Haynes and Boone Blogs » Defined Contribution Plans

American Taxpayer Relief Act Eases Fund Transfers from Traditional to Roth 401(k) Accounts

Haynes and Boone Benefits Group — Fri, 11 Jan 2013 14:00:26 +0000

One provision of the Act permits participants in a defined contribution plan, such as a 401(k) plan, to convert or transfer funds from a traditional IRA account in the plan into a Roth account in the plan without penalty, if the plan so permits. The transfer would not be subject to the 10 percent penalty on early distributions, such as if the participant is under age 59½, and would not violate the prohibition on such a plan not making a distribution before certain events occur. Contributions to a traditional 401(k) account are tax-deferred with the participant paying ordinary income tax when the money is ultimately distributed in retirement. In contrast, contributions to a Roth 401(k) account are taxed upfront with the subsequent distributions in retirement made tax free. Such in-plan Roth transfers could be beneficial to plan participants who expect to retire in a higher tax bracket as well as participants in a higher tax bracket who can afford to pay the tax now so that the additional earnings and appreciation in the account would be distributed tax free in retirement, provided they qualify for the special distribution treatment when the distribution occurs. This provision is effective for transfers after December 31, 2012. The Act did not change the requirement that the participant still must be able to pay the income tax on the in-plan Roth conversion out of non-plan assets (out of his or her cash on hand or in non-retirement plan savings) held by the participant. Plan sponsors should consider reviewing their plan documents to determine if the plan currently permits such in-plan Roth transfers or conversions and, if not, to consider the advisability of amending the plan to include such a feature.

11th Circuit Affirms that Unpaid Employer Contributions are Not Plan Assets Absent Clear Plan Language to the Contrary

Haynes and Boone Benefits Group — Fri, 28 Dec 2012 16:00:44 +0000

ERISA’s regulations expressly provide that employee contributions withheld from an employee’s wages are “plan assets” even if the employer never remits the contributions to its employee benefit plan. Yet, there is no corresponding provision relating to unpaid employer contributions. Courts generally hold that unpaid employer contributions are not plan assets unless clear language in the plan indicates otherwise, such as provisions indicating that employer contributions are plan assets when “due” or “owing.” Nevertheless, the employer may still be liable to the benefit plan for the unpaid contributions under contract law depending upon how the plan provision is worded. The 11th Circuit recently reaffirmed this proposition in an unpublished case where a participant in the employer’s 401(k) plan sued for breach of fiduciary duty because the employer used its employer contribution funds to pay its payroll taxes rather than remitting the funds to the 401(k) plan. The court held that there was no breach of fiduciary duty because the unpaid employer contributions were not yet plan assets. The court cited binding precedent within the circuit as well as similar authority in the 2nd, 8th, 9th, and 11th Circuits supporting the court’s conclusion that, absent clear and specific language to the contrary, the unpaid employer contributions were not plan assets until actually remitted to the 401(k) plan. Consequently, plan sponsors should review their plan documents for provisions requiring employer contributions to be remitted to the plan. Pantoja v. Edward Zengel & Sons Express, Inc., No. 12-10036, 2012 WL 6117886 (11th Cir. Dec. 11, 2012) (unpublished opinion).

IRS Eliminating Form 5500 Proposed Penalty Notices

Haynes and Boone Benefits Group — Fri, 21 Dec 2012 19:00:20 +0000

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.

Presumption of Reasonableness Standard Does Not Apply at Pleading Stage and SEC Filings Incorporated by Reference in a Summary Plan Description are Fiduciary Communications

Haynes and Boone Benefits Group — Tue, 27 Nov 2012 14:30:44 +0000

Plan participants sued claiming breach of fiduciary duty relating to an employee stock ownership plan (“ESOP”) offered as one investment option in the employer’s defined contribution, participant directed retirement plan. The trial court dismissed the suit for failure to state a plausible claim for relief. The 6th Circuit reversed the dismissal, holding that (1) the presumption of reasonableness standard applied to an ESOP fiduciary’s decision to remain invested in employer securities does not apply at the pleading stage and (2) SEC filings, when incorporated by reference into a Summary Plan Description (“SPD”), are a fiduciary communication under ERISA. First, the court clarified that the presumption of reasonableness standard is not appropriately applied at the pleading stage because the presumption can be overcome “when applied to a fully developed evidentiary record.” The court reasoned that while ERISA 404(a)(2) generally abrogates an ESOP fiduciary’s duty to diversify investments, the fiduciary is not relieved of ERISA’s other requirements, such as acting prudently and solely in the participants’ interest. Thus, a fully developed record could show that the defendants failed to act prudently by remaining invested in employer stock after the stock’s value dropped by 74 percent, even though they had no obligation under the plan to do so. Second, the court held that the defendants may also have breached their fiduciary duty by making material misrepresentations in fiduciary communications. The defendants argued that any misrepresentations made in SEC filings were not fiduciary communications under ERISA. The court disagreed, reasoning that while ERISA requires plans to publish an SPD, ERISA does not require an SPD to incorporate by reference SEC filings. By incorporating the SEC filings in the SPD, any statements made in the filings became fiduciary communications under ERISA. Thus, the defendants could be liable for fiduciary breach for any material misrepresentations made in the SEC filings. Dudenhoefer v. Fifth Third Bancorp, No. 11-3012 (6th Cir. Sept. 5, 2012).

Seventh Circuit Holds Employee’s Questions are Protected “Inquiries” under ERISA Section 510

Haynes and Boone Benefits Group — Mon, 12 Nov 2012 14:54:49 +0000

An executive complained to the company’s internal accountants regarding money withheld from his paycheck not being deposited in a timely manner into his retirement and health savings accounts within the time period required by the Employee Retirement Income Security Act (ERISA). Over the next few months, the executive made several complaints with other officers of the company, but did not file a written complaint. The executive finally received a check to make up for the missed deposits plus interest, but was soon thereafter terminated prior to expiration of his employment agreement. The executive filed suit under ERISA Section 510, which prohibits retaliation “against any person because he has given information or has testified or is about to testify in any inquiry or proceeding relating to ERISA.” The district court granted the company’s motion for summary judgment and held that Section 510 did not cover the executive’s complaints because an “inquiry” should be understood to be in a more formal proceeding. On appeal, the U.S. Seventh Circuit Court of Appeals reversed the trial court’s decision and held that “inquiry” could also refer to asking or questioning by an employee in an informal setting. George v. Junior Achievement of Central Indiana, Inc., No. 11-3291 (7th Cir. Sept. 4, 2012).

Retirement Plan Year-End Action Items

Haynes and Boone Benefits Group — Mon, 29 Oct 2012 14:00:51 +0000

The following non-exhaustive list of annual notices for retirement plans must be distributed within a reasonable time prior to the start of the plan year. For calendar year plans, providing them by December 1 will meet this requirement.
- Safe Harbor 401(k) Notice – for 401(k) plans that are designed to comply with the safe harbor requirements of the Internal Revenue Code (the “Code”).
- Automatic Enrollment Notice – for any plan that includes automatic enrollment provisions.
- Qualified Automatic Contribution Arrangement Notice – for plans that are designed to comply with the Code’s qualified automatic contribution provisions.
- Eligible Automatic Contribution Arrangement Notice – for plans that are designed to comply with the Code’s eligible automatic contribution provisions.
- Qualified Default Investment Alternative (“QDIA”) Notice – for plans with participant-directed investments that include a QDIA in which a participant’s account will be invested if the participant fails to make an investment election.
Distribute Summary Annual Reports within 9 months after plan year end or 2 months after the Form 5500 is due (with extension).
Contact service providers who have not provided, or have provided incomplete, fee disclosures to the plan.
Distribute quarterly fee disclosure notice.
Adopt amendments for 2012 plan design changes (remove references to IRS letter forwarding program).
Adopt amendments for 2013 plan design changes that would reduce future benefits.
Adopt hybrid plan amendments to ensure compliance with Code Section 411 age discrimination rules.
Adopt Code Section 436 amendment for defined benefit plans.
Plans with employer securities must comply with the new definition of “readily tradable on an established securities market” in IRS Notice 2011-19 to be exempt from the additional requirements imposed on non-tradable employer securities.
Governmental plans must be amended to include rollovers to non-spousal beneficiaries and qualified military service provisions.
Cycle B plans must be submitted to the IRS for a favorable determination letter by January 31, 2013.

IRS Announces 2013 Qualified Pension Plan Limitations

Haynes and Boone Benefits Group — Thu, 18 Oct 2012 20:12:34 +0000

The Internal Revenue Service announced the 2013 cost-of-living adjustments on October 18, 2012. Here are some of the key limits for 2013 that will affect employer qualified retirement plans:

The Code section 402(g) limit on elective deferrals for employees who participate in 401(k) and 403(b) plans will increase from $17,000 to $17,500.
The Code section 415(c) limit for annual additions under defined contribution plans will increase from $50,000 to $51,000.
The Code section 414(v) catch-up contribution limit for employees aged 50 and over who participate in 401(k) and 403(b) plans will remain unchanged at $5,500.
The Code section 415(b) annual benefit limit under a defined benefit plan will increase from $200,000 to $205,000.
The Code section 416(i) dollar limit on compensation for defining a key employee in a top heavy plan will remain unchanged at $165,000.
The Code section 414(q) dollar limit on compensation for defining a highly compensated employee remains unchanged at $115,000.
The Code section 401(a)(17) annual compensation limit will increase from $250,000 to $255,000.

The full list of changes will be posted on the IRS website in IRS News Release 2012-77.

DOL Announces New 401(k) Fee Disclosure Resource Website

Haynes and Boone Benefits Group — Wed, 26 Sep 2012 18:30:17 +0000

The U.S. Department of Labor (DOL) recently announced that is has launched a new website with resources for consumers regarding the new 401(k) fee disclosures. The new website is intended help individuals with 401(k) type plans to see what they are paying in fees and expenses to invest their retirement savings in order to understand the impact of such fees. The DOL’s new website can be found here.

IRS Discontinues Letter Forwarding Program for Locating Plan Participants

Haynes and Boone Benefits Group — Thu, 06 Sep 2012 22:05:29 +0000

The IRS recently issued Revenue Procedure 2012-35, which, effective August 31, 2012, discontinues the IRS letter forwarding program for retirement plans. Under Revenue Procedure 94-22, plan administrators, plan sponsors, and qualified termination administrators of abandoned plans under the Department of Labor’s Abandoned Plan Program attempting to locate missing plan participants were permitted to make a written request to the IRS to use its letter forwarding program. Under the new revenue procedure, the IRS will no longer provide letter-forwarding services to locate such missing plan participants. The letter-forwarding program is now limited to situations in which a person is trying to locate a taxpayer to convey a message for a “humane purpose” or in an emergency situation. This revenue procedure applies to requests postmarked on and after August 31, 2012. Retirement plan sponsors should review their plan provisions and administrative procedures for locating missing plan participants and make any needed changes in light of the IRS’ modified procedures. A copy of Revenue Procedure 2012-35 can be found here.

Fifth Circuit Reverses Award of Benefits to Stepchildren and Rejects Imposition of Equitable Adoption into Plan’s Definition of “Children”

Haynes and Boone Benefits Group — Fri, 17 Aug 2012 15:00:20 +0000

In a case involving a thrift plan subject to ERISA, the Fifth Circuit Federal Court of Appeals reversed the district court’s decision to award benefits under the plan to a deceased participant’s stepchildren. Prior to the challenge by the stepchildren, the plan administrator distributed the participant’s benefits to the participant’s siblings, based on the priority of distribution set forth in the plan document. Because the plan afforded the plan administrator with discretionary authority to determine the eligibility for benefits, the court determined whether there was an abuse of discretion in the plan administrator’s interpretation. The court concluded that because the plan administrator’s interpretation of the term “children” was “legally correct” and there is nothing in the plan or ERISA requiring the plan administrator to incorporate the concept of equitable adoption into the plan’s definition of children, there was no abuse of discretion. As a result, the court reversed the district court’s decision. Herring v. Campbell, No. 11-40953 (5th Cir. August 7, 2012).

New DOL Guidance Regarding Fee Disclosures and Brokerage Windows

Haynes and Boone Benefits Group — Thu, 02 Aug 2012 13:00:14 +0000

Previously, the United States Department of Labor (“DOL”) issued guidance suggesting that a plan fiduciary may not have met its fiduciary obligations if there are no designated investment alternatives under a plan (i.e., it is solely a brokerage window) or if a significant number of participants select an investment through a brokerage window and the fiduciary does not treat such investment as a designated investment alternative. The DOL issued new guidance replacing this previous guidance. In reversing its prior position, the new guidance clarifies that the fee disclosure regulation does not require that a plan have a particular number of designated investment alternatives and the selection through a brokerage window of a particular investment by a significant number of participants does not impose such a requirement. However, the guidance notes a fiduciary’s failure to designate investment alternatives to avoid disclosure requirements would raise questions under ERISA’s fiduciary duties of prudence and loyalty and reminds fiduciaries of plans with brokerage windows or similar arrangements that those duties require taking into account the nature and quality of services provided in connection with the brokerage window. The DOL intends to engage in discussions with interested parties to determine how best to comply with these fiduciary duties, which may include amendment of relevant regulations. The guidance also clarifies how a number of different fee disclosures and investment related disclosures should be provided, including information related to benchmarks. The guidance indicates that plans permitting participants to contract with investment managers to manage the investments in the participant’s personal account in the plan may limit the investments the personal managed account can make by the agreement with the investment manager. The information above includes just a few highlights of the 39 questions answered in the guidance. Field Assistance Bulletin No. 2012-02R can be found here.

Sixth Circuit Holds No Fiduciary Breach in Transfer of Account Balances from Participant-Elected Fund to QDIA

Haynes and Boone Benefits Group — Fri, 20 Jul 2012 14:45:47 +0000

After enactment of the Pension Protection Act, a defined contribution plan administrator decided to change the default investment from a stable value fund to a target date fund. The fiduciary sent notices to all participants who were 100% invested in the stable value fund that, unless instructed otherwise, it intended to transfer their balances into the target date fund. Two participants who had actively elected to participate in the stable value claimed they did not receive the notice. Each suffered a loss when their account balances were subsequently transferred. The participants sued for fiduciary breach. The U.S. federal district court held that the plan administrator was not liable due to the Department of Labor safe harbor regulation. The U.S. Court of Appeals for the Sixth Circuit upheld the district court reasoning that the safe harbor for qualified default investments applies any time a participant fails to make an election, not just when a participant fails to make an initial election. Thus, because a notice was sent to the participants, and they failed to confirm their elections in the stable value fund, the safe harbor applied. Bidwell v. Univ. Medical Ctr., Inc., No. 11-5493, 2012 U.S. App. LEXIS 13306 (6th Cir. June 29, 2012).

DOL Amends Method for Plan Fiduciaries to Report Noncompliant Service Providers

Haynes and Boone Benefits Group — Wed, 18 Jul 2012 20:30:55 +0000

Under the new ERISA 408(b)(2) service provider fee disclosure regulations, responsible plan fiduciaries must file notices with the Department of Labor (DOL) to obtain relief from ERISA’s prohibited transaction provisions which may apply if a service provider fails to disclose information in accordance with the regulation’s requirements. On July 13, 2012, the DOL revised the mailing address and web-based submission process for filing such notices. Under the new rule, notices may be submitted electronically through a dedicated link on the DOL’s website, or by mail to a PO Box dedicated for such notices. A copy of the final rule can be found here.

Department of Labor Issues Guidance on Certain 403(b) Plans Subject to ERISA

Haynes and Boone Benefits Group — Thu, 21 Jun 2012 14:01:18 +0000

In Advisory Opinion 2012-02A, the U.S. Department of Labor advised that a Code Section 403(b) Plan will be subject to ERISA if an employer’s contributions to a Code Section 401(a) plan are contingent upon the employee’s contributions to the 403(b) Plan. Specifically, the 403(b) plan would no longer satisfy the safe harbor exemption from ERISA in 29 C.F.R. 2510.3-2(f) which requires participation of employees to be completely voluntary and limits employer involvement. Advisory Opinion 2012-02A can be found here.

Eleventh Circuit Holds No Fiduciary Breach in ESOP Stock Drop Case

Haynes and Boone Benefits Group — Fri, 18 May 2012 17:00:27 +0000

The U.S. Court of Appeals for the Eleventh Circuit affirmed dismissal of the claim by plan participants that The Home Depot had violated its fiduciary duties with respect to the ESOP by continuing to offer employer stock as an investment option after certain accounting adjustments caused earnings to be restated and the stock price to fall. Although ultimately the Eleventh Circuit upheld the district court’s decision, it overruled the district court on several points. First, the district court had determined that the plaintiffs’ prudence claim was really a diversification claim in disguise (ESOPs are exempt from the diversification requirement). Alternately, the district court had held that even if the claim were properly a prudence claim, the claim would fail because the participants did not allege that The Home Depot was on “the brink of financial collapse.” The Eleventh Circuit determined that this was a prudence claim, not a diversification claim. The claim was that the defendants acted imprudently because they knew the employer stock was overpriced, not because it made up too large a percentage of the employer stock fund. Further, the Eleventh Circuit found that “the brink of financial collapse” is not the correct standard. Rather, the standard is whether the ERISA fiduciary could not have believed reasonably that continued adherence to the plan document’s provision for investment in an employer stock fund was in keeping with the settlor’s expectations of a prudent trustee. Notwithstanding, the Eleventh Circuit determined that the plaintiffs failed to state sufficient facts to overcome the Moench presumption. Lanfear v. [The] Home Depot, Inc., No. 10-13002 (11th Cir. May 8, 2012).

Seventh Circuit Holds 10% Tax Applies to IRA Withdrawal Following Rollover

Haynes and Boone Benefits Group — Fri, 18 May 2012 13:00:57 +0000

At age 56, a partner left his law firm and elected to roll his balance in the firm 401(k) over into an IRA. Subsequently, he took a pre-age 59½ distribution from the 401(k) and was assessed with the additional 10% tax. The U.S. Tax Court upheld the additional 10% tax. The U.S. Court of Appeals for the Seventh Circuit upheld the Tax Court. The court held that the taxpayer would not have been subject to the 10% tax if he had taken the distribution directly from the 401(k) plan upon termination because of the exception in section 72(t)(2)(A)(v) of the Internal Revenue Code for post-separation distributions to an employee who has attained age 55, but because he chose to roll over his balance, the exception no longer applied to a distribution from an IRA. Kim v. Comm’r of Internal Revenue, No. 113390 -10 (7th Cir. May 9, 2012).

Department of Labor Issues FAQs on Retirement Plan Fee Disclosure Rules

Haynes and Boone Benefits Group — Thu, 17 May 2012 20:00:27 +0000

The U.S. Department of Labor (“DOL”) recently issued Field Assistance Bulletin 2012-02 which includes FAQs to assist plan administrators and service providers in complying with their obligations under the final participant level fee-disclosure regulations which apply to plans permitting participant direction of investments, such as many 401(k) plans do. The 38-question set of FAQs provides additional information on topics such as the scope of covered individual account plans, the required plan-related information to be disclosed and the method of disclosure of plan-related information, disclosures related to managed accounts, brokerage windows and funds accounted for on a unitized basis. Because plan administrators and service providers may have furnished or already prepared to furnish initial disclosures before the date of publication of Field Assistance Bulletin 2012-02, the guidance provides that for enforcement purposes the DOL will take into account whether covered service providers and plan administrators have acted in good faith based on a reasonable interpretation of the regulations. Field Assistance Bulletin 2012-02 can be accessed here.

Federal District Court Dismisses Fiduciary Liability Claims in BP Stock Drop Lawsuit

Haynes and Boone Benefits Group — Fri, 13 Apr 2012 13:53:38 +0000

The U.S. Federal District Court for the Southern District of Texas dismissed stock drop claims brought against the plan fiduciary for BP’s 401(k) plans. The plans contained employer stock funds that allowed investment in BP American Depository Shares (ADSs). The ADSs incurred a 55 percent drop after the Deepwater Horizon incident in the Gulf of Mexico. The plaintiffs claimed that plan fiduciaries should have divested BP stock because of flaws in BP’s safety programs. In dismissing all claims, the court determined that plaintiffs failed to show that the plan fiduciaries had access to nonpublic information regarding the safety programs, and that the presumption of prudence applied. In re BP p.l.c. ERISA Litigation, S.D. Tex., No. 10-md-2185 (Mar. 30, 2012).

IRS Provides Guidance on Rollovers from Defined Contribution Plans to Defined Benefit Plans to Obtain Annuities

Haynes and Boone Benefits Group — Fri, 23 Mar 2012 13:00:38 +0000

In Revenue Ruling 2012-4, the IRS provided guidance for employers that sponsor both a defined contribution plan and a defined benefit plan to allow participants in the defined contribution plan to roll over amounts from that plan to the defined benefit plan in exchange for an annuity from the defined benefit plan. Under the ruling, the defined benefit plan does not violate Code sections 411 or 415 if the plan provides an annuity using actuarial factors that are at least as favorable as the applicable interest rate and mortality table under Code section 417(e). The rolled over amounts must be nonforfeitable and the defined benefit plan must not be permitted to accept rollovers if the plan’s adjusted funding target attainment percentage drops below 60 percent. A copy of the Revenue Ruling can be found here.

Sixth Circuit: ERISA Defenses for Employer Stock Fund do not Prevail in Motion to Dismiss

Haynes and Boone Benefits Group — Fri, 02 Mar 2012 15:22:22 +0000

The U.S. Court of Appeals for the Sixth Circuit found that several common defenses to participant stock-drop lawsuits alleging fiduciary breach are not available in the motion to dismiss stage. In its opinion, the Sixth Circuit held that the Moench presumption (presumption of prudence when the plan’s terms require a company stock fund) does not apply at the motion to dismiss stage. Plaintiffs do not have to plead enough facts to overcome the presumption in order to survive a motion to dismiss. Additionally, the Sixth Circuit held that ERISA section 404(c) is not available as an affirmative defense at the motion to dismiss stage. The court found that ERISA section 404(c) does not shield fiduciaries from liability for allowing imprudent investment choices to be offered to plan participants. The court also refused to dismiss for inadequate causation on the basis that the participants had an unrestricted right to transfer their investments out of the employer stock fund. The effect for employers defending stock-drop lawsuits in the Sixth Circuit is that early disposal of the lawsuit will likely have to wait until the motion for summary judgment. Pfeil v. State Street Bank and Trust Co., No. 10-2302 (6th Cir. Feb. 22, 2012).