The EU Court of Justice held that Directive 2008/94/EC of the European Parliament and of the Council of 22 October 2008 (“Directive 2008/94”) applies to pension benefits under a supplementary pension scheme, regardless of the cause of the employer’s insolvency, and without taking into account state pension benefits. Directive 2008/94 provides that member states must protect the pension interests of retirees when an employer becomes insolvent. In prior cases, the EU Court of Justice held that, while a member state need not guarantee 100 percent of the pension benefit, a guarantee of less than 50 percent is insufficient. In the case before the court, a crystal manufacturer (the “Employer”) in Waterford, Ireland, entered into bankruptcy. The Employer’s defined benefit pension scheme was severely underfunded and could cover only between 18 percent and 28 percent of the liabilities. A group of employees sued the Irish Minister for Social and Family Affairs… Continue Reading
IRS Issues Voluntary Correction Program Submission Kit for Plan Sponsors Who Missed the Deadline to Adopt a Pre-Approved Defined Benefit Plan
Employers that maintained pre-approved defined benefit retirement plans generally were required to adopt a new plan document, on or before April 30, 2012, that incorporated changes required by EGTRRA. Employers that failed to meet this deadline may correct this failure by adopting a restated EGTRRA plan document and filing a submission for a Voluntary Correction Program (“VCP”) compliance statement with the IRS in accordance with the submission kit, which guides plan sponsors through the steps in filing a submission for a VCP compliance statement for this adoption failure. If there are other plan failures, a submission using the kit’s requirements will not correct the other failures. A copy of the kit can be found here.
PBGC Proposed Rule Would Exempt 90 Percent of Plans and Plan Sponsors from Reportable Event Requirements
The Pension Benefit Guaranty Corporation (“PBGC”) recently issued proposed Rule 2013-07664, which would exempt most pension plans and plan sponsors from reporting many corporate and plan events under ERISA. Currently, ERISA plans and plan sponsors must report certain events to PBGC, such as active participant reductions, missed contributions, and an inability to pay benefits when due, among others. The proposed rule significantly changes the reportable event waiver structure currently in place and adds new funding-based and financial soundness safe harbors. Consequently, the proposed rule would reduce the reporting requirements of plans and plan sponsors that are financially sound and would permit PBGC to focus its resources on those plans that are at risk. The proposed rule includes a summary chart that compares the current and proposed reporting waiver structures. Additionally, the proposed rule makes electronic filing of reportable event notices mandatory. The proposed rule would apply to reportable events occurring… Continue Reading
6th Circuit Reverses Trial Court’s “Mechanical Application” of Statutory Pre-Judgment Interest Rate Applied to Pension Benefit Award
The U.S. Court of Appeals for the Sixth Circuit recently affirmed a trial court’s award of more than $3 million in unpaid pension benefits but reversed the trial court’s award of pre-judgment interest at the statutory rate. The Sixth Circuit agreed that a class of plaintiffs’ claims for unpaid pension benefits were not precluded by their execution of severance agreements, which included a release of claims, because the claims allegedly released (i.e., lump sum benefit calculations) had not yet accrued at the time the severance agreements were signed, since lump sums were not yet available for those who signed the releases, and because there was no mention in the releases of future pension or ERISA claims. The circuit court held that its ruling was consistent with the law that waivers of future ERISA violations are unenforceable. Nevertheless, the Sixth Circuit reversed the trial court’s application of the statutory pre-judgment interest… Continue Reading
The International Accounting Standards Board (“IASB”) recently proposed amending IAS 19 to address the proper method of accounting for contributions from employees or third parties to a defined benefit plan when such contributions are required by the defined benefit plan’s terms. The amendment is intended to clarify when an employer can recognize such contributions as a reduction in its short-term employee benefits costs instead of a reduction in its post-employment benefits costs. The proposed amendment would permit an employer to recognize the contributions as a reduction in its short-term employee benefits costs in the same period in which the benefits are payable if, and only if, the contributions are linked solely to the employee’s services rendered during that period, for example, employee contributions based on a fixed percentage of the employee’s salary regardless of the employee’s years of service to the employer. Interested parties may submit comments to IASB through… Continue Reading
The U.S. Department of Labor (“DOL”) recently released Field Assistance Bulletin No. 2013-01 (the “FAB”) addressing supplements to the annual funding notices for single-employer defined benefit plans required as a result of the Moving Ahead for Progress in the 21st Century Act (“MAP-21”). The MAP-21 supplemental notice explains to participants how MAP-21 changed the way their pension plans may calculate plan liabilities. The FAB contains a model supplement that plan administrators may attach to the front of the model annual funding notice provided in Field Assistance Bulletin 2009-01. The FAB also contains a series of Q&As describing the plans for which the additional MAP-21 disclosures are required, the information required to be set forth in the additional disclosures, and the years in which the additional disclosures are required and no longer required. The FAB can be found here.
Seventh Circuit Holds Individuals Personally Liable for the Corporation’s Withdrawal Liability from a Multiemployer Pension Plan
Messina Trucking withdrew from a multiemployer pension plan after the collective bargaining agreement ceased. The pension plan filed suit for collection of withdrawal liability against, among others, Messina Trucking’s owners, Mr. and Mrs. Messina, and other businesses owned by the Messinas. While passive investors are not trades or businesses for these liability purposes, the Seventh Circuit Court of Appeals, citing a prior opinion, held that renting property to a withdrawing employer is “categorically” a trade or business. It was undisputed that the Messinas rented property to their closely-held corporation; therefore, the Messinas were personally liable to the pension plan for the company’s withdrawal liability. The Court also held another entity owned by the Messinas was a trade or business even though it had no employees, regular business activity, real estate, or other assets, aside from an investment in another entity. The court concluded that this entity was a trade or… Continue Reading
Department of Labor Proposes Rule to Speed Distributions to Participants of Plans Sponsored by Bankrupt Companies
The U.S. Department of Labor’s Employee Benefits Security Administration announced a proposed rule that would expand its Abandoned Plan Program to include individual account plans, including 401(k) plans, of companies in Chapter 7 bankruptcy (a “Chapter 7 Plan”). Under the current rule, only large financial institutions and other asset custodians can serve as administrators of abandoned plans, and a plan is considered abandoned only after no contributions or distributions have been made for at least 12 months. Under the proposed rule, a Chapter 7 Plan would be considered abandoned on the date the plan sponsor’s bankruptcy proceeding commences. A bankruptcy trustee, or its designee, could then take advantage of the Abandoned Plan Program’s streamlined plan termination and benefit distribution procedures. As a result, plan participants would likely see fewer administrative and termination fees charged to their accounts and could receive benefit distributions more quickly. Additionally, the proposed rule permits a… Continue Reading
The IRS announced on December 7 that it is eliminating proposed penalty notices relating to Form 5500 filings in an effort to reduce processing costs, eliminate notices, and comply with notice and system standards. The IRS will no longer send the following notices: CP 213N: Proposed Penalty Notice for Late Filing of Form 5500, Annual Return/Report of Employee Benefit Plan; and CP 213I: Proposed Penalty Notice for Incomplete Filing of Form 5500. The IRS will continue to send notice CP 283: Penalty Charged on Your 5500 Return, if a Form 5500 is filed late or is incomplete. The IRS announcement is here.
Under Internal Revenue Code (“Code”) section 436, unless a defined benefit pension plan sponsored by a debtor in bankruptcy is fully funded, the plan may not make “prohibited payments” (i.e., lump sum payments or payments in any other form that exceed the monthly amount under a single life annuity). Moreover, the anti-cutback rule in Code section 411(d)(6) prohibits a plan from being amended to eliminate an optional form of benefit. On November 8, the IRS issued a limited exception to the anti-cutback rules to permit a plan sponsor in bankruptcy to amend its plan to eliminate prohibited payments such as lump sums. The exception applies if the following four conditions are satisfied: first, the enrolled actuary certifies that the plan is less than fully funded; second, the prohibition on making prohibited payments arises because the plan sponsor is a debtor in bankruptcy; third and fourth, the bankruptcy court must issue… Continue Reading