea where their spouse is?

From an administrators perspective, how they disappeared is not as important as confirming that they have actually disappeared.  Or, to put it more correctly, that the spouse cannot be located to give or deny consent.  It is one thing when a participant can't find their spouse, but a plan cannot simply accept that the spouse is gone.  Such was the case in Lester v. Reagan Equipment, where the participant gave the plan administrator an affidavit listing all the ways he tried to find his missing spouse.  The plan accepted the affidavit and distributed the plan account balance without tying it up in a QJSA.  Sure enough, the "missing" spouse popped up demanding her benefit after the participant died.  The court found that relying on the affidavit was not enough.  The administrator had to "take reasonable steps on its own to verify that the spouse could not be located."

So what are reasonable steps?  Section 205(c) or ERISA and Code Section 417(a)(2)(B) provide that a plan can make a distribution without a QJSA if it is established to the satisfaction of a plan representative that the consent required may not be obtained because there is no spouse or because the spouse cannot be located.  But what constitutes proof?  There are locator services through the IRS Letter Forwarding program and Social Security that a plan administrator should use as proof they tried.  An certifications from participants certainly help.  But the Code and ERISA are delightfully silent on other options.

Well, consider what the federal government does.  Under 5 CFR 846.202, the Federal Employees Retirement System provides that the Office of Personnel Management may waive the requirement of spousal consent upon a showing that the former spouse's whereabouts cannot be determined.  A request for waiver on this basis must be accompanied by—

1. A judicial or administrative determination that the former spouse's whereabouts cannot be determined; or
2. Affidavits by the employee or Member and two other persons, at least one of whom is not related to the employee or Member, attesting to the inability to locate the former spouse and stating the efforts made to locate the spouse; and Documentary corroboration such as newspaper reports about the former spouse's disappearance.

It also provides that OPM may waive the requirement of consent  based on "exceptional circumstances" if the employee or Member presents a judicial determination regarding the former spouse that would warrant waiver of the consent requirement based on exceptional circumstances.

Unfortunately most plan administrators are not prepared to deal with a missing spouse and did not draft rules or procedures to address this issue.  Maybe it will never happen to your plan.  But consider the possibility that it might and be prepared in advance if it does.  By providing a framework in the SPD on which a decision will be made, you put participants on notice of how they will need to comply.  It is not enough to just take their word for it. 

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Employment agreements and offer letters that make reference to employee benefits can create a whole host of potential problems.  Not the least of which is an argument over whether a subsequent claim for "breach of contract" is preempted by ERISA if the employee does not get the benefits they think they were promised in their contract.  Whether or not a claim for breach of contract is preempted by ERISA depends on what the contract actually promises.

First, consider the decision in Arditi v. Lighthouse International, recently decided by the 2nd Circuit.  Applying the standard articulated by the Supreme Court in Aetna Health Inc. v. Davila (ERISA preempts a cause of action where (1) an individual could have brought his claim under ERISA §502(a)(1)(B), and (2) no other independent legal duty is implicated by the defendant's actions), the Court reasoned that a mere promise to participate in the plan and receive benefits in accordance with the plan terms warranted preemption.  The former employee claimed his contract guaranteed him a certain benefit but the Court disagreed, finding that the employment agreement only described the benefits and made it clear that benefits arose from, and were governed by, the terms of the plan.

Contrast that with Dakota, Minnesota & Eastern Railroad v. Schieffer, where the 8th Circuit found that a breach of contract claim was not preempted by ERISA.  In this case, the contract provided for a severance benefit separate from any welfare plan offered by the company.  Therefore, preemption did not apply because the damages (in this case severance) could be satisfied outside of any plan and directly from the employer.  In short, a contract referencing a specific benefit would not necessarily be preempted if that benefit is provided outside of a plan (or even could be).  For example, promising an employee "health benefits for life" in an employment agreement might create a breach of contract claim that would not be preempted by ERISA even if it was intended to provide those health benefits through the company plan.

Employers have to be careful about what their employment contracts and offer letters say.  To avoid breach of contract claims, offer of benefits should be limited to participation in plans in accordance with the terms of the plan and not separate from the plans themselves.  Don't summarize the benefits provided by the plans, just reference participation in the plans.  Be careful not to promise something that can be construed as anything other than what the plan gives (and in accordance with plan terms).  Otherwise, you might find that ERISA preemption does not apply and your company, not your plan, is under the gun.

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Owners of companies should avoid signing collective bargaining agreements themselves.  Maybe that is too broad of a statement, but I present it because over the last couple of years, a series of cases have been decided that put personal liability on the owners of companies for withdrawal liability and delinquent contributions because they personally signed the agreement obligating the company to make contributions to a multiemployer fund.

The theory from the fund side goes something like this: unpaid contributions to ERISA funds constitute plan assets when they are due.  A person who exercises discretionary authority over plan assets is a fiduciary, so if your company is obligated to make contributions to a fund and the company does not do it, you have breached a fiduciary duty and are personally liable for the deficiency.  Lots of individual owners are now being sued for "breach of fiduciary duty" and, in many instances, have been found to be personally liable for the delinquent contributions.

What typically happens is that the fund trust agreement provides that contributions are assets of the plan when due.  Then the collective bargaining agreement contains a very innocuous provision that, in addition to creating a contribution obligation, incorporates all of the trust provisions into the contract.  So by signing the contract, you acknowledge and agree to be bound to the proposition that contributions are plan assets when due.  So if the company does not pay, you as the owner are personally liable because it is assumed you exercised the authority by deciding not to pay. 

The counter to this position is that ERISA fiduciary status does not attach to someone unless they know they are a fiduciary and surprising liability on owners and corporate officers is not favored.  If the owner of the company does not sign the bargaining agreement, he or she is not agreeing to be bound by the terms of the trust and fiduciary status does not personally attach to them.  In short, if you personally do not sign the agreement that requires contributions, you are not personally bound by the trust provisions.  Now, having said this, it is still possible to have some claim for fiduciary obligation associated with a decision to not make contributions.  But it certainly helps in defending a claim for personal liability if you have not signed the document creating the contribution obligation.

If you are the owner of a company and don't have the luxury of having someone else sign, perhaps a good fall back position is to actually get a copy of the trust agreement for the funds and read it as well as the bargaining agreement to see if a "springing" fiduciary status is being created.  But don't just sign and assume.  Read and understand because personal liability for delinquent contributions, and even withdrawal liability, is something you definitely want to avoid. 

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Employers who contribute to multiemployer pension funds are more and more concerned with unfunded liability and potential withdrawal liability.  That exposure can be substantial and it is important to prepare to deal with it before taking any actions that trigger liability.  But within the concept of withdrawal liability generally, there is a special consideration for employers in the building and construction industry generally that merits a closer.  It provides an exception to withdrawal liability in certain circumstances involving the building and construction industry.

ERISA generally provides that an employer who ceases to have a contribution obligation to a plan has a withdrawal.  Then it has a special section that provides that in the case of (1) an employer that has an obligation to contribute under a plan for work performed in the building and construction industry, a complete withdrawal occurs when (2) substantially all the employees with respect to whom the employer has an obligation to contribute under the plan perform work in the building and construction industry, UNLESS (3) the plan primarily covers employees in the building and construction industry, or is amended to provide that this subsection applies to employers described in this paragraph, and then ONLY IF (4) the employer continues to perform work in the jurisdiction of the collective bargaining agreement of the type for which contributions were previously required, or resumes such work within 5 years after the date on which the obligation to contribute under the plan ceases, and does not renew the obligation at the time of the resumption.

Each step is important.  (1) are you an employer in the building and construction industry?  The term "building and construction industry" is not defined in MPPAA but it is under 8(f) of the Taft-Hartley Act, 29 U.S.C. Sec. 158(f), which contains the same term.  Section 8(f) is applicable to employers "engaged primarily in the building and construction industry, defined as "subsuming the provision of labor whereby materials and constituent parts may be combined on the building site to form, make or build a structure."  It takes a case by case review of your business, but you don't get the exception unless you are in the building and construction industry.

Step (2), substantially all of your employees have to perform work in the building and construction industry.  Not all of them, but substantially all.  So you have to determine how many using the same criteria to determine if the company itself is in the industry.  Step (3) requires you to contribute to a plan that primarily covers employees in the industry, or has specifically been amended to state the exception applies.  So you have to review the plan and know who it covers and what it says before knowing if you get the exception.  Finally, step (4).  If you don't continue to perform covered work in the jurisdiction and don't resume performing covered work for at least 5 years, then there is no withdrawal.

So why bring it up?  Because this 4 step analysis is something that should be done BEFORE a withdrawal occurs.  Don't withdraw and assume you are exempt under this exception.  Research each step carefully to make sure the exception really applies or the results could be disastrous.  And of curse, make sure to consult with your attorney at Fox Rothschild for assistance.

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As I have discussed here before, the new fee disclosure regulations are going to obligate plan sponsors to provide information to participants about what it costs to maintain the plan.  This is certainly going to require sponsors to be more active in their review of fees and more active in their pursuant of controlling those fees.  But because participants are now going to have access to information about fees, we are also likely to see more inquiries about investment choices and options available because some investment options simply cost more to choose.  So that challenges sponsors to review plan investment options.

We know from prior cases the importance of not only having an investment policy statement, but in following the terms of that statement.  There are also numerous cases that remind us the importance of providing a diverse pool of investment options (although not an unlimited pool).  The plan sponsor is charged with making investment options available in a manner consistent with their investment policy statements.  So simply making more options available to participants is not enough if it runs afoul of the policy statement.  Likewise, not following the dictates of your policy statement when making investment options available creates its own set of problems. 

Then, consider default investment elections and whether your plan provides for them and are they memorialized in your policy statement.  Your default election should be a reasonable one (meaning not too risky or too conservative).  Plus, your default investment option has to be reviewed to see if the fees and costs associated with that option are reasonable.  So you have to watch performance as well as fees to make sure you have a reasonable selection.

To recap, plan sponsors have to look at investment options to see if they are reasonable and if you have enough options, whether they fit within your investment policy statement and whether the fees and expenses are reasonable for those options.  And you have to do it with regularity because now you have an annual reporting requirement to participants.  A new age of review is upon us ad it pays to be diligent to avoid future litigation.  But you can always ask for assistance from your attorneys at Fox Rothschild. 

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In prior entries, I have talked about the new fee disclosure rules and also how they would impact plan sponsors.  Coupled with these disclosures is the underlying issue of whether a plan sponsor breaches a fiduciary duty by failing to monitor fees and actively pursue the opportunity to reduce fees to plan participants.  Well, now we have a court decision that pretty well clears that up.

In Tussey v. ABB, Inc., which recently came out of the Western District of Missouri, the Court found that a plan sponsor breached its fiduciary duty to plan participants because it failed to monitor record keeping fees and revenue-sharing payments and paid record keeping fees in excess of the market cost to subsidize other record keeping services.  Factually, ABB sponsored two 401(k) plans that offered Fidelity Investments mutual funds as investment options.  Fidelity was also the investment adviser and the record keeper.  Fidelity then used some of those fees to offset losses it was taking on other services provided to ABB.  There were other issues related to investment options as well, but the key consideration here was the excessive fee issue.

While revenue sharing can be used to pay for plan record keeping services, the Court felt that by not actually calculating the amount that was generated by revenue sharing for Fidelity, ABB could not properly analyze how revenue sharing would benefit the plans and could not use the relative size of the plan as leverage to offset or reduce record keeping costs.  So by failing to make a "meaningful effort" to monitor revenue sharing payments and insure that revenue sharing payments were actually being used to reduce record keeping costs, ABB breached it's duty to defray expenses.  Plus, using the revenue sharing arrangement to offset other costs was completely inappropriate because it resulted in the plans paying above market rate for the record keeping services generally.  All told, the liability was more than $13 million, which is a pretty hefty penalty.

Certainly the facts of this case suggest there was something fishy about the arrangement.  However, it was not a development that occurred overnight and you can imagine how, over time, minor decisions related to costs and fees can compound into major problems for plan sponsors.  Plan sponsors should make themselves keenly aware of what fees and expenses can and cannot be charged to the plan and also make inquiries about the reasonableness of fees.  This case also serves as a reminder that regular review of fees (monitoring) is an important component of satisfying that fiduciary obligation and your plan should be reviewed on a regular basis to see if (1) you are being charged the correct amounts under your agreements, (2) those amounts are reasonable and (3) there are ways to reduces those fees.  Otherwise, you might end up paying back the plan.

For assistance in evaluating your plan, contact your attorney at Fox Rothschild.

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Last week I read two interesting articles about 401(k) plan participant loans.  One article suggested that in a struggling economy, plan participants were better off borrowing from themselves through a plan loan.  Another article reported that 80% of terminated employees who had outstanding loans from their previous employer's 401(k) plan defaulted on those loans.  It also reported that nearly 20% of 401(k) plan participants maintained an outstanding loan.  For plan sponsors, this can create a real problem because dealing with plan loans is not always as simple as it sounds.

IRC Code §72 generally sets out restrictions on plan loans but it does not restrict the number of loans a plan participant can take.  §72(p)(2) provides that a loan to a plan participant will not be treated as a distribution to the participant as long as the loan is limited in accordance with the terms of the Code.  If a loan does not satisfy the Code’s requirements, then the loan is deemed to be a taxable distribution to the participant.  This can happen if the participant does not make the payments required under the terms of the loan.  Because the plan sponsor (usually the employer) has and obligation to properly report and treat loans as taxable or non-taxable based on these rules, administering outstanding loans can be a problem hidden away waiting to jump out at you if you are ever audited.

The IRS has a couple of useful "Fix-it" statements relating to 401(k) loans.  One discusses how to treat defaults in payment.  The second addresses non-conforming loans.  Both look at how to fix the problems, which means they are problems that have to be fixed by the sponsor.  They also suggest some possible ways to avoid mistakes in loan administration, like permitting cure periods for missed payments, requiring transmittal of loan information to payroll before loans are permitted, reviewing plan documents regarding loan requirements and actually creating a written loan policies that should be followed every time a loan is requested.

On top of that, consider a couple other suggestions.  Maybe your plan should only permit one loan at a time or there should be a limit on the size and scope of the loans.  You should also consider your procedures for monitoring and collecting loans from participants after they have terminated employment and establish a procedure for keeping track of whether those loans have been satisfied.  Since non-conforming loans are clearly a component of the IRS's audit package for 401(k) plans, it pays to know more about loans, better manage them and accurately report them before you face an audit.  So don't simply assume plan loans are being handled properly.  Look into them now and fix your mistakes.  If you need assistance, your attorney at Fox Rothschild can help you sort it out..

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Late last year I reviewed the case of Milgram v. Orthopedic Associates which dealt with a plan having to essentially pay twice because it gave too much money to an ex-spouse in a QDRO distribution.  Now consider the other side of the coin, where a plan makes a distribution to a participant without protecting the rights of the spouse.  They are beneficiaries just like participants and it is important to make sure you know they are out there so you can address their claims.

For most defined benefit pension plans, these plans generally have to provide a Qualified Joint and Survivor Annuity (QJSA), or a Qualified Preretirement Survivor Annuity (QPSA) if the participants dies before retirement payments are made.  Generally, if a married participant in a retirement plan with survivor annuity benefits wants to receive a distribution in a different form, the spouse must provide written consent and the consent must be witnessed by a plan representative or notary public.  As a general rule, most profit sharing and 401(k) plans are safe harbored from the QJSA rules but they still require spousal consent to designate a beneficiary other than a spouse.

So what happens if someone gets married AFTER they have already enrolled in your plan and forgets to tell you?  Depending on the terms of the plan, their status as a "spouse" may create claims by a beneficiary even if you are not aware of it.  Call it Milgram in reverse...the spouse makes a claim after the distribution is made to secondary beneficiaries or the participant.  How can you protect your plan against "springing" spouses who appear without your knowledge?  Or maybe people who are not spouses that you don't find out about the divorce until after the participant dies and forgot to remove the ex-spouse from the designation form?  Lots of potential pitfalls relating to spouses as beneficiaries.

While I don't have an absolute answer to dealing with these issues, consider the open-enrollment period for your health plan as an opportunity to take stock of your retirement plan participants and their beneficiary designations.  If you are giving participants the opportunity to change their investment elections (and you should be), you should also remind them to update their beneficiary designations and their marital status.  Your duties as a fiduciary mean more than just assuming your participants will tell you about changes.  Sometimes you have to remind them to tell you. 

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Back in 2009, we looked at a Third Circuit case called Pittsburgh Mack Sales v. IUOE, Local No. 66 that found that it was not against public policy to require a union to reimburse an employer for withdrawal liability.  Well, the Sixth Circuit agrees.  In Shelter Distribution v. General Drivers, Warehousemen & Helpers Local Union No. 86, the Sixth Circuit Court of Appeals considered a situation where an employer was assessed withdrawal liability because of a termination of a collective bargaining agreement.

The collective bargaining agreement that expired contained the following provision: "The Union and the members of the Bargaining Unit have agreed that only the liability of the Company to the Pension Benefit Plan are, have been and shall be limited to the actual contributions it makes during the course of the past, present and future Contracts and the Company shall not be liable for any other obligation or contingent obligation of any kind or nature whatsoever.  The Union shall indemnify the Company for any contingent liability which may be imposed under MEPPAA."  Sure enough, it happened and the company went looking for indemnification from the union.

The union argued that it was against public policy because it shifts the liability Congress imposed on employers and would defeat the statute.  But the Court disagreed, noting that since ERISA allows fiduciaries to insure against risk, there must be a way to shift potential liability, including indemnification contracts.  So it was not a frustration of the statute and not against public policy.

So when undertaking future bargaining with your unions, consider adding this indemnification language that has now been twice confirmed.  Of course, it will be part of collective bargaining and it may cost you something, but it might be worth it in the long run.  If you need assistance in dealing with multiemployer plans, or in collective bargaining, please contact your attorney at Fox Rothschild.

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When making decisions about benefit plans, plan sponsors should at least take some time to consider what role they are playing.  I am working with a company that is terminating its health plan and the distinction between "settlor" functions and "fiduciary" functions became very significant.  So I thought I might share some thoughts on the topic.

Settlor functions are those typically related to plan design, such as establishment of a plan, determination of who the plan will cover and designing the benefit offerings.  The creation or termination (or even amendment) of a plan is a settlor function.  This is important because settlor functions are not subject to the same fiduciary status when making these decisions.  For instances, the decision to amend or terminate a plan is a settlor function that does not give rise to a claim for breach of fiduciary duty.  Similarly, the decision about what class of employees to make eligible for coverage would be a settlor function.  You might have qualification issues and have to comply with IRS regulations, but the decision about design is not necessarily a fiduciary one.

Fiduciary functions tend to be the "administrative" aspects of the plan.  Fiduciaries exercise control or management over plan assets and have discretionary authority over the plan operation.  So while the decision to terminate the plan may not be a fiduciary function, the way that you administer the termination would be.  Likewise, while a decision to offer coverage to a specific group of employees may not be a fiduciary function, denying eligibility to an employee who thinks they are eligible would be.  Fiduciary actions are governed by ERISA standards, while settlor activities are generally not.  I say "generally" because often times the decisions can be a mix of both settlor and fiduciary functions and it is important to know which hat you are wearing for each decision.

And it is the "mix" that is important.  When making decisions related to creating a plan, amending a plan or terminating a plan, it is important to separate those decisions made or actions taken in a settlor capacity from those decisions made or actions taken in a fiduciary capacity.  That way there is a clear delineation of what role you were playing at each point.  When you are acting as both a fiduciary and a settlor, your actions will be given very close scrutiny by a court if they are challenged, so give them that same close scrutiny before you make them.  It saves grief in the long run.

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Although I have commented on the new financial disclosure rules before, I thought it would be good to actually reference the code sections involved to give a little deeper explanation of the compliance rules.  Plus, as we get closer to the compliance deadline, you may see more reference to these sections so it is good to know that they are there.

408(b)(2) requires that most service providers to retirement plans have to provide written disclosure of their services, fiduciary status and total compensation to the plan sponsors on an annual basis.  The deadline for this disclosure to the plan sponsor is July 1, 2012.  They have to include a description of the services provided and a description of the fee arrangement.  The information can be delivered electronically and while there is no specific format required, the information provider must be in a format that is "sufficient to meet the guidelines."  Service providers are continuing to work out the details of what that means.  Plan sponsors are required to terminate any service provider who fails to information relating to future services.  So 408(b)(2) covers the service provider to plan reporting obligation.

404(a)(5) covers the plan to participant reporting requirement.  That information includes general information about the structure and operation of the plan, as well as investment options,  Plan sponsors must also provide an explanation of fees and expenses that are charge or deducted from participant accounts, including loans and other transactional fees.  This statement is due the later of 60 days after the July 1, 2012  disclosure to the plan sponsor, or 60 days after the the first day of the plan year beginning on or after November 1, 2011.  While the final rules have a sample chart to use for disclosures, no specific format is required.  

Since the first step is the 408(b)(2) exchange of information, plan sponsors should consider reaching out to their various services providers now to (1) make sure they will be sending the information and (2) ask for a sample or draft of what their disclosure information will look like to begin preparing from the individual reports under 404(a)(5).  Don't wait until the last minute.

For assistance or more information, please contact your attorney at Fox Rothschild.

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Plan fiduciaries are frequently faced with difficult decisions regarding plan administration and it is important for them to know not only what the plan says, but also what the potential penalties are for not following the plan.  And sometimes, strict adherence to "form over substance" can create a fiduciary breach.  Such was the case in Klepeis v. J&R Equipment, recently decided in the Southern District of New York.

Klepeis left employment in January of 2005 and was entitled to have his 401(k) account balance rolled over as of December 31, 2005.  Klepeis made a rollover request, but it was not on the correct form.  The plan administrator testified that to make a rollover, the form provided by the participant was not required, only authorization from the plan trustee (who happened to be the owner of the company).  The defendants argued a variety of defense, claiming the request was untimely and that the funds in the plan were frozen pending an IRS approval of the plan's termination. 

The Court found that though the SPD provided that upon termination, plan assets would be distributed as soon as practicable, that did not allow a fiduciary to withhold assets until the actual termination occurred, particularly where the participant had no notice of the termination.  Moreover, because the fiduciary was aware of the request and only need to authorize the distribution, it was a breach of fiduciary duty to delay the approval.  When the plan terminated, Klepeis' account was transferred to an IRA, but he lost almost $7,000 between the time he should have received his distribution and the actual rollover date.  The Court awarded this as damages, plus interest and attorneys fees. 

I think this case illustrates what I consider to be an ongoing warning to fiduciaries.  To satisfy their obligations as fiduciaries, they are charged with acting reasonably and in the best interests of the plan.  Strict adherence to the law is one thing but requiring strict adherence to form requirements or ignoring participant's reasonable requests can be a breach of duty.  So fiduciaries should comply with the law, seek to know the requirements of the law and the plan and administer the plan accordingly.  But being a draconian administrator can be as problematic as being too lax.  Satisfying your fiduciary obligations requires a balance of both.  Your plan professionals should be consulted to help you figure out what is "reasonable" to avoid these problems.

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Gearing up for the April 1, 2012 fee disclosure deadline?  Well, yesterday the Department of Labor released final regulations under Section 408(b)(2) of ERISA, requiring retirement plan service providers to disclose information about their services and fees to plan sponsors.  They then delayed the application of the rules until July 1, 2012 to give plan sponsors more time to comply.

Some changes were made to the interim rule with the release of this new final rule:

1. There is an increase in the information that must be disclosed relating to any indirect compensation received by a covered service provider to include a description of the arrangement made between the payer of the indirect compensation and the service provider.
2. They revised  the investment-related information that must be disclosed by providers of fiduciary services to an investment contract, product or entity that holds plan assets and in which the plan has a direct equity investment to provide consistency for parties that are also required to comply with the DOL's participant-level disclosure regulation under ERISA Section 404(a).
3. Providers of record-keeping or brokerage services required to provide investment-related information are now permitted to comply with the regulations by providing information from the investment issuer's current disclosure materials, provided the issuer is one of the regulated entities described in the regulations.
4. Adding an optional "summary guide" to assist fiduciaries with their review of required disclosures.
5. Changing the deadline for disclosures of changes to investment-related information so that providers may disclose all such changes on an annual basis instead of being required to separately disclose each change within 60 days of the date the provider knows of the change.
6. Revising the deadline for providing related reporting and disclosure information to responsible plan fiduciaries to coordinate with the date the plan intends to comply with ERISA's general reporting and disclosure requirements, rather than the prior requirement to provide this information upon request.
7. Clarifying that any errors or omissions made by the covered service provider in disclosures of changes to previously disclosed information can be corrected within 30 days of the date the provider knows of the errors or omissions.
8. Requiring any covered service provider that provides record-keeping services to include a detailed explanation of the record-keeping services provided to the plan and the cost of those services.

To assist with compliance, the DOL issued a new "Fact Sheet", as well as a copy of the new "Final Regulation" and a "Summary of the Changes."

 From a plan sponsor's perspective, these changes should not have a significant impact on the information that is disclosed to participants.  However, it may change how information is reported to the plan by service providers.  Because these changes are relatively fresh, we should see some further explanation to sponsors about what they are required to communicate and we will continue to pass that information along.

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When talking about mergers, acquisitions and maybe even liquidations, retirement plans can sometimes get lost in the shuffle.  Asset purchases that result in the liquidation of the seller company, or acquisitions of assets by buyers, can create problems over legacy retirement plans.  These "orphan" plans just don't disappear and they have to be dealt with properly.

An “orphan plan” is defined as a plan that no longer has a plan sponsor.  The sponsor may have disappeared because of bankruptcy or merger, but the primary factor leading to the "orphan" status is that the reported plan sponsor is no longer in existence.   The plan may have been abandoned or simply forgotten but it still has to be dealt with because the IRS and DOL don't let plans simply disappear.  You also have to be wary of the possibility that an "orphan" plan will lose its tax qualified status.  In order to be a qualified plan, the sponsor has to be an employer and if that is no longer the case, it would not longer maintain its tax favored status.  On top of that, there may be fiduciary concerns related to making appropriate distributions, reporting requirements and managing investments that cannot be left unattended.   

Fortunately there is a process under the IRS's Employee Plans Compliance Resolution System (EPCRS) to deal with orphan plans, so they can be saved.  But beware that correction of an orphaned plan can be more problematic than simply addressing the plan in the first place.  Perhaps the plan can be terminated?  Should it be "adopted" by the buyer?  Will the bankruptcy trustee deal with it?  I have dealt with several orphaned plans over the years and they can be messy undertakings, particularly when the buyer did not expect them and has the matter foisted upon them.  So consider this an introduction to the term and make sure to avoid making your plan an "orphan."

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Insurance coverage can be a confusing thing.  Coverage for employee benefit plan fiduciaries sometimes adds a wrinkle to the process that can be overlooked.  Depending on the type of claim asserted, there are a variety of "coverage" options that may apply.  I think the new fee disclosure rules are likely to increase claims for breach of fiduciary duty in the future, but even without that development, it makes sense to at least know whether you have coverage and what your options are.  So let's take a look at some of the options.

• The ERISA Bond.  Generally, plan's have to have an ERISA bond that applies to anyone who handles plan assets.  The presumption is that handling the assets equates to "discretionary authority" which is the hallmark of fiduciary status.  The bond can be very narrow (covering only fiduciaries and employees) or broad (extending to vendors and person who do not necessarily handle plan assets), but the bond will only provide protection for claims for "fraud and dishonesty."  It does not generally provide insurance coverage for other claims, particularly claims for breach of fiduciary duty not involving fraud or dishonesty.
• Fiduciary Liability Insurance.  Unlike a bond, Fiduciary Liability coverage pays for claims arising out of the administration of a benefit plan without requiring "fraud" or "dishonesty."  Often it is combined with Employee Benefits Liability Coverage.  This type of coverage is designed to insure fiduciaries acting specifically in their capacity as benefit plan fiduciaries which include claims for breach of duty or mistake in administration of the plan.  Some policies can even be expanded to include coverage for penalties and fines (for a price). 
• Directors and Officers Liability Insurance. D&O policies generally provider coverage for directors and officers of a company in the event they are sued in conjunction with the performance of their official duties as they relate to the company.  But many D&O policies exclude claims arising from administration of benefit plans.  Others require a specific rider that includes employee benefits coverage (likely for an additional premium).  Don't assume that because you have a D&O policy that it automatically provides coverage for claims arising from plan administration. 
• Errors and Omissions Insurance. E&O polices rarely provide coverage for ERISA claims (unless the company with the coverage happens to be in the business of providing service to ERISA plans).  Unless specifically included in an E&O policy, this coverage will not likely protect a fiduciary from a claim arising from administration of a benefit plan.
• Employment Practices Liability Insurance.  EPLI coverage is typically bundled with D&O coverage and generally insures against claims that allege misconduct by the officers of a company in an employment setting.  These claims are typically for things like harassment, discrimination and wrongful discharge.  EPLI coverage does not typically provide protection against claims arising from plan administration unless specifically included (usually with a rider and usually for an extra premium).

Why be concerned?  Frequently I find myself in a position of defending a fiduciary (or an officer or owner of a company alleged to be a fiduciary) who finds him or herself in a position of being "uninsured."  They assume that their general commercial liability policy or D&O policy covers them for ERISA claims, only to find out the carrier has denied coverage.  Depending on the nature of the claim, the size of the claim or the breach alleged, ERISA claims can be very expensive to defend and can result in some hefty damages. 

Of course, insurance is not free and balancing the cost of coverage versus the risk of exposure is a business decision that plan sponsors and fiduciaries have to evaluate on their own.  I certainly recommend that anyone in a fiduciary position have coverage, but it is not required.  However, I do think it is very important for you to check to see if you do or do not have coverage for employee benefit claims.  Look at your policies to see whether or not you have coverage.  If you don't have coverage, maybe you should look at the cost of adding it.  But better to know now whether or not you do than to be surprised later to find out you don't.  And ask if you are not sure.

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According to a Towers Watson survey, only 26% of retirement plan administrators regularly conduct operational and compliance reviews of their plans.  The survey interviewed 245 executives and found that while most are concerned about plan compliance, apparently very few are doing anything about it.  Oddly, 62% said they would conduct a review if their plan advisors identified potential risks and 49% say they would conduct a review if they received notice of an IRS audit.  But few do it on their own.  So consider this identification of "potential risks."

I happened to give a talk today about fiduciary duties and Section 404 of ERISA.  I stressed to the group the importance of knowing about your fiduciary status, and also the importance of satisfying your fiduciary obligations.  That necessarily includes making sure your plan is in compliance with all statutory and regulatory obligations.  Given the vast array of benefit plan litigation in the courts these days, and the focus on fees, disclosures and reporting, it seems only logical that a good starting point would be to review your policies and procedures concerning plan administration and make sure they comply with the actual terms of your plans.

One of the first question the IRS asks when conducting plan audits is "are your plan's operations based on the terms of the plan document?"  Do you know if it is?  You should.  It is the start of a new year and budgets have been renewed.  So now is the perfect time to resolve to audit your benefit plans for operational and compliance problems.  Here are some starting points to consider:

1. When was the last time you updated plan documents?
2. When was the last time you reviewed the definitions in your plan documents?
3. When was the last time you verified your definition of eligibility in your plans?
4. When was the last time you compared investment options in your retirement plan?

If the answer to any of these questions is "I don't have any idea," then resolve to make 2012 your year to conduct a review of your plans.  Collect review and repair as needed, and let your attorney at Fox Rothschild know if we can help.

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Although it is probably not high on the list of priorities for plan administrators, the end of a calendar year usually means means the start of the process of preparing 5500s.  They may not be due right away, but it is always good to know what information you will have to provide when you eventually file them.  The EBSA has made an informational copy of the 2011 5500 available, with instructions, on its website.

Make sure you take a look at the "Changes to Note" section in the instructions to see how 2011 differs from prior years.  Also, remember that you have 7 months from the end of the plan year to make a filing (unless you request an extension).  And finally, make sure you read very carefully to make sure you know whether or not you have to file for your specific plans. 

I also like this site because it gives samples of older forms and instructions just in case you may have forgotten to make a required filing and are looking to voluntarily correct that failure. If you have any questions about filing requirements for 2011 or any prior year, don't hesitate to reach out to your benefits professionals, including your attorney at Fox Rothschild.

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Picking plan investments can be a difficult task.  Chances are your investment strategy will not maximize returns to a plan because, statistically, in any given time frame, there was some investment option that outperformed your investment choices.  Of course this leads to problems for plan sponsors faced with claims of breach of fiduciary duty under ERISA 404, particularly in light of the obligation to sufficiently diversify plan assets and to try to maximize returns to participants.

Recently, the 4th Circuit decided Plasterer's Local Union No. 96 Pension Plan v. Pepper, which happens to be a case about a multiemployer plan, but it also has some significant implications for single employer retirement plans.  The new trustees sued to old trustees for breach of fiduciary duty claiming the old trustees failed to properly investigate alternative investment strategies.  The Court agreed but the issue of damages was key to the ultimate decision.  Some key points that I find relevant to plan sponsors (and trustees):

1. The expert used determined that from 2003 to 2005, the optimum investment strategy for the fund would have been 50% of the assets in an equity index and the other 50% in an aggregate bond index.  Hindsight being what it is, I wonder if most plans wish they had gone that route.
2. There must be a causal link between the breach of duty and the losses to the plan.  A breach does not automatically equate to liability and damages.  There has to be a connection where the breach caused the loss.
3. When assessing damages for a breach, the measure of damages would be those damages actually caused by the totality of the breach, not just a haphazard measurement window. 

Point three is key to defending plan investment decisions because plan participants usually want to pick out a finite window (in this case 2003-2005) and show how they would have made more money investing in something else.  But the Court said you can't pick a measurement period out of the air.  In this case, had they used 1999 to 2005 as a measuring period, there would have been almost not actual damage to the plan.  So there has to be some logical connection between the alleged breach and the time period measured for the damages.

I also think point two is significant because it reminds us that ERISA 404 is not an absolute penalty statute.  In many ways, it encourages fiduciary compliance by setting out a standard for fiduciaries to meet and, as long as they do so in good faith and to the best of their ability, they will not be liable unless there is actual damage associated with an actual breach.  The market ebbs and flows and plan assets can rise and fall.  Fiduciaries who satisfy their 404 duties can sleep somewhat more soundly knowing that just because there might have been an investment option with higher returns, they will not automatically have to make up the difference because they did not choose it.

Of course all of this assumes you are following the rules and satisfying your 404 duties.  So if you are a plan fiduciary that has concerns about what those duties are and how you to satisfy them (and how to document you satisfied them), this decision should also be a wake up call that there is personal liability and while measuring damages may be tricky, you can still be on the hook for them.  Make sure you have sound guidance from your professionals to rely on.

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Rumors continue to swirl that the DOL is increasing its audits of 401(k) plans.  In previous posts, I talked about the DOL audit program and the audit letters sent to plan sponsors.  However, a diligent plan sponsor would want to be prepared for an audit, even while hoping it never comes.  Plus, preparing for a possible audit provides the opportunity to self-police your 401(k) plan to see if there are any "action items" that need to be addressed. 

A DOL 401(k) audit can be triggered by an employee complaint or even information you have submitted in your retirement plan’s annual Form 5500 filing.  Of course, it can be totally random as well.  So what should you have available for inspection if the audit requests comes along?  Here is a list of the most common documentation requests from the DOL:

1. The Plan document and all plan amendments
2. Summary plan description
3. An Investment policy statement
4. A copy of the most recent IRS determination letter
5. Copies of Forms 5500
6. All plan notices. communications and meeting minutes
7. Investment analysis and reports
8. Discrimination testing results
9. Account statements for participants and beneficiaries and Contribution reports
10. Loan applications and repayment schedules

Opinions may vary about how much documentation to keep, but the general rule is that you should retain  at least 6 years worth of information.  I recommend keeping it for as long as you can and with the constant improvement of electronic storage mechanisms, I believe best practices can dictate scanning and retaining plan information for even longer periods.  Better to have the information somewhere than to try to explain its destruction later, particular plan documents, summary plan descriptions and regulatory filings.

One of the most common errors identified by the DOL is a failure by the sponsor to have actual signed documents.  Also, it is common for plans to have an incomplete record of amendments.  Investment policy statements are also a big red flag, so not having one can certainly have a negative impact on the audit process.  I have also discovered that plan's with lax loan documentation procedures and repayment schedules can have a more difficult time completing the audit process. 

So while we all hope we are not audited, the best practices are to be prepared that one might occur.  Look over your documentation and practices now and make sure you have everything in place just in case.  And if you have concerns about what you have (or don't have), contact your benefit professionals to get it cleaned up.

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I recently read an article that suggested that 49% of employees surveyed anticipated that portions of their benefit packages would be eliminated or reduced in 2012.  Kind of a bleak outlook, but if that is true, then it also suggests that a lot of employers are going to undertake to change their benefit plan structures over the next year.  And with change, comes potential problems because you might not be able to just cut benefits.  You have to know (and follow) the correct process.

Earlier, I mentioned ERISA Section 206(d) that acts as the "anti-cutback" rule for some benefit plans.  There are also a number of court cases that deal with "vesting" rights related to retirement plans as well as welfare plans.  And there are a number of regulations and cases related to disclosure and retaining the right to amend and terminate benefit plans.  In sum, it is not simply a matter of declaring a change.  You have to know the process specific to the plan of benefits you are looking to change, and also what parts of the required process might be missing from your plan. 

Amendment and termination can be very problematic, both from an implementation perspective, but also from a "results" standpoint.  Something as simple as a change in eligibility requirements can cause discrimination testing concerns or "partial termination" concerns, depending on the size and nature of the plan.  Of course, there could always be collective bargaining issues if you have a union in your company.  There could be administration issues related to notices, communications and elections for the new (or revised) plan design.  And there could be distribution concerns as well as administrative reporting and termination filing requirements that are triggered.

The point is that if you are contemplating a change to your benefit plans, it is important to know what your plan requires to make changes, how the rules and regulations control those changes and the impact the proposed changes will have going forward.  Each of these items should be fully vetted with your benefits professionals BEFORE making the change.  If you have questions about how to make changes, you can always contact your attorney at Fox Rothschild.

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Plan administrators have to be careful about making sure they pay the correct beneficiaries and pay the correct amount.  Even if the plan makes a good faith distribution to someone they think is entitled to the benefits, the plan may still be obligated to make the payment to the participant again, result in the plan paying twice.  Such was the case in Milgram v. Orthopedic Associates Defined Contribution Pension Plan, a recent 2nd Circuit decision. 

Factually what happened was that Milgram got divorced in 1996 and, under QDRO, his wife was to receive a distribution.  As a result of an administrative error, the plan overpaid the ex-wife about $770,000.  When Milgram went to withdraw his account balance from the plan later, the error was discovered.  The plan sued the ex-wife to recoup the overpayment, and Milgram sued the plan to recover his full distribution.  The plan's case against the ex-wife has not concluded or resulted in any settlement.  The plan's defense to Milgram's claim was that until the ex-wife pays the money back, they can't pay the money to Milgram.  The court saw it differently.

The court reasoned that a profit-sharing plan must pay plan assets it owes to Milgram in full regardless of whether the ex-spouse first repays the plan the excess amount.  The plan had argued that ERISA's anti-alienation provision precluded the plan from using plan assets to pay Milgram because they were technically assets of other participants.  In short, the money did not belong to the plan and taking it away from the plan would result in alienation of other participant's benefits. 

The court disagreed and held that  ERISA's anti-alienation provision that precludes the assignment of "benefits provided under the plan" did not apply because undistributed funds held in a defined contribution plan trust for participants do not constitute "benefits" within the meaning of ERISA Section 206(d)(1) (the "anti-alienation" provision).  In other words, Section 206(d)(1) does not prevent pension plan assets from being used to satisfy a judicial judgment against the plan itself.  Thus, Milgram was entitled to his full correct account balance from the plan even though the plan had not yet received the money back from the ex-wife.  The judgment was against the plan itself which has assets.

The problem is that the court did not address what claims the remaining participants might have against the plan for having to pay its assets out to Milgram.  Maybe they would have their own claims for breach of fiduciary duty against the plan administrator.  If the plan never gets the money back from the ex-wife, their accounts will certainly suffer a loss.  So it leaves plan administrators with this warning: double check your payments to make sure they are in the correct amount and going to the right place.  You cannot always rely on the assertion that the plan assets belong to other participants.     

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Is making employees contribute to the 401(k) plan a good idea?  I get this question any time is plan sponsor is considering automatic enrollment as an option.  The DOL and EBSA have a program for encouraging automatic enrollment plans for small businesses.  Some people would argue that automatic enrollment helps plans with discrimination testing because all eligible employees are in unless they opt out.  Others argue that automatic enrollment does not guarantee deferrals and real participation, plus it comes with the risks associated with default elections.

I recently read a study by Vanguard that found that, when automatic enrollment was used as a feature in defined contribution plans, participation rates for blacks rose from 57 percent to 94 percent after automatic enrollment, and 67 percent to 95 percent for Hispanics.  They concluded that automatic enrollment reduced racial disparities in plan participation.  Not exactly a necessary consideration for a plan sponsor, but as an employer, encouraging retirement savings by all employees (including minorities) seems to be a good thing.  

The Vanguard study also found that, after automatic enrollment, about 75 percent of blacks and Hispanics remained in the default fund after automatic enrollment, compared to 68 percent of whites and 60 percent of Asians.  Taking the race component out of the mix, consider that this means that when automatic enrollment is used, a significant portion of your participant population will probably stay in the default election chosen by the plan sponsor.  That certainly puts a premium on the plan sponsor to make a thoughtful choice when electing a default option (if they go the automatic enrollment route).  So adding automatic enrollment as a feature certainly suggests that a large portion of your participants are not going to "actively manage" their accounts.  You have to carefully consider your fees and expense load in your default option as you can bet they won't.

So to answer the question, maybe.  A decision to add automatic enrollment should be made based on a careful consideration of your population, current participation rates and the risks the plan sponsor is willing to undertake associated with choosing a default option.  Plan amendments and plan documentation changes can be easily made to allow for it, but the longer term implications of requiring automatic enrollment have to be considered.  I have recommended automatic enrollment, and also recommended against it, so I have to say neither one is absolutely better.  If you are considering to add, not add or take it away, make sure you walk through it with your plan professionals before making the choice.   

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Remember that pesky fee disclosure thing that won't go away?  Well, just in case you missed it, the DOL issued Technical Release 2011-03  that gives us an "interim" policy regarding the use of "electronic media" that can be used to satisfy the disclosure requirements.

Generally, the new Participant Fee Disclosure Rule requires employers to disclose more information about fees and costs allocated to participants in defined contribution retirement plans (like 401(k)s).  Under the final rule, plans generally have until at least May 31, 2012, to start providing this enhanced information on plan fees and expenses.  2011-03 is a limited technical release that allows for electronic disclosure and distribution of the information required under the final rule.  As with most policies, this could be changed after further review.  But if you are preparing to deliver fee information by electronic means, this technical release helps set the standard for your communications.

The interim policy provides a "safe harbor" for electronic disclosure.  It states that the DOL will not take enforcement action based "solely on a plan administrator’s use of electronic technologies to make the required fee disclosures if the administrator complies with the conditions in the technical release."   For example, plan administrators may furnish fee disclosure information electronically—including via e-mail or a through a website, with proper notice of online availability—if participants who receive this information meet the following requirements:

1. As to active participants, it applies if they have the ability to access documents furnished in electronic form from any location where the participant is reasonably expected to perform his or her duties as an employee and with respect to whom access to the employer’s electronic information system is an integral part of those duties (most likely a work terminal)
2. For participants who don't meet the requirements of option 1, like retirees, former employees or active employees who don't have regular computer access through their normal job functions, they can receive the information electronically if they "affirmatively consent" to receiving disclosures through electronic media in the manner prescribed by the regulation.  Note that the form of the affirmative consent remains undefined.

For defined benefit plans, the policy provides that fee disclosures included in a pension benefit statement may be furnished in the same manner that other information included in the same pension benefit statement is furnished.  So if the pension benefit statement information is furnished through a secure continuous access website, then fee disclosures included as part of the pension benefit statement can be furnished electronically in the same manner. Fee disclosures furnished outside of the pension benefit statement may be electronically disclosed to participants and beneficiaries who voluntarily provide an e-mail address for the purpose of receiving disclosures if the plan administrator:

1. Provides participants and beneficiaries with initial and annual notices that meet specified requirements
2. Takes appropriate measures to confirm that individuals are actually receiving the electronic transmissions
3. Takes appropriate measures to protect the confidentiality of personal information in the electronic delivery system
4. Meets other specified requirements (yet to be fully defined)

The point of this technical release, then, is really to give plan sponsors some guidance on how they can either implement or continue to use electronic notices to comply with the new fee disclosure rules.  What this means is that if you , as a plan sponsor, intend to distribute fee disclosures electronically, you have to design your disclosure process to satisfy these safe harbor rules.  I have long advised that if you intend to distribute plan notices and documents electronically, rules of this type should be followed, so the change should not be drastic.  The good news is that at least now we know we can use electronic medium as a means for relaying these disclosures to participants.

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In these tough economic times, employers have been cutting employees.  But in doing so, some employers as plan sponsors are forgetting to make sure terminated employees are provided with all appropriate notices and documentation to deal with their benefit plans.

Of course we have the COBRA notice obligations, and this may include COBRA notices and continuation rights under FSAs, dental or vision plans.  But what about retirement plans?  A recent case out of the Fifth Circuit serves as a reminder that failing to satisfy the obligation to provide information to participants can be very costly.

In Kujanek v. Houston Poly Bag, a terminated employee alleged that he was not provided with sufficient information about how to roll-over his 401(k) account balance.  He claimed a loss of almost $184,000 because of the delay.  First there was a debate about whether the employee had requested information from the plan.  Under ERISA 104(b), a plan administrator has to provide certain information to the participant upon request.  But it also appears that the plan forgot the requirements of IRC 402(f) that requires a plan administrator of an employer plan to provide a participant, who is about to receive an eligible rollover distribution from the plan, with a written explanation of the rollover and other tax treatment of the distribution.  There was no indication that the plan had provided this notice at the time of his eligibility for distribution.

While not at issue in this case, group life insurance policies can also have a notice obligation.  Many states require that group life insurance policies provide conversion rights when an employee terminates.  While ERISA generally preempts state law relating to benefit plans, insurance laws (like those governing life insurance policies) are saved from preemption.  There have been multiple cases involving the failure of an administrator of a life insurance plan to provide conversion notices.  Often times the insurance regulations leave that obligation entirely to the policyholder (meaning the employer in most instances).  So failing to give notice of that conversion option would be an ERISA breach and state law may make it the sole responsibility of the plan sponsors to provide the notice.

So when terminating employees, it is good practice to have a notice or form checklist related to all the benefit plans the employee previously participated in and make sure that on their way out the door, they have all the required notices.  If you have any questions about what notices are required for your plans, don't hesitate to contact your attorney at Fox Rothschild.

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If you are planning for your 2012 retirement plan contribution administration, the IRS recently released the 2012 Pension Plan limits.  Some key provisions:

1. The elective deferral (contribution) limit for employees who participate in 401(k), 403(b) and most 457 plans is increased from $16,500 to $17,000.
2. The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.
3. Effective January 1, 2012, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased to $200,000.
4. The limitation for defined contribution plans under Section 415(c)(1)(A) is increased to $50,000.
5. The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased to $250,000.
6. The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased to $165,000.
7. The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased to $115,000.

Most plan service providers will be ready for these changes, but plan sponsors should make themselves aware of these limits.  Also, since we are coming up on another plan year, now is a good time to look at your retirement plan documentation and make sure you have all of your required content, notices and statements.  Get with your benefits counsel and make sure your plans are all up to speed.

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Do you know how many disclosure requirements there are for benefit plans?  If you are a plan sponsor, you probably should and then how often they have to be made.  In an effort to compile everything in one list, I decided to just lay them all out as provided in the Reporting and Disclosure Guide for Employee Benefit Plans published by the DOL.  Admittedly, this is their 2008 so there needs to be some updating for PPACA, but let's hit the basics.  These are documents, disclosures or notices that the EBSA and the DOL anticipate are part of your benefit plan administration:

All plans (retirement or welfare plans):

1. Summary Plan description
2. Summary of Material Modifications
3. Summary Annual Report
4. Plan Documents
5. Summary of Material Reduction in Covered Services or Benefits

Specific to Health Plans:

1. Explanation of Benefits
2. COBRA Notices
3. Certificate of Creditable Coverage
4. General Notice of Preexisting Condition Exclusion
5. Individual Notice of Period of Preexisting Condition Exclusion
6. Notice of Special Enrollment Rights
7. Wellness Program Disclosures
8. Women's Health and Cancer Rights Notices
9. Medical Child Support Order Notice
10. National Medical Support Notice
11. Medicare Part D Notice of Creditable or Non-Creditable Coverage
12. HIPAA Notice of Privacy Practices
13. Notice Regarding Grandfathered Plan Status
14. Children's Health Insurance Program Re-authorization Act

Note: you should also review the EBSA's Compliance Assistance Guide: Health Benefits Coverage Under Federal Law.

Whew.  But what about those specific to retirement plans:

1. Periodic Benefit Statements
2. Statements of Accrued and Nonforfeitable Benefits
3. Suspension of Benefits Notice
4. Domestic Relations Order Notice
5. Annual Funding Notices
6. Qualified Default Investment Notice
7. Automatic Contribution Arrangement Notice
8. And of course, we are on the cusp of fee disclosure requirements so those have to be considered as well.

Now not every plan will have every notice or disclosure as some may not be applicable to your specific plan.  But as a plan sponsor, an employer should be aware of what notices and disclosures are required, and more importantly, when the notices must be distributed.  Some have an annual distribution requirement, some may have more frequent distribution requirements and some might only have to be given out at the time of enrollment.

My point is that a conscientious plan sponsor wants to satisfy these disclosure obligations and remain in compliance.  So learn what they are, when they are due and whether they apply to your plan.  And if you have questions about whether they apply to your plan, when they have to be given out or what they should contain, you can always rely on your attorney at Fox Rothschild for assistance.

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The questions may sound like the title to a Dr. Seuss book, but it really has great bearing on how to you are treated under ERISA. Knowing your title also creates clarification as to what your duties are, and what they are not.

Take the term “plan administrator.” The plan administrator is the person responsible for managing the day-to-day operations of the plan. The plan administrator is designated in the plan the plan documentation as administrator. If no one is otherwise designated, the plan administrator is the plan sponsor (unusually the employer). This was relevant in a recent decision finding that an plan sponsor (employer) was not liable for the failure to send a COBRA notice because COBRA requires the plan administrator to send notices, and the plan designated an insurance company as the plan administrator. So if the duty is on the plan administrator, then you need to know if you are a plan administrator.

But plan administrator may not be the same as “claims administrator.” This would be an entity that processes claims, but may not necessarily administer the plan. So designating a claims administrator would not be enough to name someone other than the employer as the plan administrator.

Similarly, “plan sponsor” is just that, the entity that sponsors the plan. This could be the employer or an organization or a group of employers. But status as a plan sponsor or status as a “fiduciary” can be different. Particularly when evaluating the difference between decisions that implicate settler functions (such as the decision to terminate a benefit plan) and those that implicate plan administration functions (such as the obligation to provide appropriate notice about the termination of a plan). Of course, “fiduciary” has its own distinction. A fiduciary in ERISA terms is someone designated s such by the plan, or someone who exercises “discretionary authority” over the administration of the plan. Fiduciaries have specific responsibilities to the plan beneficiaries and can be sued for “breach of fiduciary duty.”

The point of this post is not to answer definitively what you are, but to make sure you know to ask what you are. The point is what you are matters. If you are an employer with a benefit plan, you are one and may be all of the above. What you are defines your risks and responsibilities. So if you have questions about what you are, ask your attorney at Fox Rothschild.

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Are your 401(k) fees too high?  Are you breaching your fiduciary duty?  No question that this "fee" issue is becoming an increasingly hot topic, so let's take a look at the Third Circuit's decision in Renfro v. Unisys Corp. that came out last week.

Originally, this action was brought as a breach of fiduciary duty claim where the participants alleged that the fiduciaries had “inadequately selected" the mix and range of plan investment options.  The claim was that the plan might have had the opportunity to offer cheaper options.  Factually, the plan’s investment options consisted of 73 funds, 67 of which were retail mutual funds managed by the plan’s service provider and added as part of a bundled service agreement with the provider.  The participants claimed that the fees on the provider’s mutual funds were excessive when compared to the services they provided, other mutual funds, and other types of investment options that could have been included.  The trial court dismissed the case based on its finding that the plan’s “sufficient mix of investments” did not support a fiduciary breach claim and the Third Circuit affirmed.  In sum, just because other cheaper options may have been out there, at least a variety of options was offered and that was sufficient.

To reach their conclusion, the 3rd Circuit looked to decisions  in the 7th Circuit and the 8th Circuit and determined that the analysis hinges on the the characteristics of the mix and range of the investment options offered.  So the determining factor was the reasonableness of the options offered in the aggregate.  For example, the 7th Circuit concluded that a set of options that 23 retail mutual funds and a brokerage option with access to over 2,500 funds satisfied the fiduciary obligation.  The 8th Circuit determined that a narrower range of options in a plan that offered only 13 investment options, 10 of which were retail mutual funds, was not acceptable and upheld a claim for breach of fiduciary duty.  So the 3rd Circuit decided that because the menu of options available had a “variety of risk and fee profiles, including low-risk and low-fee options,” the breadth of the options weighed in favor of a dismissal of a claim for breach of fiduciary duty.

This is not to say that more investment options will always be better.  The court seemed particularly focused more on the range and mix.  Certainly a variety of options, both in terms of investment strategy and fees, was a key component.  For example, offering 3 large-cap stock funds may not be enough if all three have the same fee component.  Plan sponsors would do well to consider offering a mix of fee options.  To do that, plan sponsors have to make themselves aware of the fees charged.  Which brings us back to the whole debate about reporting.  Participants not only need to know the risk and have various options to control that risk, but they also have to have variety of fee options (and be told which investments cost less).

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In case you missed it, the East Coast has had an odd month or so, what with an earthquake, a hurricane and flooding.  It struck me that in trying to find money to pay for the repairs and clean up, some folks might look to their retirement plan savings as a resource.  So let's take a look at "hardship distributions."

The IRS has a very good FAQ for Hardship Distributions, but here are some of the basics:

1. A retirement plan may, but is not required to permit hardship distributions.  So there are no distributions unless the plan permits them.
2. The plan has to set a specific criteria for distributions and making a determination of a hardship.  There has to be a set way to apply for and get approval for the distribution and the rules of the plan have to be satisfied.
3. The IRS generally defines a hardship as "an immediate and heavy financial need" and the most common examples are medical expenses, purchase of a principle residence, tuition, funeral expenses AND "certain expenses for the repair or damage of the employee's principle residence."
4. Employees must have all other available distributions and loans from the plan prior to receiving the hardship distribution.
5. Employees cannot make elective deferrals to the plan for 6 months after receipt of a hardship distribution.
6. Hardship distributions are generally limited to the amount of the employee's total elective contributions (less any previous withdrawals).
7. Hardship distributions are generally includable in gross income and may be subject to taxation as an early distribution of elective deferrals.

So generally speaking, hardship distributions may be available to an employee to cover the costs of repair or recovery from a natural disaster, provided the plan permits it and they have no other available financial options.  It is not designed to be the first source of money.  Instead, it should be the option of last resort.  Bear in mind, there can be negative tax implications from the distribution.

Finally, there is something called a "qualified hurricane distribution" that provides for special relief for victims of hurricanes Katrina, Rita and Wilma.  This relief is not presently available for victims of hurricane Irene but it may become available in the future.  For now, there is no qualified hurricane distribution available for victims of Irene.

So to conclude, victims of natural disasters may be able to obtain distributions, but likely as a last resort, and certainly not without some negative implications.  For more information about amending your plan to include for these distributions, or for assistance in administering these distributions, please contact your attorney at Fox Rothschild.

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Whether being subject to an involuntary EBSA Audit, or undertaking a voluntary correction program (VCP), there are certain things a plan sponsor should be looking for (and looking out for) if they are going to have the EBSA nosing around their plans.  The EBSA recently held an online seminar about things to anticipate in an EBSA investigation and here are some things I think are important to remember.

The general emphasis in an EBSA review falls into one of 6 categories: review of plan assets, reporting and disclosure, bonding, general plan operations, compliance with plan documents and remittance of employee contributions.  The objective is to make sure that the plan is being operated in accordance with statutory guidelines.  These six areas of focus are what the statutes generally require.

So what are the looking for?  Well, they will certainly check to see if reporting requirements are satisfied, whether required disclosures have been made and whether the fiduciaries are properly bonded.  They will also look at the transactions undertaken by the plan to see if there are any prohibited transaction or a failure to diversify plan investments.  If the plan requires employee contributions, they will want to confirm that these contributions are remitted in a timely manner. 

They will do this by reviewing the plan documentation.  So the will want to see a plan document or trust agreement, the form 5500s for the past few years and the summary plan description.  They will also want to see the summary annual report for the plan, copies of the bond and fiduciary insurance policies, provider services contracts and asset statements.  You should also be ready to produce benefit statements and payroll/contribution records.  If there are meeting minutes or formal resolutions related to plan administration, those will have to be produced as well.

So knowing what they will be looking for and what they want to see, plan sponsors should take this opportunity to (1) make sure they have the information that would be requested and (2) consider undertaking their own internal review to see if corrections should be made.  The VCP process is designed to permit plan sponsors to fix things on their own without a full blown audit (and it is better to self-police then to get caught late in an audit).  A diligent plan sponsor might take this opportunity to look at what would be looked at if there was an audit and see if there are some things that can be fixed.  For assistance in the review or the fixing, be sure to contact your attorney at Fox Rothschild.

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Good news for employers in union defined benefit plans!  The Financial Accounting Standards Board (FASB) had proposed a rule that would require companies to report to disclose potential withdrawal liability for multiemployer defined benefit pension in which they participated which would have put the pension fund's unfunded liability on the employers' books.  However, on July 27, FASB notified Congress that it has withdrawn this proposal.   

Instead, FASB has now approved a revised accounting standard with disclosures intended to provide more information about an employer’s financial obligations to multiemployer pension plans, including:

1. The amount of employer contributions made to each significant plan and to all plans in the aggregate.
2. Whether the employer’s contributions represent more than five percent of total contributions to the plan.
3. Which plans the employer is in that are subject to a funding improvement plan.
4. The expiration dates of collective bargaining agreements and any minimum funding arrangements.
5. The most recent certified funded status of the plan ( the “zone status”) to which the employer makes contributions.  If the zone status is not available, an employer will be required to disclose whether the plan is: (a) Less than 65 percent funded, (b) between 65 percent and 80 percent funded or (c) greater than 80 percent funded. 
6. A description of the nature and effect of any changes affecting comparability for each period in which a statement of income is presented.

For public entities, the effective date of the new requirements will be for fiscal years ending after December 15, 2011, while for non-public entities, the disclosures will be required in fiscal years ending after December 15, 2012.

If your company participates in a multiemployer plan and you need assistance in obtaining the information or interpreting the information, please contact your attorney at Fox Rothschild.

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Are you getting prepared for the required fee disclosures?  The good news is that the DOL issued the final rule on the extension of the 408(b)(2) and participant-level disclosures applicability dates and extended it until April 1, 2012.  Final regulations are due by the end of the year.  Plans will have to make participant-level disclosures within 60-days after the effective date.

If you have not made yourself familiar with the fee disclosure rules under 408(b)(2), I suggest you take a look at two documents.  The first is the ESBA Final Rules (published in July of 2010).  The second is an Interim Fact Sheet that the DOL published as well.  What is key to remember is that there are several ongoing fee disclosure requirements for plan sponsors.  There are Disclosure of Services and Compensation requirements that service providers have to furnish to fiduciaries, and then there are also ongoing fiduciary obligations to report those fee disclosures back to participants. 

So whether you are a plan sponsor or a plan service provider, get to know these new requirements.  We have some time to prepare.

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Service providers beware!  A recent ruling in the Ninth Circuit Court of Appeals seems to suggest that anyone who participates in the administration of a benefit plan is a potential defendant under ERISA. 

Generally, we look at claims brought by participants under ERISA Section 502 as limiting of who may bring a suit, and ERISA clearly provides that fiduciaries (including plan administrators) are certainly potential defendants in actions brought under that section.  However, in the recent case of Cyr v. Reliance Standard Life Insurance (9th Cir. 6/22/11), the Court found that Section 502 does not appear to limit which parties may be defendants in a civil action brought under that provision. 

Cyr sued the plan administrator, but also sued Reliance as the actual insurer of the benefits in question.  Reliance was not the administrator but did control approval or denial of the insured disability benefits.  The court reasoned that, based on the holding in Harris Trust v, Smith Barney, there is really not set restriction in Section 502 about who can be sued, so there is no reason to read in such a limitation.  Reliance was a "logical defendant" because it was the ultimate payer and effectively controlled the plan, even though it was not the designated plan administrator. 

So where does this leave us?  Well, companies that participate in the process of providing plan benefits, though not specifically designated as fiduciaries or administrators, are viable defendants if they have authority to accept or reject claims.  The extent of that authority may be subject to debate, but those would be issues raised against any potential defendant.  So be wary that just because you are not "named" as a fiduciary, if you exercise decision making power over claims, you could be a defendant in an ERISA litigation.

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In case you missed it, last weekend, New York passed a law recognizing same-sex marriages.  For plan administrators, this change to "marriage" might cause some problems that have to be addressed. Not the least of which is preemption of federal law.  New York employers will eventually have to comply, but generally, all employers and plan sponsors should be aware of some of the confusing aspects of states recognizing same-sex couples.

First, let's review retirement plan concerns.  Qualified retirement plans are generally governed by ERISA and various corresponding tax regulations.  All of these regulations are subject to the impact of the federal Defense of Marriage Act, which while currently not being "enforced," is still the law of the federal government.  The net effect is that when considering the term "spouse" in your qualified plans, it does count include a same-sex partner, married or otherwise.  So any provision in a plan that provide for benefit to a "spouse" would not apply to a same-sex spouse even when married under state law.  For example, consider a defined contribution benefit plan distribution (like a 401(k) plan) that requires spousal consent for distribution.  A partner in a same-sex marriage is not required to obtain spousal consent because in the eyes of the plan, he or she has no spouse.  Similarly, any spousal rights that may accrue as a result of the death of the participant under the terms of the plan would not accrue to the same-sex partner.

Second, when we look at welfare plans, all of the dependent coverage definitions in the plan referring to "spouse" would not automatically include the same-sex spouse.  Certainly a plan can add coverage for same-sex partners, but doing so does not grant them the federal protections of things like COBRA (which would not apply since the dependent would not be recognized as a spouse under federal law).  Cafeteria plans cannot provide benefits to same-sex partners, which means that employees cannot pay that portion of their health coverage attributable to same-sex partners with pre-tax dollars.  So plan administrators have to be prepared to exclude same-sex partners from cafeteria plan participation and make sure that same-sex partners' medical bills are not paid out of an FSA.

Also, because of the impact of the Defense of Marriage Act on federal tax laws, the employer paid cost of providing coverage for same sex partners who are not “dependents” under the Internal Revenue Code would be considered regular compensation and would be taxable as income.  Moreover, that portion of the premium that an employee pays that is attributable to the same-sex partners coverage would not be eligible for pre-tax treatment under a cafeteria plan.  This means that employers who have employees who take advantage of the new civil union will have to make sure the value of the partner’s benefit is properly treated for federal tax purposes.

Continue Reading...

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Your participants want to sue you!  Yep, that's right.  Apparently there is a whole cottage industry springing up relating to participants suing for hidden fees.  I read 4 articles this morning by people postulating about how much fiduciary litigation there will be in the future over fees and costs passed on to plan participants.

What it caused me to question is how far will it go?  What about health plan administration fees and costs associated with maintaining your benefit plan?  Does the cost of plan administration weigh on the value of overall benefits provided to participants?  Should profit sharing plan sponsors eliminate loads on participants' accounts and bear the full weight of the plan themselves to maximize participant account balances?  What will the "reasonable person" standard under ERISA Section 404 look like in 5 years based on the answers to these questions?

I happened to be looking at a multiemployer health fund for a client where 60% of employer contributions were being used to pay plan administrative costs.  How do you think the participants will feel when that plan starts cutting benefits because it does not have sufficient income to cover claims?  They will want to know what the fiduciaries did to control administrative costs.  Or how about a single employer plan where participants want to know why the employer did not pay administrative fees out of company assets instead of the plan?  Why should my 401(k) balance be lower just because my employer was stingy?

Well, before we try to divine the ultimate decisions of the court, let's try something more practical.  I believe that a "reasonable person" starts by looking for potential problems, so let's check ourselves out first.  I think a good starting point is to make a little chart and list all of your employee benefit plans, list all the fees and costs associated with maintaining that plan annually and then list how they are paid.  Once you know how much and who pays, you can then start evaluating whether the fees are too high and whether you can take steps to minimize the impact on participants.

Of course you don't have to do it alone.  Your benefits professionals and your attorneys at Fox Rothschild are available to help evaluate whether or not your plan practices with respect to fees and costs make you a likely target for participant litigation. 

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Plan administration is a tricky thing.  There is a long history of court cases arising from claims for misrepresentation, but ERISA has generally been found to protect simple state aw claims for negligent misrepresentation.  However, a misrepresentation can give rise to a claim for breach of fiduciary duty.

Take the case of Stark v. Mars, where the S.D. of Ohio recently ruled that a claim for breach of fiduciary duty for misrepresentation could proceed against the benefits committee.  Stark utilized the company website to confirm her retirement benefit of about $5,300 a month.  She also called a company employee and was again told that her monthly benefit would be $5,300.  After she made here election, she was informed that there was an error in the calculation and her true monthly benefit would be $2,300 a month and she had to pay back an overpayment of $15,000.  Naturally she brought a lawsuit.

The Court first found that the complaint failed to establish that the company was a fiduciary.  But it did find that the benefit committee was a fiduciary and was therefore subject to a claim for breach of fiduciary duty.  To the extent the committee was responsible for plan administration, including giving advice to participants about their benefits, that would be sufficient discretionary authority to sustain a claim for breach of fiduciary duty.  Since the case was only at the motion to dismiss stage, the Court did not rule on whether Stark would recover, only that she could proceed with her claim.

Now it is very likely that the members of the benefits committee individually did not have contact with Stark.  But they had a duty to make sure benefit information was communicated properly.  So I think this case serves as a reminder to fiduciaries that one of their duties is to ensure that the plan, service providers and other plan representatives communicate accurate information to participants.  Participants are allowed to rely on representations made by the plan.  If your communication are not accurate (such as miscalculated benefit statements, incorrect eligibility language or missing disclaimers on notices), the participant may not necessarily get the benefit from the plan.  But they can pursue a claim for breach of duty against the fiduciaries. 

So make sure you are providing accurate statements.  And make sure you have your benefits professionals review communications on a regular basis to confirm they are accurate and correct under the current state of the law.  It will go a long way toward avoid claims for breach of fiduciary duty based on misrepresentations. 

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I read an article in US News and World Report that gives the 5 keys to telling whether or not you have a good 401(k) plan. Here is what they said are the 5 key characteristics:

1. An active and engaged investment committee
2. An investment process
3. A menu of well-diversified investment options.
4. Low expenses.
5. Easily accessible investment advice.

I don't disagree with them on these items, but with all due respect and deference, I think they missed a couple of key components. So let's say for the sake of argument, here are a few more.

Good Documentation. No matter what your options are or what process you have, communication to participants is the key to a good benefit plan. Summary plan descriptions, summaries of material modification and annual reports are not just buzzwords pulled out of an ERISA dictionary. They are the links between the participants and the plan that describe how the plan works. Make sure your documentation is in order.

Good Service Providers. Not just knowledgeable, but also responsive. Sponsoring a plan means you might have questions. You might need to make changes. You have need for advice. A good 401(k) plan has good service providers that are ready and willing to help the sponsor with whatever issues arise.

Good Knowledge of the Participants. Ultimately the goal of the plan is to provide benefits to participants when they retire. But to do that, the sponsor has to know something about the population. There are lots of defined contribution benefit plans available and lost of "off the self" products. A plan sponsor should start by considering what type of plan might best suit his or her specific set of participants. Then design a plan around them. The most common complaint I hear about 401(k) plans is that employees don't participate enough. Well, maybe its not the employees, maybe its the plan. A good 401(k) plan fits the population.

Everyone want to say they have a good retirement plan. And plan sponsors want to be sure they offer a good retirement plan. So make sure you define "good" correctly. Consider these characteristics before creating a plan, or look at your current plan and see if you should change. And make sure you have good support, like you will get from your attorneys at Fox Rothschild.

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On previous occasions I have referenced the fee disclosure rules for retirement plans with an emphasis on fee disclosures.  Today I discovered that the AARP has just introduced an on-line tool for calculating 401(k) fees.  This was done in conjunction with their release of a survey that had some interesting results:

1. 62% of respondents were unaware of the fees they were paying in their 401(k) plan
2. 81% of respondents said fees were very important or somewhat important to them
3. 71% of respondents believed the paid no fees whatsoever
4. 32% said they had no idea how fees impacted their retirement savings

As I read these figures, it leads me to believe that as a larger portion of the population gets closer to retirement, fees and efforts to reduce those fees by fiduciaries is becoming increasingly more important.

Then, I happened upon a class action case recently filed in US District Court in Washington that alleges that a pension plan fiduciary breached its fiduciary duty to the participants by over-investing in alternative, risky plan investments.  This allegedly caused the plan to become significantly underfunded, putting pension benefits at risk.  The claim is that the alternative investments were too complex to be given appropriate due diligence by the fiduciaries and that the fiduciaries may have put the company's own interest ahead of the participants.  This case was just filed so there is no ruling in it, but it does bring to bear the fact that participants are becoming more savvy about where their pensions are invested and what the risks and costs might be.

So a careful, prudent fiduciary has to be reminded to take steps to reduce costs, report adequately and follow a prudent investment policy.  Don't overlook the need for an investment policy statement and consider providing more information to participants about fees on their retirement accounts so that they themselves have options.  Make sure your communications are properly vetted by your benefits professionals before they go out, but definitely think about increasing communications.  Sometimes the best defense to a claim for breach of duty is showing in advance steps taken to satisfy that duty.

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Plan administrators are generally aware that qualified retirement plans (401(k) plans, profit sharing plans and pension plans) almost always provide a benefit payable to a beneficiary following the participant’s death.   Most plans provide for the participant to elect a primary and secondary.  Unfortunately, the rules relating to beneficiary designations for plans are often complicated and various state law concerns may jump into the mix.  Plan sponsors should review their designation forms to make sure they eliminate confusion about beneficiary designation and election and also make sure they comply with the current status of both federal and state law.

Question 1 should be whether spousal consent must be obtained for a participant to name a non-spouse beneficiary.  Without appropriate spousal consent, the election is likely going to be "defective" and the plan administrator will be stuck trying to determine the correct payee or risk possibly having to pay the benefit twice. 

Question 2 should focus on the state laws relating to community property.  Community property states provide that retirement accounts are part of communal assets that have to be distributed in a divorce or separation.  Those states may have specific requirements with respect to how those assets are treated.  While federal law may trump state law requirements, it is a good idea for administrators to know what state laws say with respect to the division of community property.

Question 3 relates to same-sex partnerships or civil union laws in particular states.  While federal law does not recognize same-sex marriages or civil unions, some states do and beneficiary designations have to be very carefully drafted to make sure they give appropriate options to participants who are in these types of unions.  As with question 1 and 2, federal law would seems to trump state law, but a plan administrator should not risk the possibility of fighting over distributions with a child, former spouse or same-sex partner when beneficiary designation forms are not clear or spousal waiver rules are not followed.

Take this hypothetical: A (employee) marries B (opposite sexes) and then A and B get divorced. They have children, C and D.  A then remarries E (same sex) in a state recognizing same-sex marriage.  When A passes away, B,C,D and E may all have a claim against the retirement plan account balance of A.

There have been many changes in federal and state law that could potentially impact a participant’s beneficiary designation form.  Beneficiary forms drafted even a few years ago may be outdated and not compliant with current law.   So now is a good time to inventory.  Make sure you have beneficiary designation forms for all participants.  Make sure your current forms are up to snuff.  And make sure to have participants execute new beneficiary designation forms if they want to make changes.  It's not enough to tell us that a spouse waives.  Get the waiver in writing.

If you have any questions about beneficiary designations or retirement plans in general, please contact your attorney at Fox Rothschild.

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If you are interested in learning the basics about multiemployer withdrawal liability, how it is calculated, how it is triggered and how to possibly avoid it, please consider attending a free seminar we are conducting in our Roseland, New Jersey office on Thursday, May 19, 2011.  Unfortunately, it will not be broadcast outside of our Roseland Office, but we might take it on the road later if there is significant interest.  Also, you don't have to be an attorney to attend.  It is simply an opportunity to get some CLE credits if you need them, but non-attorneys who deal with multiemployer pension plans might find it useful.

Details:

Thursday, May 19, 2011
8 to 8:30 a.m. – Registration and breakfast
8:30 to 10:30 a.m. – Program

Fox Rothschild LLP
75 Eisenhower Parkway, Suite 200
Roseland, NJ 07068-1600
 

Join us as we provide a general overview of withdrawal liability and discuss how it is triggered, calculated and disputed. Our presenters will explain ERISA Sections 4201, 4203, 4204, 4219 and 4221 as they relate to employers contributing to multiemployer plans. We'll also provide an actuarial perspective on the computation of underfunding and demonstrate how unfunded liability is calculated to be assessed under ERISA Section 4219. Attendees will receive materials highlighting each code section and showing sample calculations to explain how unfunded liability is calibrated.

Presenters:
Victor P. Harte, EA, MAAA
Principal and Consulting Actuary
Milliman, Inc.

Keith R. McMurdy, Esq.
Partner
Fox Rothschild LLP
 

To Register, click this link.

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If you are in a multiemployer pension plan as a result of union participation, you should be aware by now of the concept of withdrawal liability.  Basically, withdrawal liability means that portion of unfunded vested liabilities that is allocated to an employer who ceases to have a contribution obligation to the multiemployer fund.  The allocation occurs at the time of the withdrawal.  However, there are certain exceptions to withdrawal liability and one of them is when there is a sale of assets and the buyer agrees to continue to participate in the pension fund in substantially the same way as the seller used to.  If you are not in a multiemployer pension fund, you might want to stop reading now. 

ERISA Section 4204 is called the "asset purchase exception" and it provides that there will not be withdrawal liability solely because of a sale of assets if the purchaser assumes the liabilities.  In a recent case, Central States, Southeast and Southwest Areas Pension Fund v. Georgia-Pacific (2011), the pension fund challenged the word "solely" to determine when in fact a withdrawal occurs.  Georgia Pacific sold its assets to a buyer who assumed the contribution obligation in 2004.  But prior to 2004, Georgia Pacific had gradually taken actions to decrease the numbers of employees in the pension fund without causing a partial withdrawal (which occur when the contribution obligation decreases but is not complete).  

The Fund said "hey, the withdrawal from the fund was not solely from the sale of assets, but occurred over time, so the asset purchase exception does not apply."  In other words, they contended that the word "solely" meant it could be the ONLY occurrence of withdrawal.  Since there had been prior actions that resulted in cessation of contributions, this was not the sole withdrawal.  Fortunately for employers, the Seventh Circuit Court of Appeals disagreed.  The Court said that while this was the first opinion that looked at this issue, it agreed with the arbitrator that the prior reductions should not be treated as a single transaction with the ultimate sale.  These separate reductions had their own potential consequences and could not be tied to the actual final withdrawal.

This decision is important for employers that are considering an asset purchase transaction and possible exemption.  What is says is that the transaction will be viewed as its own withdrawal event.  Prior steps taken to lower potential liability, like partial closing or reductions in force that do not trigger a partial withdrawal, do not cause the ultimate sale to fall outside of the 4204 exception.  So in essence, this affirms that it is you are contemplating a sale in the future, it's OK to act in the present to reduce potential future issues.  Knowing that these actions won't be held against you is a positive.

For questions about withdrawal liability, multiemployer pension funds or union plans in general, please contact your attorney at Fox Rothschild.

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Previously I have posted several comments relating to the proposed changes to 401(k) fees and expenses and regulations relating to reporting of those fees.  Fortunately, our friends at the Department of Labor have provided us with some "back to the basics" explanation of retirement plan fees and expenses, in a handy summary called "Understanding Retirement Plan Fees and Expenses."

If you have ever had questions about what terms like "loads," "commission", "annuity" and "redemption fees" mean but were embarrassed to ask, this booklet provides a good basic explanation of many of the words used in describing benefit plan costs.  It also serves as a gentle reminder to plan sponsors that they have to know these terms and be aware of how they impact plan administration.

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Last year at this time we were talking about amending 401(k) plans to eliminate matches and employer contributions.  Today, I happened upon an article that suggested that employers are reinstating employer matches.  If you are considering reinstating a 401(k) match (or any employer contribution), there are some things you should be aware of before you make that change.

1.  When should you do it?   Benefit plan administration is always cleaner if you make changes in advance of the plan year.  You have to let participants know of changes prior to the commencement of that plan year, so a decision to reinstate (or even add) matches has to be made and notices have to be issued prior to the change.

You can certainly make mid-year changes to a plan.  If you decide to reinstate a matching contribution mid-year, remember that you still have to do discrimination testing of both employee and matching contributions for the current plan year.  That means that you suspended contributions under a safe harbor 401(k) plan, you can’t resume a safe harbor matching contribution midyear.   You can resume safe harbor status by sending out a new safe harbor notice before the next plan year starts but you have to wait for the next plan year.. 

2.  How much will I match?  You have to be aware of what you previously had and how you ended or suspended.  Are you reinstating a suspended match or are you making a new set of rules altogether?  A lot depends on how you handled the suspension or elimination of the match requirement for prior years.  It is not as simple as simply deciding on a figure.

If you are not certain you want to commit to a set figure, you could adopt a discretionary matching provision, with or without a guaranteed minimum match, and determine the total match (if any) before the end of the plan year.   You could also restrict employer contributions to a profit sharing component.  But be cognizant of safe harbor restrictions and also Section 415 maximum contribution limits.

3. Who Will Be Eligible?  Whether reinstating a suspended employer contribution or adding a new one, discrimination concerns abound.  It is not uncommon for bargaining unit representatives to share a plan with non-union employees.  Check to see if the match is required (or even permitted) under any bargaining agreements.  Also, make sure that the employer contribution does not overly favor highly compensated employees because you will want to avoid discrimination issues.

Giving back the match (or any employer contribution) is not as simple as turning the switch back on.  In many respects, it's like adding an employer contribution for the first time.  So make sure to consult with your benefit plan professionals before taking this step.  It is a sign of good will to give back employer contributions as business improves.  But don't do it without first checking to make sure your are doing it correctly.  And of course, if you have questions you can ask your attorney at Fox Rothschild.

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Dan Kuperstein, an attorney in our Roseland office, brought to my attention that the DOL/EBSA has released an Advisory Opinion clarifying “Prohibited Transaction” and “Party in Interest” rules pertaining to brokers providing services to ERISA plans.  This is important stuff for both brokers and plan sponsors to be aware of so I have included the full text of his summary below:

"On February 11, 2011, the Department of Labor, Employee Benefits Security Administration(“DOL”)released Advisory Opinion 2011-06A (“the Opinion”), which discusses and clarifies the “prohibited transaction” and “party in interest” rules pertaining to broker-dealers that provide services to ERISA plans. 

Under Sections 406, 404 and 3(14) of ERISA, relationships (and transactions) between a benefits plan and other parties become important, as they can lead to significant amounts of liability for those involved when a “prohibited transaction” occurs.  Generally, a prohibited transaction involves self-dealing or selfish interests of an individual or company with important responsibilities with respect to a benefits plan.  “Plan fiduciaries” and “parties in interest,” defined and discussed in these provisions, have heightened responsibilities with respect to plans.

At issue in the Opinion was whether service transactions between a group of brokers and certain employee benefit plans, for which an asset management firm acted as a plan fiduciary, violated ERISA’s prohibited transaction rules because of indirect ownership interests between the brokers and the asset management firm.   Although the Opinion concluded that the ownership interest was not sufficient to find that the brokers were parties in interest, significantly, the Opinion makes clear that general standards of fiduciary conduct under ERISA apply to any selection of a service provider by a plan fiduciary, i.e., even where a plan fiduciary is not dealing with “parties in interest” under ERISA § 3(14).  In the Opinion, the DOL says that whether a fiduciary has an interest in another party that may affect the fiduciary’s best judgment is an inherently factual question and one that requires consideration of all relevant facts and circumstances.  In other words, all relationships (and all the relevant facts) matter when it comes to the issue of whether a prohibited transaction has occurred, not just relationships with parties in interest. 

The Opinion also clarifies that Prohibited Transaction Exemption 84-14, Part I, providing an exemption from the prohibited transaction rules for plan asset transactions determined by independent qualified professional asset managers, provides an exemption only from violations of ERISA § 406(a) (pertaining to transactions between plans and parties in interest), and does not extend relief to transactions that violate ERISA § 406(b) (pertaining to transactions between plans and fiduciaries)."

I think that this opinion should serve as a reminder to plan sponsors and plan administrators that the selection of brokers (and other fund professionals) has to be carefully scrutinized, particularly if there is some other relationship between the parties.  The "relatedness" of the professional has to be a consideration and there has to be some consideration of whether the relationship gives rise to the color of a prohibited transaction.  Don't get caught with a fund professional that could give rise to a claim that the relationship fosters a "prohibited transaction."

If you have questions about prohibited transactions, or administration of your plan generally, please contact your attorney at Fox Rothschild. 

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Employers with unionized employees are all too familiar with the issues that arise in the negotiation and maintenance of collective bargaining agreements.  It is not uncommon for the union to require the employer to participate in the union multiemployer defined-benefit pension plan and contribute toward the employees’ retirement benefits.  Now, more than ever, it is likely that there pension plans are “underfunded.”   So employers have to be keenly aware of the possibility of certain transaction triggering “withdrawal liability.”

What Does Underfunded Mean?

Generally speaking, a defined benefit pension plan promises and employee an amount of benefit after he or she retires.  This is usually paid out periodically until the death of the employee.  For these defined benefit plans, the amount of money currently going in is rarely enough to cover the actual amount of benefits that will be paid.  The plan has to make money through investing the plan assets to generate more income.  The plan makes certain assumptions about how long employees will live, how much of a return the plan will make on investments and how much employers will contribute over time.  Employees continue to accrue benefits based on years of service and vest in their right to receive certain benefits.  At any point in time, the plan’s actuary can calculate the anticipated payout of these benefits and compare it against the value of the total assets of the plan. If the value of the benefits exceeds the value of the plan assets, the plan is said to be “under funded.”  In other words, there is not enough money to pay all the promised benefits.

What is Withdrawal Liability?

Withdrawal liability is the employer’s share of the unfunded liability of the plan.  Under the provisions of the Multiemployer Pension Plan Amendments Act (“MPPAA”), an employer who withdraws from a multiemployer pension fund is liable for that portion of unfunded liability that is attributed to the employer under the formulas provided in the statute.  The employer is required to continue payments to the plan to help complete funding of the liability for benefits.  Depending on the amount of under funding, or unfunded liability the plan has, the amount of the withdrawal liability can be substantial.

How is Withdrawal Liability Triggered?

MPPAA recognizes two specific types of withdrawal: complete and partial. A complete withdrawal occurs when the employer ceases to have any obligation to contribute to the plan. This can happen for a variety of reasons, including the expiration of a bargaining agreement, a decertification of the union or because the employer sells or terminates the business. A partial withdrawal can occur when the amount of contributions to the plan drops significantly or when the employer ceases to have an obligation to contribute at one, but not all, of its facilities. Partial withdrawals can occur as a result of substantial layoffs or because of a decertification at one, but not all of the company’s facilities.

 

Continue Reading...

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More and more defined contribution plans offer "target date funds" as investment options.   Some estimates range as high as 75% of plans make these funds available to participants.  These types of funds tailor investments to a participant’s projected retirement date, meaning they should move from aggressive to conservative as the participant nears retirement age.  Many plans use these funds as “qualified default investment alternatives” ("QDIAs") which would be safe-harbor investments for fiduciaries to select for participants who don’t make their own elections.

In the past, I have suggested that fiduciaries should be aware of the fact that not all target date funds are good options and that fiduciaries should be wary of fees and expenses in these funds before choosing them as an option.  Fiduciaries should also be aware that a target date fund invests in other funds, so performance can vary significantly based on the investment restrictions of the target date fund.  Obviously, the best strategy for using a target date fund is to provide as much information as possible to participants so that they understand that simply because a fund says it has a target date, that does not mean that the target date satisfies the particular investment need of all participants.

Ultimately, though, the problem is that if these funds are in a 401(k) plan, it is very likely that not only are the fiduciaries unsure of how they operate, but that the participants have no idea either.   Whether or not this is the case, the DOL assumes it is, and after having a variety of hearings and other surveys, has issued proposed regulations requiring special participant disclosures for target date funds, even if participants are not defaulted into them, and for other “qualified default investment alternatives”. 

Plans would have to give participants the following:

1. An explanation of how a target date fund's asset allocation will change over time, and the point in time when it will reach its most conservative position.
2. A graphical illustration of how a target date fund’s asset allocation will change over time.
3. For a fund that references a particular date, such as the “Retirement Fund 2030”, an explanation of the relevance of the date to the asset allocation.
4. A general warning that the target date fund may have losses and does not guarantee that sufficient assets will be available for retirement or any specific return.
5. If the target fund is the QDIA, there has to be a detailed disclosure of the principal strategies and risks of the QDIA, more information about fees and expenses, and historical performance data.  These will be consistent with the final disclosure regulations that will apply to all participant directed investments.

Ultimately, the DOL is going to provide us with a checklist for fiduciaries who already have or are considering adding target date fund as an investment option.  But until that checklist is issued, fiduciaries that have target date funds as an option should consider expanding their educational efforts to participants and also become more familiar themselves with how the funds operate.  The more you know, the more you can disclose and more disclosure is preferred.

For more information about educating plan participants and disclosure requirements, please contact your attorney at Fox Rothschild.

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Susan Jordan, from our Pittsburgh office, provides the following related to the IRS guidance issued on "in-plan" Roth rollovers:

Included in the Small Business Jobs Act of 2010 is a provision whereby amounts accumulated in a 401(k) plan can be converted into Roth accounts through in-plan Roth rollover.  Until that option was added, Roth conversion could be accomplished only by direct rollover from the plan to a Roth IRA.

Immediately after the new law was passed, the IRS strongly cautioned plan sponsors not to permit in-plan Roth rollovers unless and until additional guidance had been issued.  That guidance came in the form of Notice 2010-84-- which was released on the day after Thanksgiving-- and it was no turkey!  To the contrary, it was stuffed with helpful clarification, as well as a bonus in the form of an extended remedial amendment period. 

 

The Notice, issued in question and answer form, makes it clear any vested amount held in a plan account for a plan participant, whether attributable to elective deferrals, employer contributions, or earnings (other than amounts held in a designated Roth account), is eligible for Roth rollover within the same plan, provided that the disbursement is an “eligible rollover distribution.”  Thus, a participant who has not had a severance from employment is eligible for in-plan Roth rollover only if the participant has reached age 59-1/2 (or died, become disabled, or received a qualified reservist distribution.) 

 

Although treated as a distribution for tax purposes, an in-plan Roth direct rollover will not be treated as a distribution with respect to plan loans, elimination of optional forms of benefit, or spousal annuities. This means that spousal consent will not be needed for in-plan Roth rollover.  Likewise, rights to optional forms of benefits will not be eliminated through an in-plan rollover, and amounts transferred to the Roth account through in-plan rollover must be taken into account in determining whether the participant’s account balance exceeds $5,000 for purposes of consent to future distributions.

 

Contrary to some initial interpretations of the in-plan rollover option, the Notice makes it clear that a plan may be amended to permit in-plan Roth rollover by participants who have attained age 59-1/2 but need not permit any other rollover or distribution option for these amounts.  Thus, a plan may be amended to permit in-plan Roth direct rollovers by participants who have attained age 59-1/2, without having to permit in-service withdrawal at the same age.

 

In general, the tax consequence of in-plan Roth rollover is inclusion-- in the participant’s gross income for the year in which the rollover occurs – of an amount equal to the fair market value of the distribution, reduced by any basis the participant has in the distribution.  The special tax rule available to Roth IRA rollovers occurring in 2010 is extended to in-plan Roth rollovers, such that, for an in-plan rollover made in 2010, one-half of the taxable amount will be includible in the participant’s gross income for 2011, and the other half will be includible in 2012, unless the participant elects to include the entire taxable amount in his gross income in 2010.  In any event, in-plan Roth direct rollovers are not subject to mandatory income tax withholding.

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You might recall that The Pension Protection Act of 2006 (PPA) requires that administrators of all defined benefit plans (including multiemployer benefit plans) to provide an annual funding notice to the Pension Benefit Guaranty Corporation (PBGC), plan participants and beneficiaries, labor organization representing participants or beneficiaries.  In the case of a multiemployer plan, the plan also has to send a notice to each employer that has an obligation to contribute to the plan. This funding notice must include the plan’s funding target attainment percentage, a statement of the value of the plan’s assets and liabilities and a description of how the plan’s assets are invested as of specific dates, a description of the benefits under the plan that are eligible to be guaranteed by the PBGC, and other information relevant to the plan’s funded status.

The Employee Benefits Security Administration (EBSA) published a proposed rule (available here) that implements the annual funding notice requirement for all defined benefit plans.  The proposed regulation outlines the scope of an administrator’s obligations in providing this notice and details the content requirements of the notice itself.  The proposed rule’s appendix contains two model notices, one for single employer plans and one for multiemployer plans.  The notices can be accessed through the EBSA Annual Funding Fact Sheet.  

The purpose of the notices, according to the proposed rule is to “increase the transparency of information about the funding status of plans, affording all parties interested in the financial viability of these plans with a greater opportunity to monitor their funding status and take action where necessary.”  The model notice in the proposed rule, the rule asserts, “is expected to mitigate burden and contribute to the efficiency of compliance.“

The deadline for written comments on the proposed rule is January 18, 2011.

For more information about how these rules and notices apply to your plan, please contact your attorney at Fox Rothschild.

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In May of this year, the IRS began issuing "Compliance Questionnaires" to some 1,200 401(k) plan sponsors.  The purpose of the questionnaires was not for an external audit, but rather to encourage sponsors to conduct an internal audit to identify and correct any compliance problems.  While the compliance questionnaire is not formally part of the audit process, the IRS has reiterated that employers who do not respond will be contacted directly by the IRS.

The most common problems that are identified by the questionnaire are plan documentation failure, failure in discrimination testing and failure to follow the plan's definition of compensation.  While the IRS will use the questionnaires to plan future educational activities, sponsors can certainly use them as a self-correction guideline. 

Even employers who do not receive a questionnaire should consider this an opportunity to self-audit and self-correct.  The IRS guide to completing the questionnaire is available here if you did not already receive one.  For assistance in responding, or in self-auditing, please contact your attorney at Fox Rothschild.

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You might recall last week I wrote about the DOL's new rule requiring disclosure of fees and expenses associated with management of their 401(k)-type retirement plans.  At that time, the proposed rule was available.  The DOL has now issued the Final Rule on Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans.  As anticipated, the Final Rule requires that a plan provide the following information:

1. General Plan Information
2. Administrative Expenses Information
3. Individual Expenses Information
4. Statements of Actual Charges or Deductions
5. Investment-Related Information
6. Performance Data
7. Benchmark Information
8. Fee and Expense Information
9. Internet Website Address
10. Glossary

For compliance assistance or with questions, please contact your attorney at Fox Rothschild.
 

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The U.S. Department of Labor's Employee Benefits Security Administration has announced a proposed rule to update the definition of "fiduciary."   The proposed rule will further clarify the regulations to more broadly define the term as a person who provides investment advice to plans for a fee or other compensation.

The DOL's website provides the following:

"The proposed rule would amend a 1975 regulation that defines when a person providing investment advice becomes a fiduciary under the Employee Retirement Income Security Act.   The proposed amendment would update that definition to take into account changes in the expectations of plan officials and participants who receive advice, as well as the practices of investment advice providers.

According to the proposal, the 1975 rule's approach to fiduciary status may inappropriately limit the department's ability to protect plans, participants and beneficiaries from conflicts of interest that may arise from today's diverse and complex fee practices in the retirement plan services market. The proposed rule is designed to remedy this limitation, and protect plan officials and participants who expect unbiased advice, by giving a broader and clearer understanding of when individuals providing such advice are subject to ERISA's fiduciary standards."

The proposed rule itself is available here.

The introduction to the rule provides that "the proposed rule takes account of significant changes in both the financial industry and the expectations of plan officials and participants who receive investment advice; it is designed to protect participants from conflicts of interest and self-dealing by giving a broader and clearer understanding of when persons providing such advice are subject to ERISA's fiduciary standards. For example, the proposed rule would define certain advisers as fiduciaries even if they do not provide advice on a ``regular basis.'' Upon adoption, the proposed rule would affect sponsors, fiduciaries, participants, and beneficiaries of pension plans and individual retirement accounts, as well as providers of investment and investment advice related services to such plans and accounts."

Written comments on the Proposed Rule may be submitted through January 20, 2011.

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The U.S. Department of Labor’s Employee Benefits Security Administration announced issuance of a final rule requiring disclosure of fees and expenses associated with management of their 401(k)-type retirement plans.  Under the rule, workers will receive this information in a format that enables them to meaningfully compare the investment options under their plans.

The final regulation requires plan fiduciaries to:

1. Give workers quarterly statements of plan fees and expenses deducted from their accounts.
2. Give workers core information about investments available under their plan including the cost of these investments.
3. Use standard methodologies when calculating and disclosing expense and return information to achieve uniformity across the spectrum of investments that exist in plans.
4. Present the information in a format that makes it easier for workers to comparison shop among the plan's investment options.
5. Give workers access to supplemental investment information in addition to the basic information required under the final rule.

The final rule requires that a plan provide the following information:

1. General Plan Information
2. Administrative Expenses Information
3. Individual Expenses Information
4. Statements of Actual Charges or Deductions
5. Investment-Related Information
6. Performance Data
7. Benchmark Information
8. Fee and Expense Information
9. Internet Website Address
10. Glossary

The DOL Fact sheet provides an explanation of the information contained in each of these categories as well as an explanation of how plan sponsors comply.  The DOL Fact Sheet regarding compliance is available here.  A copy of the rule is available here.

The DOL also prepared a Model Comparative Chart that is available by accessing the DOL website (http://www.dol.gov/ebsa/) and selecting the Model Chart Option under the title "Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k)-Type Retirement Plans."

For compliance assistance or with questions, please contact your attorney at Fox Rothschild.

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It used to be that you could not convert 401(k) assets to a Roth 401(k).  But that's about to change, thanks to a new law that allows traditional 401(k) participants to convert at least part of their assets to a Roth 401(k).  True, it will be in a more limited way than is currently available to IRA holders, provided their plans allow it, but it is now permissible.  The conversion option is also available to 403(b) and 457 plan participants.

The Small Business Jobs and Credit Act of 2010 provides that, assuming the plan allows for it, employees can convert the portion of their 401(k) that consist of employer contributions into a Roth 401(k) if they meet one of the following criteria:

1. they are age 59 1/2
2. they have participated in the plan for at least five years
3. the money has been in the plan for at least two years.

If the rollover is made this year, the participant could elect to pay the tax on the money in equal parts in 2011 and 2012.  Once rolled over into the Roth 401(k) plan, the money would earn tax-free investment income and participants would not be taxed when they receive a distribution.

To convert, of course, your employer must offer the Roth 401(k) to begin with.  While plans of all sizes can participate, the new provision was crafted with small-business owners in mind.  But because adding a Roth choice will increase the cost of administering a retirement plan, small-business plan sponsors will have to determine whether the long-term benefit of withdrawing Roth funds tax-free (after paying income taxes on the amount converted) is worth the additional administrative expense.

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Plans have participants, participants are people and people sometimes disappear.  It is unfortunately a fact of plan administration and it can be a problem.  As I mentioned last week, health care reform has about 5 new notices that have to be sent to participants.  There are annual notices and reporting that requirements that apply to retirement plans.  Even non-qualified plans have notices that have to go out.  But what happens when you can't find a participant?

The general rule under ERISA is that communications have to be made in a manner reasonably calculated to reach a substantial number of plan participants.  Certain specific notices, like COBRA notices, have to be issued in a manner reasonably calculated to reach that participant.  But missing from the regulatory scheme is any set action that a plan sponsor must take in locating participants.  Fortunately, there is no requirement that a plan sponsor actually confirm receipt of notice (although best practices sometimes makes us want to confirm receipt).  But what if we really need to locate them.  For example, what if we are terminating a plan and they have to be told? 

DOL Field Assistance Bulletin 2004-02 provides guidance on locating missing participants in defined contribution plans.  It gives search methods and default treatment of account balances for participants you can't find.  The PBGC has a Missing Participants Program, but its application is limited to locating missing participants when terminating a defined benefit pension plan.  If you are dealing with these situations, follow the rules to the letter and you will be safe. 

But for other plans, maybe all you can do is look.  Some search methods recommended include

1. • Certified mail.
2. • Contact participant's designated beneficiary
3. • Consult related plan records from the employer
4. • Use of a service that forwards letters. The Internal Revenue Service and the Social Security Administration both offer this kind of service.  The IRS also has a missing participant program.
5. • Internet search tools
6. • Commercial locator services
7. • Credit reporting agencies

It might be worthwhile for a plan to consider adopting certain administrative guidelines for dealing with participants that cannot be located.  For example, if participant consent is required to change administrators (such as in a employee stock plan or some other retirement plan), consider inserting a provision in the plan that provides that if consent is not denied within 30 days from the notice date, it will be deemed accepted.  Or perhaps inserting specific language that obligates the participant to provide the plan with current contact information with the under standing that the plan will rely on that information as current unless told otherwise.

I also think that providing a plan administrator with broad discretionary authority to administer the plan and to take whatever steps are necessary to accomplish the purposes of the plan helps.  This type of "reservation of rights" gives plan administrators more leeway in dealing with issues that arise, like lost participants and how they will be treated.  So think about how you will deal with lost people before you lose them.  That may save time and effort in dealing with missing persons. 

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Benefit plan design, administration and documentation is not thrilling stuff.  But when things go wrong, it can be very exciting.  As a plan sponsor, there is no "perfect" plan design that you can latch on to for every plan and never have any problems because you still have to administer them.  Still, there are some things about plan design and administration that can reduce risk, so consider the following as things you can do in designing your plan.

1. Don't make the plan sponsor the fiduciary of the plan.  It is not required that the company that creates the plan automatically takes on the role of "fiduciary."  Instead, consider whether creating an Employee Benefits Committee to be named as the fiduciary might be more appropriate.  The committee structure may help differentiate the fiduciary plan functions from the non-fiduciary (i.e., business or settlor) functions, thus reducing potential conflict-of-interest issues as well as concerns over executive v. fiduciary status in making hard business decisions.  Plus the committee could retain separate legal counsel from the company specifically for the plan concerns, thereby further preserving privilege.

2. Along those same lines, avoid naming key corporate officers as fiduciaries.  C-suite executives have loads of information about the company but that knowledge would also be imparted to them in their capacity as plan fiduciaries.  Wearing a high level executive hat AND a plan fiduciary hat carries with it a host of potential conflict-of-interest issues.  Its better to keep the company executives away from the plan if possible.

3. Before you go any further, make sure you have strong reservation of rights language in your plans.  Make sure that plan documents specifically provide for the ability to amend, revise or terminate the plan at the discretion of the fiduciaries.  Also, consider including the reservation of rights language in every communication from the plans.  Though not specifically required under ERISA, caselaw on the topic seems to clearly favor using the disclaimer in all communications.

4. Clearly define roles and responsibilities.  Make sure that everyone who has a role in plan administration knows the role and is held accountable for what has to be done.  Consider creating an administrative manual for the plan that specifies when and how plan administration activities are completed.  Don't get caught wondering whose job it was to take care of something that goes wrong.

5. Don't cut off appeals.  Appeal periods that are too short or procedures that are vague or cumbersome are always a danger.  Make sure the plan documents explain how to exhaust administrative remedies and what the specific steps are to complete the appeals process.  Make sure to follow the process as it is written.  Be aware of the new requirements for external appeal if this applies to your health plan.

6. Keep a history of the plan.  Someone should always know where documents are, how things were done in the past and what service providers were used.  Consider making a written record of all the plan professionals used for each plan year and what services they provided.  Keep track of where plan records are kept, even the old ones, and pass the history down to incoming plan personnel.  Like a family oral history, take the time to share the history of the plan with new generations so they have some idea of "how things were done."

Again, none of these is definitive or absolutely required.  But in an age where benefits administration is getting more and more confusing, a few simple tweaks to your administrative processes can go a long way toward making things easier down the road.  For assistance with your plan administration concerns, you can always contact your attorney at Fox Rothschild.

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 Lately I have been fielding a lot of questions relating to employee benefits issues in mergers and acquisitions.  Whether they be asset deals, stock deals or straight mergers, due diligence about employee benefits should always come sooner rather than later.  There are lots of checklists out there about things you need to look for and specific questions to ask, but what strikes me is that some of them overlook some of the basics that I ask first.  So I thought I would share my initial questions when being asked to consider employee benefit concerns in a deal.

1. What do the entities look like to begin with and what will then end up looking like?

The structure of the entities before the transaction and after the transaction can tell us a lot about what might need to be done with the benefit arrangements.  A parent selling a wholly owned subsidiary may have different issues then two small companies creating a joint venture.  So before you do your employee benefit analysis, make sure you know where you have been and where you are going.  Believe me, it matters.

2.  What have you got that is not wages and what will you keep giving?

Seems like a silly statement, but a good review should start with the assumption that everything provided to employees that is not a straight wage could be a benefit.  Maybe not an ERISA benefit plan, but possibly some type of "plan" or "program" that has to receive special treatment.  Don't assume that simply because it is not a qualified plan it is not relevant for consideration.  I have seen things like wellness programs, commuter benefits, pet insurance and adoption assistance plans become last minute problems that would not have been issues if considered in advance.  So a real inventory is a census of everything you have (on both sides) and what you expect to give when you are done.

3. Who will still be employed when the dust settles?

Sometimes a merger eliminates employees.  Or an acquisition can take one set of employees and moves them to a new employer.  To evaluate continuation (and COBRA) obligations, you have to know who will still be around and who will be losing their employment status.  Do we have any obligations to retirees?  What about people who retiree because of the transaction?  Will job classifications change?  You would be amazed at the amount of litigation that arises related to terminating benefits for former AND continued employees that could have been addressed beforehand by simply considering who was being let go and who was being kept.

4. Do we have any unions involved?

Without going into too much detail, collectively bargained employee benefits issues can be a ticking time bomb for anyone who waits until the last minute to consider them.  Make a list of all unions involved,both before and after, and include any multiemployer benefit fund to which there may be a contribution obligation.  Be cognizant of possible successor liability for any delinquent contributions of the seller entity.

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Just because you work with retirement plan money, you are not necessarily a fiduciary.  This is generally good news to service providers who are trying to balance between potential liability under ERISA and their obligations under service contracts to plans and plan sponsors.

In Erickson v. ING Life Ins. & Annuity Co., the U.S. District Court of Idaho recently affirmed that a service provider moved money was not liable as a fiduciary.  At issue concerned moving money as a directed custodian.  The funds were transferred a day late which cost the plan money.  But the court would not allow a claim for breach of fiduciary duty to survive, finding that mere custodial responsibility (meaning acting at the direction of other fiduciaries) did not automatically give rise to fiduciary status under ERISA. 

The court reasoned that fiduciary status requires something more than merely having control of certain ministerial functions involving plan assets, like writing checks or moving money.  To be a fiduciary, one has to be using their own judgment and assume control, not simply acting at the direction of the plan.  Doing what you are told is not the same as assuming authority or control over plan assets for the purposes of being a fiduciary.

It is important to note that the court did not foreclose a possible negligence or breach of contract action against the custodian.  It merely concluded that this was not an ERISA case.  So for plan service providers, a case like this can provide some measure of comfort in the idea that just because you work with plan assets, you are not automatically a fiduciary.  but it also reminds us that service providers should be very clear in their contracts and agreements as to who is giving the directions and making the actual decisions for the plan.

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With the heady rush of health care reform changes, we might be overlooking retirement plans.  I have been writing before about the importance of fees disclosures in retirement plans and it turns out the government has not forgotten about it either.

On July 16, 2010, the DOL further clarified its position that fiduciaries must understand the fees and expenses associated with plans that allow participants to direct their investments and participants must be made aware of them.  Beginning July 16, 2011, a failure to disclose will result in prohibited transaction which in turn triggers excise tax penalties of 15 percent of the fees.

Retirement plan providers are now responsible to make the  disclosure if they reasonably expect to receive $1,000 or more in compensation.  The following persons are entities are required to make disclosures under these regulations:

• Fiduciaries of the plan, including investment managers and anyone else who gives investment advice to the plan for a fee
• Fiduciaries of plan assets in which the plan has a direct equity investment
• Registered investment advisers
• Providers of the plan’s record keeping and brokerage services
• Other service providers, if they receive indirect compensation – including accountants, actuaries, banks, consultants, investment advisors, lawyers and third party administrators.

The service provider is required to disclose, in writing,  the following information BEFORE before providing services:

• A description of the services to be provided
• A statement of the provider’s fiduciary status
• A description of all direct and indirect compensation to be received for covered services
• A disclosure of compensation paid to the service provider and affiliates or subcontractors
• A description of any compensation payable upon termination of the arrangement
• If recordkeeping services are provided, a separate identification of the cost of the services

These fees are normally reported on the plan's 5500 (typically on the schedule C).  The regulations are available here for closer review.  These regs are substantially the same as were originally considered back in 2007, so there should be no surprises.  But plan sponsors and fiduciaries should now be very careful to make sure plan records maintain a full explanation of plan service fees incurred, and also make sure they are accurately reported.

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You might recall from a previous posting that I discussed the Supreme Court's decision in Metropolitan Life Insurance Co. v. Glenn.  In that case, the Court held that there is an inherent conflict affecting insurance companies that both decide and pay claims for benefits.  This conflict must be considered in determining whether an insurance company abused its discretion in denying a claim for benefits.  This does not eliminate the application of the "arbitrary and capricious" standard of review that ordinarily applies to benefit determinations. Instead, is creates a  two-step analysis for courts that are asked to review claims determinations.  The first is to determine whether a structural conflict exists which occurs when the administrator both evaluates claims for benefits and pays for them.   If this is the case, then step two applies and the court then must determine how much weight the conflict should be afforded in determining whether the administrator abused its discretion in denying the claim.

Subsequent to Glenn, the Second Circuit Court of Appeals recently ruled in Durakovic v. Building Service 32 BJ Pension Fund, that, like insurance companies, Taft-Hartley funds are inherently conflicted when making benefit determinations, and that this conflict needs to be considered by federal district courts when reviewing plan determinations under an arbitrary and capricious standard of review.  This could have significant implications for these multiemployer plans and their future benefit plan determinations.

By way of background, Taft-Hartley (or multiemployer plans) are generally administered by a board of trustees, with equal numbers of union and management trustees. Appeal of benefit determinations are made to the board that ultimately makes a ruling on the appeal. The assumption is always that the balance of union and management takes away any perceived conflict because both sides would be equally represented in a decision process.

In Durakovic, an employee applied for disability benefits from her union-sponsored plans.  The plans provided benefits to those deemed to be disabled.  The plans denied her claim for disability benefits after a review of her appeal and she subsequently filed suit in federal district court challenging the funds’ decision.  On appeal, it was agreed that the challenged decision was subject to an arbitrary and capricious standard of review by the court. However, both parties disagreed with the district court’s decision that the Fund’s “conflict” was a relevant factor.  The plans argued that they were not conflicted within the meaning of Glenn because Taft-Hartley funds are administered by an entity composed equally of union and employer representatives. Durakovic argued that the conflict should have been accorded more weight.

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This morning, President Obama into law the "Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010" that includes a six-month so-called "doc-fix," pension funding relief, and an anti-Medicaid fraud information disclosure measure. It's not all pension relief, but there is some in there.

In June of this year, Medicare physician payment rates are scheduled to be reduced by more than 20%. The "doc fix" would reverse that reduction and provide a 2.2% update to physician payment rates through Nov. 30, 2010. The bill pays for the "doc fix" in part by providing for pension funding relief, namely temporary, targeted funding relief for single employer and multiemployer pension plans that suffered significant losses in asset value due to the steep market slide in 2008. The theory for the revenue offset is that funding relief would increase employers' taxable income thereby boosting government revenue.

Under the pension relief provision, employers that elect the relief would be required to make additional contributions to the plan if they pay compensation to any employee in excess of $1 million, pay extraordinary dividends, or engage in extraordinary stock buybacks during the first part of the relief period. Additional relief is available to certain plans sponsored by charitable organizations. Employers that opt out of requirements to pay more into their pension funds to offset losses would still have to make additional contributions if they pay compensation to any employee in excess of $1 million, pay “extraordinary dividends,” or engage in “extraordinary stock buybacks” during the relief period.

Many plan sponsors have been interested in this type of relief because of concerns over improving their funded status under rehabilitation plans. For sponsors of single employer and multiple employer defined benefit pension plans, it is expected that this relief will make it easier for plans to retain their “green” status and improve their funded status as measured under the Pension Protection Act of 2006. Stay tuned for more details on this relief and the various agencies weigh in on its true implications.

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The Department of Labor has finalized its regulations on "domestic relations orders" (DROs).  The regulations, originally issued in 2007, were required under the PPA to clarify certain issues relating to the timing and order of issuing DROs under ERISA and the Code.  The final regulations are effective August 9, 2010. 

The good news is that the regulations rely heavily on examples to illustrate general principles which can make the regulations easier to understand.  But the bad news is that the DOL makes it very clear that the examples are not intended to represent the only circumstances to which the general principles apply.  A couple of the key provisions:

• Subsequent DROs.  The regulations confirm that a DRO won’t fail to be a QDRO solely because it is issued after, or revises, another order.  For example, a second order involving the same parties is issued that reduces the benefit awarded in the first order.  The final regulations clarify that the result would be unchanged if the second order increased the benefit.
• Timing of DROs.  The regulations clarify the principle that a DRO won’t fail to be a QDRO solely because of the timing of when it was issued.   For example A DRO can still be a QDRO if it is an order issued after the death of the participant or an order issued after the parties’ divorce.

While the DOL clarifications are useful, they don't significantly deviate from original narrow guidelines and while helpful, the examples don't necessarily make any significant changes to the administration of DROs and QDROs.  A complete text of the regulations are available here.  If nothing else, it will give benefits and matrimonial attorneys something in common to discuss.  For more information, please contact your attorney at Fox Rothschild.

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Theresa Borzelli, from our Roseland office, provided me with the following:

The week of May 17, the IRS began sending out questionnaires and letters to 1,200 plan sponsors asking them to complete the 401(k) Compliance Check Questionnaire. The questionnaires and letters are being sent by the IRS Employee Plans Compliance Unit (EPCU) and are intended to provide a comprehensive view of 401(k) plans to help the EPCU “maximize its resources for education, outreach, guidance and enforcement efforts while minimizing the burden to compliant plan sponsors.”

The questionnaire will cover topics such as:

• Demographics
• Participation
• Employer and employee contributions
• Top-heavy and nondiscrimination testing
• Distributions and plan loans
• Automatic contribution arrangements
• Designated Roth features
• IRS voluntary compliance and correction programs
• Plan administration

The same questionnaire will be provided to all selected plan sponsors, but some questions may only apply to plans with certain features. While the questionnaire letter is couched as a request, the IRS has made it clear that it expects a response. Failure to respond or provide complete information will result in further action or examination of the plan.

If you receive a questionnaire your Fox Rothschild benefits attorneys are ready to assist you.

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Recently, I have been working on a number of cases that involve allegations of breach of fiduciary duty.  Having read a number of court decisions and article on this issue, it strikes me that while there are a number of duties that a fiduciary has to plans, there are 4 that have jumped out at me as the big ones.

Section 404 of ERISA provides that a fiduciary shall discharge duties with the case, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity would under the same circumstances.  404 also sets out two of the largest duties. 

First, there is the duty of loyalty.  The fiduciary has to act solely and exclusively in the best interests of the plan to provide benefits for participants and defray expenses for administration of the plan.  This means no self-dealing, but it also means watching how the dollars that are spent elsewhere to see that they are properly spent.  Fiduciaries have to know what is reasonable to pay for services rendered to the plan.

Second, there is the duty of diversification or prudent investment.  A fiduciary has to make investment decisions so as to minimize the risk of large losses, unless under the circumstances it is not prudent to do so.  It is interesting that the statute does not require fiduciaries to maximize return.  So fiduciaries should be wary of investment decisions that promise greater returns if those returns come with higher risk. 

Third, there is a duty to properly communicate.  Though specifically articulated in Section 404, there are many court cases that address failure to communicate or miscommunication of plan terms.  Fiduciaries must avoid misleading information and should seek to make sure participants are fully informed of the terms of the plan, and also any changes that occur.

Fourth, there is a duty to maintain the trust.  Sometimes referred to as a record keeping obligation or a segregation obligation, this duty requires fiduciaries to keep accurate records of the plan and also to keep plan assets separate from other assets.  No co-mingling with corporate assets is permitted.  There must e accurate accounting and reporting of plan assets, returns and withdrawals.

Certainly there are more duties that can be read into these and interpreted from them.  But if a prudent fiduciary focuses on these four and makes sure that they are diligent in their exercise of these duties, the risk of claims for breach of fiduciary duty will be lowered. 

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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.

Continue Reading...

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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.

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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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