Haynes and Boone Blogs » Retirement Plans

IRS Issues Anti-Cutback Relief for ESOPs Eliminating In-Service Distributions

Haynes and Boone Benefits Group — Fri, 03 May 2013 13:00:00 +0000

In Notice 2013-17, the IRS extended the deadline to amend an employee stock ownership plan (“ESOP”) to eliminate certain statutory in-service distributions as a diversification option that applies to an ESOP that does not hold publicly traded employer securities when the employer’s securities become publicly traded and to an ESOP that becomes subject to the diversification requirements that apply to ESOPs holding publicly traded employer securities. This guidance permits the change in the diversification rules and distribution rights without causing the ESOP to be in violation of the anti-cutback provisions of Section 411(d)(6) of the Internal Revenue Code. The prior deadline to so amend an ESOP was the deadline to amend under the Pension Protection Act (“PPA”). Pursuant to Notice 2013-17, the new deadline is the later of the PPA deadline or the last day of the first plan year starting on or after January 1, 2013.

A copy of the notice can be found here.

PBGC Proposed Rule Would Exempt 90 Percent of Plans and Plan Sponsors from Reportable Event Requirements

Haynes and Boone Benefits Group — Fri, 19 Apr 2013 13:25:51 +0000

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 on or after January 1, 2014.

A copy of the proposed rule can be found here.

6th Circuit Reverses Trial Court’s “Mechanical Application” of Statutory Pre-Judgment Interest Rate Applied to Pension Benefit Award

Haynes and Boone Benefits Group — Fri, 05 Apr 2013 18:00:36 +0000

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 rate of 0.12 percent. The Sixth Circuit found the trial court’s “mechanical application” of the statutory rate, without considering case-specific factors, to be an abuse of discretion because the statutory interest rate failed to adequately compensate the plaintiffs for the lost time value of their pension benefits and failed to prevent the defendant employer’s unjust enrichment. Accordingly, the Sixth Circuit remanded the case back to the trial court to set a more appropriate pre-judgment interest rate based on the specific factors of the case. Schumacher v. AK Steel Corp. Retirement Accumulation Pension Plan, No. 1:09-cv-794 (6th Cir. Mar. 28, 2013).

IASB Proposed Amendment to IAS 19: Accounting for Employee Contributions to a Defined Benefit Plan

Haynes and Boone Benefits Group — Fri, 05 Apr 2013 12:30:11 +0000

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 July 25, 2013. A copy of the proposed amendment can be found here.

DOL Releases Guidance on MAP-21 Required Annual Disclosures

Haynes and Boone Benefits Group — Mon, 25 Mar 2013 14:00:12 +0000

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.

State Court Order to Turn Over ERISA Plan Benefits Not Preempted by ERISA

Haynes and Boone Benefits Group — Fri, 15 Mar 2013 14:00:31 +0000

A participant in two employer-sponsored ERISA plans divorced her husband. In the marital settlement agreement, her husband waived his interest and future rights in the plans. The participant neglected to update the plans’ beneficiary designation forms. They still designated her ex-husband as beneficiary when she died. The plan administrators for each plan initially determined that her benefit under the plans should be paid to the ex-husband. The participant’s parents, as administrators of her estate, appealed the decisions. After the claims appeal process, the ex-husband filed for declaratory relief in federal district court, which stayed its decision pending the outcome of the estate’s state court suit. The state court found the ex-husband in contempt of the marital settlement agreement and ordered him to waive his interest in the benefits. The federal district court then ordered the plan administrators to pay the funds to the ex-husband and the ex-husband to then waive his right to those funds pursuant to the state court order. On appeal, the U.S. Court of Appeals for the Fourth Circuit affirmed the district court opinion. It found that under the U.S. Supreme Court decision in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 285 (2009), the plan administrator must distribute benefits to the designated beneficiary. However, once the benefits are distributed, Kennedy and ERISA preemption no longer apply because plan administration is no longer implicated. Andochick v. Byrd, No. 12-1728 (4^th Cir. Mar. 4, 2013).

Seventh Circuit Holds Individuals Personally Liable for the Corporation’s Withdrawal Liability from a Multiemployer Pension Plan

Haynes and Boone Benefits Group — Mon, 25 Feb 2013 14:30:30 +0000

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 business because it was formed, according to its operating agreement, to develop properties and to produce, market, and sell gravel. Had the company amended its operating agreement to reflect that the company was operating merely as a passive investment vehicle, the court stated it may have reached a different conclusion. Central States Southeast & Southwest Areas Pension Fund v. Messina Products, LLC, Nos. 11-3513 & 12-1333 (7th Cir. Feb. 8, 2013).

Participant “Reasonably Interpreted” Exhaustion Requirement

Haynes and Boone Benefits Group — Tue, 12 Feb 2013 15:00:50 +0000

The United States Court of Appeals for the Second Circuit recently held that a participant was not required to exhaust her administrative remedies when she reasonably interpreted a plan’s terms not to require exhaustion of her administrative remedies, and as a result, did not exhaust her remedies. The plaintiff, a participant in the plan, believed that she lost an early retirement subsidy as a result of the plan sponsor’s sale of a subsidiary. She sent letters to the benefits department, which did not respond, and received a confusing response when she called. She then received a letter with a pension quote that was lower than her pension quote from five years prior. She then filed a lawsuit.

The U.S. federal district court dismissed the plaintiff’s lawsuit reasoning she had failed to exhaust her administrative remedies under the plan. The Second Circuit Court of Appeals vacated. The relevant part of the plan’s claims procedure begins with the words, “To file a benefit claim under the Plan.” When the employer had sent plaintiff the pension quote, the cover letter described the enclosed claims form as an “Application for Retirement Benefits.” Because the plaintiff was not seeking to retire immediately but only wanted to know what her benefits would be if and when she chose to pursue early retirement, she was reasonable in thinking the claims procedure did not apply and thus she did not have to exhaust her administrative remedies. Kirkendall v. Halliburton, Inc., No. 11-2733-cv (2d Cir. Jan. 29, 2013).

PBGC Releases Technical Update on Reportable Events, Funding-Related Determinations, and Missed Quarterly Contributions

Haynes and Boone Benefits Group — Mon, 11 Feb 2013 19:00:11 +0000

The Pension Benefit Guaranty Corporation (the “PBGC”) published Technical Update 13-1 (the “Update”) providing guidance on (i) funding-related determinations for purposes of waivers, extensions, and the advance reporting threshold test; and (ii) missed quarterly contributions. The Update is generally applicable for plan years commencing after 2012. A copy of the guidance is available here.

4th Circuit Holds that the Limitations Period for ERISA Claims of Imprudent Plan Investments Commences with Initial Fund Selection and Does Not Continue With Ongoing Monitoring of Funds, Absent Material Change in Circumstances

Haynes and Boone Benefits Group — Mon, 04 Feb 2013 14:30:42 +0000

A group of participants in Bank of America’s 401(k) plan sued alleging the bank engaged in prohibited transactions and breached its fiduciary duty by selecting bank-affiliated mutual funds despite the funds’ poor performance and higher fees in comparison to other available investment alternatives. The participants conceded that the initial fund selection was outside of ERISA’s general six-year limitations period. Nevertheless, the participants argued that the bank’s failure to remove the bank-affiliated mutual funds at meetings of its benefits committee, which occurred within the limitations period, constituted new prohibited transactions and new breaches of its fiduciary duty to monitor plan investments. The 4th Circuit disagreed, reasoning that a decision to continue certain investments, or even the bank’s failure to act, cannot constitute a “transaction” for ERISA purposes; therefore, the only transaction upon which the participants could assert a prohibited transaction claim was the bank’s initial selection of the bank-affiliated mutual funds. Additionally, because the participants did not allege that the funds’ performance or fees changed in any material way after their initial selection, the participants’ breach of fiduciary duty claim was not actually based on the bank’s failure to monitor the funds but rather on the bank’s initial selection of them. Accordingly, all of the participants’ claims were time barred because they solely related to the initial selection and inclusion of the bank-affiliated mutual funds in the 401(k) plan. David v. Alphin, No. 11-2181 (4th Cir. Jan. 14, 2013).

Other circuits have also looked at the reasonableness of fees charged related to mutual fund investments offered in a defined contribution plan. Two cases are pending before the Eighth and Ninth Circuits currently that relate to mutual fund investment fees in defined contribution plans. An appeal was filed in December in both Tibble v. Edison, Intl. in the 9th Circuit and in Tussey v. ABB, Inc. in the Eighth Circuit. The Seventh Circuit previously dismissed fiduciary breach claims related to fees in Hecker v. Deere & Co. in 2009. All of these need to be watched to see how the different circuits approach the issue. With the increased disclosure of fees to participants since 2012, the analysis of these cases may begin to evolve.

District Court Finds Document Reformation and Surcharge to be Appropriate Remedies Under ERISA 502(a)(3)

Haynes and Boone Benefits Group — Fri, 25 Jan 2013 15:40:55 +0000

In Amara v. CIGNA Corporation and CIGNA Corporation Pension Plan, the U.S. District Court for Connecticut recently held that appropriate equitable remedies under ERISA section 502(a)(3) included reformation and surcharge. The court found that the plan sponsor’s deficient notice describing the benefits available under the plan constituted fraud, and that the fraudulent notice, when coupled with the employees’ misunderstanding of the notice, provided a basis for reforming the plan document, without the participant plaintiffs showing individualized reliance and harm. Under the reformed document, participants became entitled to additional benefits. Furthermore, the court found that the plan sponsor could be surcharged under either a make-whole or unjust enrichment theory. The surcharge would provide relief in the form of monetary compensation to the participants for the loss resulting from the breach of duty. The court ordered that all remedies provided in the opinion be stayed to allow the parties to pursue an appeal to the Second Circuit if they so choose. A copy of the court’s decision can be found here.

IRS To Require Restated Plan Document with Determination Letter Application

Haynes and Boone Benefits Group — Fri, 18 Jan 2013 22:00:53 +0000

Under new procedures issued by the IRS, effective for determination letter applications submitted on and after February 1, 2013, the IRS will no longer accept working copies of a plan document as part of the submission package. Plan sponsors must now provide an executed restatement of the plan with the application. This means planning ahead for those plan restatements that require board approval, so that the restatement will be executed in advance of the January 31 filing deadline for that cycle.
A copy of IRS Revenue Procedure 2013-6 can be found here.

Informal DOL Comment Suggests Delivery of SPDs via CD Not ERISA-Compliant

Haynes and Boone Benefits Group — Fri, 18 Jan 2013 16:20:30 +0000

At a Q&A session between the U.S. Department of Labor (“DOL”) and the American Bar Association, the DOL was asked whether delivering summary plan descriptions (“SPDs”) by mailing them on a CD to employees who do not normally work on computers would satisfy ERISA’s regulations regarding the delivery method for SPDs. Generally, delivery methods must be reasonably calculated to ensure distribution and receipt of the SPD. The DOL responded to this question by opining that such a delivery method may not be reasonably calculated to ensure receipt because the plan administrator has not taken any measures to determine if participants have the necessary technology and ability to retrieve information from the CDs. However, the DOL’s response reflects only an unofficial, nonbinding staff view and thus does not necessarily represent an official position of the DOL.

IRS Issues Proposed Rules for New Medicare Tax on High Wage Earners’ Net Investment Income; Whether Tax Applies to 404(k) Dividends is Unclear

Haynes and Boone Benefits Group — Thu, 03 Jan 2013 14:30:12 +0000

The U.S. Internal Revenue Service (“IRS”) recently issued proposed regulations regarding a new 3.8 percent Medicare tax on the “net investment income” of high wage earners ($200,000 for single filers, $250,000 for joint filers, and $125,000 for married persons filing separately), effective January 1, 2013. Under the proposed regulations, net investment income includes income from interest, dividends, annuities, royalties, and rents, less any allowable deductions. Notably, the proposed regulations exclude from net investment income distributions from most tax-favored retirement plans, such as those described in Internal Revenue Code (“Code”) sections 401(a), 403(a), 403(b), 408, 408A, or 457(b). Yet, the proposed regulations did not directly address whether 404(k) dividends paid under an Employee Stock Ownership Plan (“ESOP”), including a 401(k) plan with an ESOP component, would be included in net investment income.

Code section 404(k) permits plan participants, to the extent provided under the plan, to elect to receive dividends on employer stock either (1) paid directly to them in cash or (2) paid to the plan and reinvested in additional shares of employer stock. Arguably, if the participant elects to have the dividends paid to the plan and reinvested in additional employer stock, this tax should not apply because the participant will ultimately receive the value of the dividend as a distribution from the plan, which would be reported on Form 1099-R. But if the participant elects to receive the dividends directly in cash, it is possible the tax might apply because such dividends, reported on Form 1099-DIV, are otherwise taxed as “ordinary dividends.” Absent additional guidance from the IRS, it is unclear whether and to what extent 404(k) dividends should be included as net investment income for purposes of this tax. The proposed regulations can be found here.

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).

Hacienda Extends Deadlines to Comply with the Puerto Rico Internal Revenue Code of 2011

Haynes and Boone Benefits Group — Sat, 22 Dec 2012 18:00:12 +0000

Hacienda extended the deadline for plans to be amended to comply with the Puerto Rico Internal Revenue Code of 2011. The original amendment deadline was the last day of the first plan year beginning on or after January 1, 2012. For calendar year plans, the deadline would have been December 31, 2012. The new deadline is the later of June 30, 2013, or the last day of the first plan year beginning on or after January 1, 2012. In addition, the deadline to submit a “Request for Qualification” letter was extended to the later of September 30, 2013, or the due date to file an income tax return of the employer, with extensions, for the first taxable year that begins on or after January 1, 2012. Finally, the “Request for Qualification” with regard to a plan’s qualification under the Puerto Rico Internal Revenue Code of 1994 must be submitted with the “Request for Qualification” regarding the 2011 Puerto Rico Code. A copy of the letter appears here.

Department of Labor Proposes Rule to Speed Distributions to Participants of Plans Sponsored by Bankrupt Companies

Haynes and Boone Benefits Group — Sat, 22 Dec 2012 16:00:16 +0000

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 bankruptcy trustee to pay itself from plan assets, an otherwise prohibited transaction. But unlike other abandoned plan administrators, a bankruptcy trustee would have a duty to report activity it believes to be evidence of fiduciary breach by a prior plan fiduciary. The proposed rule can be found here.

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.

IRS Issues 2012 List of Changes in Plan Qualification Requirements

Haynes and Boone Benefits Group — Fri, 21 Dec 2012 15:00:54 +0000

The IRS released Notice 2012-76, which contains the 2012 Cumulative List of Changes in Plan Qualification Requirements to be used by plan sponsors and practitioners filing determination letter applications beginning February 1, 2013. Those using the 2012 cumulative list will primarily be single employer, individually designed defined contribution and defined benefit plans in Cycle C of the IRS’s 5-year remedial amendment cycle program and § 414(d) governmental plans. An individually designed plan is generally in Cycle C if the last digit of the plan sponsor’s EIN is 3 or 8. To retain its qualified tax status, a plan must be amended to comply with all statutory, regulatory, or guidance changes in tax-qualification requirements. In reviewing determination letter applications beginning February 1, 2013, the IRS will generally not look for plan amendments related to guidance issued after October 1, 2012; statutes enacted after October 1, 2012; qualification requirements that become effective in 2014 or later; or statutory provisions that become effective in 2013 for which there is no guidance listed in Notice 2012-76. A copy of Notice 2012-76 can be found here.

Using a Roth Conversion to Minimize Future Income Tax Exposure

Haynes and Boone Benefits Group — Fri, 14 Dec 2012 21:00:28 +0000

With the increase in Medicare taxes that goes into effect in 2013 and the high likelihood of increased tax rates in one form or another as a result of the “fiscal cliff” negotiations, individuals may want to consider accelerating income into 2012 to avoid additional income tax exposure in 2013 and beyond. One way to accomplish this is through the conversion of funds in the individual’s traditional individual retirement account (IRA) to a Roth IRA. A Roth conversion may also be transacted within an employer-sponsored 401(k) retirement plan, if the plan’s terms permit it. Under this “in-plan Roth rollover,” a plan participant can transfer all or part of his vested non-Roth account to a designated Roth account within the same plan. The amount converted is subject to federal income taxation in the year of conversion (except for any non-taxable basis in the converted amount), and, therefore, the participant must have funds available to pay the taxes due. Once converted to a Roth account, the converted amount is treated as “after tax” and is not subject to further taxation when distributed in the future. If the distribution is a “qualified distribution” (generally, on or after the participant attains age 59 ½ and after having a Roth account in the plan for five years), earnings that have accrued on the Roth amounts may also be distributed tax free. An attractive feature of the in-plan Roth rollover is that its availability is not limited to individuals below a particular income level; instead, it is a tax benefit that can be available to all of an employer’s plan participants, if the plan’s terms allow for it and the plan’s record keeper is able to administer it.