Tag: 401(k)

2024 New Years’ Resolutions for Retirement Plans

Over the past few years, numerous pieces of legislation affecting retirement plans have been signed into law, including the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Bipartisan American Miners Act, and the SECURE 2.0 Act (the “Acts”). While some of the changes, including both mandatory and optional provisions under the Acts previously became effective, other provisions under the SECURE Act and SECURE 2.0 Act had a delayed effective date. As we enter into 2024, many of the remaining mandatory and optional provisions established under these Acts are now going into effect. As a refresher, we have compiled a brief list of some of the important changes that will affect retirement
plans in 2024:

Long-Term Part-Time (“LTPT”) Employee Rule –
We resolve to permit more part-time employees to defer to our plans.

Beginning January 1, 2024, 401(k) plans are required to allow eligible employees who have at least 500 hours of service over 3 consecutive, 12-month periods beginning on or after January 1, 2021 to participate for purposes of making elective deferrals only, even where the 401(k) plan provides for a longer service requirement for deferral eligibility. See our prior SECURE Act and SECURE 2.0 Act newsletters, linked below, for more details on the LTPT employee rule; however, note that the IRS recently published proposed regulations on the LTPT employee rule, which are not addressed in these newsletters.

Effective January 1, 2025, the SECURE 2.0 Act changed the rule to require only 2 consecutive 12-month periods of service with at least 500 hours of service, and to apply the LTPT employee rule to 403(b) plans.

RMD Age and Roth Accounts –
We resolve to permit our elders to stay in our plans longer (again).

The age at which required minimum distributions (“RMDs”) must commence was increased again by SECURE 2.0, this time to age 73 for individuals who turn age 72 on or after January 1, 2023. Additionally, pre-death RMDs are no longer required for Roth accounts in retirement plans, generally effective for taxable years after December 31, 2023.

New Emergency Withdrawals –
We resolve to permit more access to retirement plan savings.

Beginning January 1, 2024, plan sponsors may add a number of new optional features addressing emergency situations, including:

  • Emergency Expense Distributions – Plans may permit participants to receive one emergency distribution of up to $1,000 per calendar year to cover unforeseeable or immediate financial needs relating to personal or family emergency expenses.
  • Distributions for Victims of Domestic Violence – Plans may permit a participant who is a domestic abuse victim to take a distribution up to the lesser of $10,000 (indexed) or 50% of the participants vested account balance during the 1-year period beginning on the date on which the individual is a victim of domestic abuse by a spouse or domestic partner.
  • Emergency Savings Accounts – Plan sponsors may offer an emergency savings account linked to their defined contribution retirement plan. Participants who are not highly compensated employees may contribute (on a post-tax, Roth basis) a maximum of $2,500 (indexed), or such lower amount that may be set by the plan sponsor. The account must allow for withdrawal by the participant at least once per calendar month, and the first 4 distributions per year from the account cannot be subject to fees or charges.

Mandatory Distribution Threshold –
We resolve to increase our automatic IRA rollover threshold.

The limit on involuntary distributions (i.e., the automatic IRA rollover limit) is increased from $5,000 to $7,000 for distributions occurring on or after January 1, 2024. However, this increase is optional – therefore, the limit under a plan will stay at $5,000 unless the plan administrator takes action to increase it to $7,000.

Roth Employer Contributions –
We resolve to treat employer contributions more like Roth.

Plans may permit employees to designate employer matching contributions or nonelective contributions as Roth contributions if such contributions are 100% vested when made.

Matching Contributions on Student Loan Payments –
We resolve to treat student loan payments like employee deferrals.

Plan sponsors may treat certain “qualified student loan payments” as elective deferrals for purposes of matching contributions.

2024 Resolutions Saved for Another Year

Roth Catch-Up Contribution Requirement is Pushed Back.

SECURE 2.0 required that all catch-up contributions made to a retirement plan by employees paid more than $145,000 (indexed) in FICA wages in the prior year be made on a Roth basis. The original effective date of this requirement was generally January 1, 2024 – however, in September, the IRS provided for a 2-year administrative transition period, which essentially moved the effective date for this requirement from January 1, 2024 to January 1, 2026. This extension provides plan sponsors with additional time to prepare for this new requirement.

Amendment Deadline to Reflect the Acts

IRS Notice 2024-02, released in the last week of December 2023, further extended the amendment deadline for changes made by the Acts. In general, the deadline to adopt an amendment to a qualified plan for required and discretionary changes made by the Acts is now December 31, 2026.

For more in-depth analysis of the new provisions briefly described above, please refer to our prior newsletters linked below:

The Secure Act Becomes Law!

SECURE 2.0 Passes

IRS Relief for Roth Roth Catch-up Requirement

© 2007-2023 Hill Ward Henderson, All Rights Reserved
For more news on Retirement Planning in 2024, visit the NLR Financial Institutions & Banking section.

District Court Declines to Dismiss 401(k) Fee Litigation Case in First Decision Post-Hughes

In the first decision since the Supreme Court’s ruling in Hughes v. Northwestern Univ., No. 19-1401, 595 U.S. ___ (U.S. Jan. 24, 2022) (discussed further here), a Georgia federal district court held in favor of plaintiffs and declined to dismiss allegations that defendant’s 401(k) plan included costly and underperforming funds and charged excessive recordkeeping fees. Specifically, plaintiffs alleged that defendants breached ERISA’s fiduciary duty of prudence by: (1) offering retail share class mutual funds despite the availability of identical lower-cost institutional share classes of these same funds; (2) including actively managed mutual funds which were more expensive than available passively managed funds; (3) selecting and maintaining underperforming funds; and (4) overpaying for recordkeeping services.

In declining to dismiss plaintiffs’ investment management fee claims, the district court relied heavily on Hughes. The court expressed its view that Hughes “suggested” that a defined contribution plan participant may state a prudence claim by merely alleging that the plan offered higher priced retail class mutual funds instead of available identical lower-cost institutional class funds. The district court also rejected defendant’s argument that plaintiffs’ claims should be dismissed in part because the plan offered a variety of investment options that participants could select, including lower-cost passive investment options. The district court explained that Hughes rejected this exact argument in holding that a fiduciary’s decisions are not insulated merely by giving participants choice over their investments and that fiduciaries have a continuing duty to monitor plan investments.

The court declined to dismiss plaintiffs’ recordkeeping claims because plaintiffs plausibly alleged that the plan paid nearly double the fees charged by similarly sized plans and that defendant failed to monitor those costs. In regards to plaintiffs’ underperformance claims, the court held that the existence and extent of the alleged underperformance was better left for summary judgment given the parties’ differing views on the issue.

Proskauer’s Perspective

While plaintiffs seemingly scored a victory in the first decision since Hughes, the decision does not indicate that this will (or should be) the trend. First, the district court issued its decision one day after Hughes was decided without the benefit of additional briefing, which would have likely included briefing on the Supreme Court’s direction that district courts give “due regard” to the reasons why a fiduciary made the challenged decisions. Second, the district court appears to have, at a minimum, over-emphasized the Supreme Court’s holding as to the plausibility of mutual fund retail share class claims; the Supreme Court did not hold directly or in dicta that a plaintiff may survive dismissal merely by alleging the availability of identical lower-cost mutual fund share classes.

The case is Goodman v. Columbus Reg’l Healthcare Sys., 2022 U.S. Dist. LEXIS 13489 (M.D. Ga. Jan. 25, 2022).

© 2022 Proskauer Rose LLP.
For more articles about 401(k) plans, visit the NLR Labor & Employment section.

Congress (Finally) Passes the SECURE Act

After a delay of several months, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, clearing the way for one of the most substantial pieces of retirement plan legislation in years to become law.

The House of Representatives initially passed the SECURE Act in May by an overwhelming 417−3 vote. Although the Act was set for easy bipartisan passage, it foundered in the Senate. The bill found new life at the eleventh hour of the 2019 legislative session as an attachment to the must-pass $1.4 trillion spending bill, which passed by significant margins.

The SECURE Act brings quite a few changes that will affect both plan sponsors and participants. It is intended to incentivize employers (particularly small businesses) to offer retirement plans, promote additional retirement savings, and enhance retiree financial security, including several provisions that will impact current plan administration. The changes brought by the Act are generally positive in our view, but certain ones will create some new administrative challenges and questions.

Key changes include:

Open Multiple Employer Plans (MEPs)

Among several other MEP-related provisions, the Act provides for the establishment of defined contribution Open MEPs – referred to as “Pooled Plans” – which will be treated as single ERISA plans. Under current law, where a plan is sponsored by a group of employers that are not under common control, the employers must have certain “commonality” of interests, or the arrangement may be treated as multiple component plans for ERISA purposes. Even though the recent Department of Labor regulation on “Association Retirement Plans” relaxed the commonality requirement significantly, a limited commonality requirement nonetheless remained. As a result, Open MEPs (which are generally offered by service providers and open to any employer who wishes to adopt them) remained subject to potential treatment as multiple ERISA plans. In a move largely cheered by the industry, the SECURE Act goes further by abolishing the commonality requirement entirely.

Part-Time Employee Eligibility for 401(k) Plans

Sponsors of 401(k) plans will be required to allow employees who work at least 500 hours during each of three consecutive 12-month periods to make deferral contributions ─ in addition to employees who have satisfied the general “one year of service” requirement by working at least 1,000 hours during one 12-month period. Long-term part-time employees eligible under this provision may be excluded from eligibility for employer contributions, and the Act provides very significant nondiscrimination testing relief with respect to this group. Nonetheless, this is an example of a provision that – while positive in the sense of encouraging additional retirement plan coverage – will nonetheless create new recordkeeping and administrative challenges.

Required Minimum Distributions (RMDs)

The age at which required minimum distributions must commence will be increased to 72 from 70 1/2. This is another example of a helpful change that will nonetheless lead to additional compliance questions.

Increased Tax Credits

The cap on start-up tax credits for establishing a retirement plan will increase to up to $5,000 (depending on certain factors) from $500. Small employers who add automatic enrollment to their plans also may be eligible for an additional $500 tax credit per year for up to three years.

Safe Harbor 401(k) Enhancements

Employers will have more flexibility to add non-elective safe harbor contributions mid-year. Additionally, the Act eliminates the notice requirement for safe harbor plans that make non-elective contributions to employees. The automatic deferral cap for plans that rely on the automatic enrollment safe harbor model (known as the “qualified automatic contribution arrangement” or “QACA” safe harbor) also will increase to 15% from 10%.

Other Retirement Plan Highlights

  • Penalty-free (but of course, not tax-free) retirement plan withdrawals for a birth or adoption.
  • An objective fiduciary safe harbor for the selection of a lifetime income provider is being added to encourage employers to offer in-plan annuity options. The Act also provides for tax-advantaged portability for a lifetime income product from one plan to another or between plans and IRAs to help avoid surrender charges and penalties where the lifetime income product is removed from a particular plan.
  • A separate provision also requires participant lifetime income disclosures illustrating the monthly payments if the participant’s account balance was used to provide lifetime income in an annuity.
  • Nondiscrimination testing relief for some closed defined benefit plans.
  • Certain clarifications relating to the termination of 403(b) custodial accounts and 403(b) retirement income accounts within church-sponsored plans.
  • Increase in penalties for failing to file plan returns on time.

While it is not related directly to employer-sponsored plans, readers may be interested to know that the Act also repeals the maximum age for IRA contributions and eliminates the stretch IRA. As to the latter, non-spouse beneficiaries of inherited IRAs will be required to take their benefits in income on an accelerated basis (as compared with current law) – this will have estate planning implications for individuals and families that should be understood and reviewed.

The SECURE Act is one of the most comprehensive retirement plan reforms in a decade and brings many changes for consideration. Plan sponsors should consider how the SECURE Act will impact the administration of their plans. Employers that do not currently sponsor retirement plans may wish to consider (or reconsider) doing so given the Act’s additional incentives ─ or may consider joining a MEP.

Most provisions of the Act will go into effect on January 1, 2020. In the coming months, it will be necessary to consider its practical effects on plan design and administration, including the interplay between certain of the Act’s provisions and existing regulatory guidance where there is subject-matter overlap.

©2019 Drinker Biddle & Reath LLP. All Rights Reserved

More on retirement regulation on the National Law Review Labor & Employment law page.

IRS Expands Ability of Safe Harbor Plan Sponsors to Make Mid-Year Changes

The Internal Revenue Service (IRS) recently issued Notice 2016-16, which provides safe harbor 401(k) plan sponsors with increased flexibility to make mid-year plan changes.  Notice 2016-16 sets forth new rules for when and how safe harbor plan sponsors may amend their plans to make mid-year changes, a process which traditionally has been subject to significant restrictions.

Background

“Safe harbor” 401(k) plans are exempt from certain nondiscrimination tests (the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests) that otherwise apply to employee elective deferrals and employer matching contributions.  In return for these exemptions, safe harbor plans must meet certain requirements, including required levels of contributions, the requirement that plan sponsors provide the so-called “safe harbor notice” to participants, and the requirement that plan provisions remain in effect for a 12-month period, subject to certain limited exceptions.

Historically, the IRS has limited the types of changes that a safe harbor plan sponsor may make mid-year due to the requirement that safe harbor plan provisions remain in effect for a 12-month period.  The 401(k) regulations provide that the following mid-year changes are prohibited, unless applicable regulatory conditions are met:

  • Adoption of a short plan year or any change to the plan year

  • Adoption of safe harbor status on or after the beginning of the plan year

  • The reduction or suspension of safe harbor contributions or changes from safe harbor plan status to non-safe harbor plan status

The IRS has occasionally published exceptions to the limitations on mid-year changes.  For example, plan sponsors were permitted to make mid-year changes to cover same-sex spouses following the Supreme Court of the United States’ decision in United States v. Windsor in 2013.

Aside from these limited exceptions, safe harbor plan sponsors were generally not permitted to make mid-year changes.  This led to some difficulties for plan sponsors, particularly in situations where events outside the plan sponsor’s control might ordinarily cause a plan sponsor to want to make a mid-year plan change.

Permissible Mid-Year Changes

Notice 2016-16 clarifies that certain changes to safe harbor plans made on or after January 29, 2016, including changes that alter the content of a plan’s required safe harbor notice, do not violate the safe harbor qualification requirements simply because they occur mid-year.  A “mid-year change” for this purpose includes (1) a change that is first effective during a plan year, but not effective at the beginning of a plan year, or (2) a change that is effective retroactive to the beginning of the plan year, but adopted after the beginning of the plan year.

Mid-year changes that alter the plan’s required safe harbor notice content must meet two additional requirements:

  1. The plan sponsor must provide an updated safe harbor notice that describes the mid-year change and its effective date must be provided to each employee required to receive a safe harbor notice within a reasonable period before the effective date of the change.  The timing requirement is deemed satisfied if the notice is provided at least 30 days, and no more than 90 days, before the effective date of the change.

  2. Each employee required to be provided a safe harbor notice must also have a reasonable opportunity (including a reasonable time after receipt of the updated notice) before the effective date of the mid-year change to change the employee’s cash or deferred election.  Again, this timing requirement is deemed satisfied if the election period is at least 30 days.

Mid-year changes that do not alter the content of the required safe harbor notice do not require the issuance of a special safe harbor notice or a new election opportunity.

Prohibited Mid-Year Changes

Certain mid-year changes remain prohibited, including:

  • A mid-year change to increase the number of years of service that an employee must accrue to be vested in the employee’s account balance under a qualified automatic contribution arrangement (QACA) safe harbor plan

  • A mid-year change to reduce the number of employees eligible to receive safe harbor contributions

  • A mid-year change to the type of safe harbor plan, such as changing from a traditional 401(k) safe harbor plan to a QACA

  • A mid-year change to modify or add a matching contribution formula, or the definition of compensation used to determine matching contributions if the change increases the amount of matching contributions

  • A mid-year change to permit discretionary matching contributions

In addition, mid-year changes that are already subject to conditions under the 401(k) and 401(m) regulations (including changes to the plan year, the adoption of safe harbor status mid-plan year, and the reduction or suspension of safe harbor contributions, as described above) are still prohibited, unless applicable regulatory conditions are met.  These changes are also not subject to the special notice and election opportunity requirements.

Conclusion

Notice 2016-16 fundamentally changes the rules regarding mid-year changes to safe harbor 401(k) plans.  Prior to Notice 2016-16, mid-year changes were assumed to be impermissible, subject to the limited exceptions described above.  Going forward, however, mid-year changes that are not specifically prohibited are permitted, so long as the notice requirements, where applicable, are met, and other regulatory requirements are not violated.

Notice 2016-16 should prove particularly helpful for safe harbor plan sponsors that have struggled with the limitations imposed on safe harbor plans by the inability to make mid-year changes when non-safe harbor plans would do so (for example, if a record-keeper changes administrative procedures or other events outside the plan sponsor’s control require mid-year changes).  However, safe harbor plan sponsors wishing to make mid-year changes will still need to consult with advisors to determine whether a proposed amendment is permissible, or whether the amendment is subject to additional regulatory requirements.  In addition, plan sponsors wishing to make a mid-year change that would alter the plan’s required safe harbor notice content must assume the additional cost of issuing a special safe harbor notice and must plan ahead to make sure the supplemental notice is delivered on time.

The IRS is also requesting comment on additional guidance that may be needed with respect to mid-year changes to safe-harbor plans, and specifically as to whether additional guidance is needed to address mid-year changes relating to plan sponsors involved in mergers and acquisitions or to plans that include an eligible automatic contribution arrangement under Section 414(w) of the Internal Revenue Code.  Comments may be submitted in writing not later than April 28, 2016.

Article By Jeffrey M. Holdvogt, Stephen Pavlick, PC & Sarah G. Raaii of McDermott Will & Emery
© 2016 McDermott Will & Emery

DOL’s Recent Guidance on State Retirement Initiatives for Private Sector Employees Part II: Interpretive Bulletin

140px-US-DeptOfLabor-Seal.svg__0This post continues our two-part series discussing the Department of Labor’s (DOL’s) recent guidance on state retirement initiatives. The first part of this series, “The Proposed Rule—State-Sponsored IRAs,” discusses the DOL’s proposed rule that would create an ERISA “safe harbor” for state-sponsored IRAs. In Part II, we discuss the DOL’s Interpretive Bulletin (Interpretive Bulletin), which addresses other types of state retirement initiatives for workers in the private sector.

The Interpretive Bulletin sets out, in a summary format, the DOL’s views on state-offered 401(k) plans for private sector employees and other state initiatives. Beginning with the DOL’s strong support for ERISA-covered plans (for reasons including the availability of employer contributions, higher contribution limits, and the protection of ERISA accounts from creditors), the Interpretive Bulletin surveys a range of current and potential state-sponsored programs and offers the DOL’s views on how ERISA coverage may apply to each of these initiatives.

The Interpretive Bulletin reviews programs in

  • Washington State, where the state’s proposed retirement program is not considered to be an ERISA-covered plan, but instead by design establishes a marketplace for the offering of ERISA plans and IRAs;

  • the Commonwealth of Massachusetts, where a state law allowing nonprofit organizations to adopt a contributory retirement plan developed and administered by the state is shown as an example of how states may set up their own 401(k) prototype plans for private employers to adopt; and

  • the State of Maryland, where a Governor’s Task Force report considered the possibility of the state establishing and obtaining IRS tax qualification for a state multiple-employer plan (MEP).

The DOL closes by providing its views on ERISA preemption, including the view that the types of programs outlined in the Interpretive Bulletin would not be preempted by ERISA because they do not “undermine ERISA’s exclusive regulation of ERISA-covered plans” and that they “contemplate a state acting as a participant in a market rather than as a regulator.”

Several issues addressed in the Interpretive Bulletin are giving rise to debate, including the DOL’s view that a state’s unique “representational interest in the health and welfare of its citizens” allows a state to sponsor an MEP for in-state employers. What is new here is that the DOL is providing states a different standard for the establishment of an MEP than the “employment based nexus” standard that the DOL established for private enterprises that wish to do the same. This issue is critical because MEPs can have streamlined regulatory reporting and disclosure requirements, allowing them to provide competitive cost savings to adopting employers. Another issue to watch is the DOL’s query (included as a footnote in the bulletin) on whether state sovereign immunity laws need to be reviewed in light of ERISA’s remedial provisions.

While the DOL’s Interpretive Bulletin became effective on November 18, 2015, the impact of the Interpretive Bulletin and the proposed rules on IRAs are worth keeping an eye on. We recognize that change is often the rule and not the exception, but how these state-sponsored programs will play out has yet to be determined. A significant impact to the retirement industry could be on the horizon.

In addition to this DOL guidance package discussed in this series, there is also talk of possible legislative proposals, and the Treasury Department recently announced the federal myRA program as a voluntary national initiative.

Article By Marla J. Kreindler & Matthew J. Chapman of Morgan, Lewis & Bockius LLP

© 2015 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

Retirement and Pensions Law Update

The National Law Review published an article about Retirement and Pensions Laws Changes written by David J. Leiter and Abby Matousek of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.:

 

PBGC Offers Guidance on MAP-21 Rate Changes

On August 29th, the Pension Benefit Guaranty Council (PBGC)released guidance on how the recently enacted MAP-21 legislation, which gives defined benefit plan sponsors flexibility in near-term plan contributions, will affect PBGC premiums. The guidance clarifies that calculation of variable-rate premiums will be unaffected regardless of whether plan sponsors avail themselves of interest rate stabilization provisions. The guidance also says that MAP-21 increases the flat and variable premium rates and caps variable rate premium. This guidance supersedes any “inconsistent guidance” in the PBGC’s 2012 premium instructions—which will be reflected in the 2013 instructions.

PBGC Requests OMB Extend Info Collection on QDRO Booklet Revisions

On August 23rd, the PBGC issued a notice requesting an extension of an information collection request for a booklet on qualified domestic relations orders (QDROs). The booklet contains information on benefit options that the PBGC offers on QDROs, modeled orders and child support. The booklet also clarifies rules on when payments to an alternate payee may begin. PBGC is planning several revisions to the booklet, including changing the description of agency procedures for informal review of a draft domestic relations order.

Industry Speaks Out on Brokerage Window Pros and Cons

Amidst concerns over DOL’s brokerage window Field Assistance Bulletins, plan fiduciaries are speaking out on the pros and cons of brokerage windows. In an August 16th interview SIFMA managing director Lisa Bleier said brokerage windows allow plan fiduciaries to give participants maximum flexibility in choosing investment options and are often the only way for employers to attain the fullest possible participation in its 401(k) plan. However, the downside to brokerage windows is that employees sometimes make investment choices fiduciaries would avoid. While a relatively small percentage of defined contribution plans have brokerage windows and the decision to offer them is generally based on participant demand.

Brokerage Window-Only Plans Will Likely be Heavily Influenced by Election Results

In an interview, Bradford Campbell, a benefits attorney and former DOL assistant secretary, said DOL officials will address concerns associated with brokerage windows if President Obama wins a second term; however, the issue will likely go away if Mitt Romney wins in November.

Witnesses Urge ERISA Advisory Council to Not Require Affirmative Beneficiary Designations

At an August 29th ERISA Advisory Council hearing, participants urged DOL to avoid one-size-fits-all regulation that would burden administrators with an affirmative duty to contact participants who undergo significant life events regarding changes to beneficiary designations. Practitioners present at the hearing told DOL that a rule requiring a plan administrator to actively reach out is unnecessary as most plans already encourage employees to update beneficiary choice and burdensome to plan administrators. Witnesses agreed on the importance of up-to-date beneficiary designations and outlined the standards already in place to ensure these designations are updated as necessary.

ERISA Advisory Council Hears from Industry on Lifetime Income and Income Replacement

At the August 30th meeting of the ERISA Advisory Council, flexibility of 401(k) plan distributions was underscored as a valuable tool to meet plan participants’ unique needs. Jason Scott, managing director of Financial Engines Retiree Research Center, told the Council that the common defined benefit model is not necessarily the right way to approach the issue of lifetime income, saying the “real power of the 401(k) plan is its flexibility.” Participants at the meeting agreed that plan sponsors tend to look for lifetime income solutions that are “fully vetted and approved and very easy,” which are not always the best for retirees. Some suggestions to the Council in the area of lifetime income included: encouraging plan sponsors to offer in-plan lifetime income assistance; providing clear guidance that “prudent retirement help includes consideration of the broader picture” (including Social Security); and considering solutions that lower the plan sponsor’s fiduciary risk.

Insurance Experts Should be the Judges of Annuity Providers

Witnesses told the ERISA Advisory Council on August 30th that the DOL should allow plan sponsors to defer to state insurance regulators’ determinations of an annuity provider’s long-term financial viability and ability to satisfy fiduciary duty. Cynthia Mallett, Vice President of Corporate Benefit Funding at MetLife told the Council that the requirement to assess annuity providers’ financial viability leaves the “entire retirement community at a loss” as it should not be expected that plan sponsors have stronger reviews than state insurance regulators. Participants said that the fiduciary responsibility involved in selecting an annuity provider “is one, if not the biggest, issue for plan sponsors” offering lifetime income options.

American Benefits Council Speaks Out Against 401(k) Credit Insurance Legislation

At an August 28th meeting of the ERISA Advisory Council, Diann Howland, Vice President of Legislative Affairs at the American Benefits Council, spoke in opposition to the Retirement Savings Security Act of 2011 (H.R. 3656), introduced by Representative Pete Sessions (R-TX). The legislation would promote an insurance product that repays some 401(k) plan loans in the event a participant defaults due to death or disability and would require plan sponsors to automatically enroll plan participants. The American Benefits Council is concerned that the automatic enrollment aspect in terms of costs of the product and the fact that the legislation waives the ERISA fiduciary responsibility. Howland cited concern that the bill continues to garner cosponsors—current cosponsors include Representatives Bruce Braley (D-IA), Ruben Hinjosa (D-TX), Tom Latham (R-IA), Charles Rangel (D-NY) and Pat Tiberi (R-OH).

IRS Examining Regulatory Progress on Lifetime Income Guidance

On August 28th, the IRS held a phone forum to discuss a package of guidance and proposed rules on lifetime income options. The guidance, issued in February, is intended to encourage the use of lifetime income options such as fixed and longevity annuities. The package includes:

  • REG-110980-10,  addressing partial annuity distribution options under defined benefit pension plans;
  • REG-115809-11, on qualified longevity annuity contracts (QLACs);
  • Rev. Rul. 2012-3, on how qualified joint and survivor annuity and the qualified pre-retirement survivor annuity rules apply when an annuity is purchased under a profit-sharing plan; and
  • Rev. Rul. 2012-4, on rolling over amounts from a defined contribution plan to a defined benefit plan to obtain an additional annuity.

IRS Cancels hearing on Anti-Cutback Exemption

The IRS has announced that a hearing scheduled for August 24th has been cancelled. The hearing would have considered proposed regulations that would provide a limited exemption to anti-cutback rules for pension plans, allowing single-employer plan sponsors that are in a bankruptcy proceeding to amend its pension plan to eliminate a lump-sum distribution option if it met certain conditions.

American’s Nearing Retirement Face Challenges

Americans approaching retirement age are faced with new challenges as a result of the financial crisis. The almost-retired “suffered disproportionally” according to a recent New York Timesarticle, experiencing falling home process in addition to lower incomes. The article cites a report from Sentier Research which found that household income for Americans age 55 to 64 fell by almost 10 percent in today’s dollars from three years ago.

Workers Show Confidence in Ability to Retire Despite Inadequate Savings

A recent study, Baby Boomers and Generation Xers: Are They on Track to Reach Their Retirement Goals?, conducted by the Insured Retirement Institute found that, although the majority of Baby Boomers and Gen Xers are confident they will have enough money to retire comfortably, many have not calculated what their needs will be and have not saved appropriately. While the report found that “there are large groups of people who just do not have realistic expectations,” the results show that those taking important steps—such as consulting financial advisors, calculating savings or buying annuities—are the most confident in their ability to retire.

©1994-2012 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Benefit News of Note For Human Resources and Finance Departments

The National Law Review featured an article by Nancy C. Brower and Kelsey H. Mayo of Poyner Spruill LLP regarding Benefit News for Human Resources and Finance Departments:

It’s April.  For those of you in a planning mode, here’s what you may  want to think about…

Your Pension Plan and Retiree Medical Costs May Be Rising.  The culprit behind the cost increase, better than expected mortality improvement after the age of 55.   The Society of Actuaries exposure draft of a new mortality improvement scale, if adopted, is expected to  result in increases in traditional pension plan liabilities of 2% to 4% and in retiree health care liabilities of 6% to 9%.  The new mortality scale may be applied by the IRS as soon as 2014, and it is possible that auditors will push for its implementation even earlier.
401(k) Safe Harbor Plans IRS Compliance Check.  Employers with 401(k) plans that utilize safe harbor designs to pass nondiscrimination testing may soon be receiving a compliance check in the mail from the IRS.    The IRS will look to see whether the safe harbor requirements are being met, in addition to plan form qualification.   Accordingly, if you have never had your safe harbor notice reviewed by counsel, now is a great time to make sure it is compliant.  Also, note that if you  receive an IRS compliance check you should not just ignore it.  The IRS will refer for audit plans that do not respond to compliance checks.  Remember that plan errors can be corrected through the IRS voluntary correction program even after receipt of a compliance check, but the less expensive  voluntary correction programs are not available once the IRS commences a plan audit.
Identifying Executive Employment Contracts and Severance Arrangements with Release Language.   It is not unusual for employment agreements and severance arrangements to contain claims release language that the IRS believes violates Section 409A.   The IRS guidance on releases was issued after 2008, meaning this issue may not have been addressed through the Section 409A review process that companies completed in 2008.  The IRS has given employers an opportunity to correct deficiencies in release language without any penalties or reporting requirements, but to be entitled to relief, agreements must be amended no later than December 31, 2012.

Utilizing  a Private Health Insurance Exchange.  Some of the nation’s largest consulting firms (Aon Hewitt and Mercer), as well as other companies in the insurance business, are rolling out private health insurance exchanges for employers.  With a private health insurance exchange, a company provides its employees with a lump sum and then lets the employees choose from an array of insurance products that can be offered by more than one insurance company.  This type of arrangement may appeal to companies that wish to provide their employees with more flexibility to choose the type of coverage they wish while fixing the company’s share of the health insurance costs in a more predictable manner.  The exchanges are expected to result in cost savings and to better contain health insurance cost increases.

© 2012 Poyner Spruill LLP

Why Your Qualified Plan – Isn’t

Recently The National Law Review published an article by Ben F. Wells and William M. Freedman of Dinsmore & Shohl LLP regarding Qualified Plans:

There are many generous tax benefits that come from having a “qualified” retirement plan (such as a section 401(k) plan). For example, as an employer, you can deduct your plan contributions, but participating employees don’t have to recognize the contributions as income until they receive a distribution; usually many years later. However, those tax benefits disappear if your plan loses its qualified status.

What can cause a plan to lose its qualified status?

Several things, but there are three types of problems that frequently arise:

  • Failure to adopt required plan amendments in a timely fashion. The IRS issues reams of guidance that require plan amendments. Fail to adopt even one on time, and your plan is technically disqualified.
  • Failure to administer the plan in accordance with its terms. Your plan document probably contains hundreds of pages of fine print and technical jargon. Most employers have never read it, at least not all the way through. But you are required to follow it to the letter. Slip up one time and your plan can be considered disqualified.
  • Failure to satisfy the Internal Revenue Code’s various tests. The Code contains a number of mathematical tests which specify who must benefit from the plan and what benefits must be provided. These tests also prohibit “discrimination” in favor of highly compensated employees and others. Many of those tests are extremely complex and easy to violate. Fail one of them, and fail to correct it within the allowable time periods, and your plan will be disqualified.

How to correct qualification failures

Luckily the IRS has provided ways to correct most qualification failures. For example, their “Employee Plans Compliance Resolution System” or “EPCRS” allows plan sponsors to correct qualification failures through a variety of methods, such as employer contributions, retroactive amendments and corrective distributions. Generally those corrections are designed to put the plan in a position as if the qualification error had not occurred. But these require experienced and knowledgeable advisors to navigate.

Conclusion

To help avoid disqualification, make sure that:

  • Your advisors are monitoring your plan to help eliminate potential causes of disqualification.
  • Your plan document is up to date, and matches the way you actually administer your plan. Don’t make a change to your plan without telling your document provider and third party administrator.
  • Someone in your organization is reviewing your plan’s discrimination testing and dealing with violations.

If you see a problem, correct it as soon as possible – before the IRS audits you. This way you can keep your qualified plan “qualified.”

© 2012 Dinsmore & Shohl LLP

EBSA Moving Forward with Rules to Protect Retirement Savings

An article featured recently in The National Law Review by the U.S. Department of Labor regarding Retirement Savings:

 

 

 

The Employee Benefits Security Administration is moving forward with regulations and proposals that will increase the quality of advice being provided to individual retirement account investors and 401(k) plan sponsors and participants. Assistant Secretary of Labor Phyllis C. Borzi delivered this message to the American Society of Pension Professionals and Actuaries last week during the group’s Los Angeles Benefits Conference. A final rule requiring financial services firms to disclose fees to retirement plan sponsors will be out soon, and EBSA is working toward re-proposing a separate rule that would re-define who is a fiduciary for the purposes of giving advice to retirement savers. These rules combined with other regulatory efforts will help ensure that employers and workers are able to make informed decisions and obtain the best possible advice when choosing how they save.

© Copyright 2012 U.S. Department of Labor