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IRS Announces Procedures to Assist Low Risk Overseas U.S. Taxpayers
New procedures go into effect on September 1, 2012, that, among other things, allow qualifying taxpayers to resolve certain concerns relating to participation in foreign retirement plans. The IRS provides the example that in some instances tax treaties allow for income deferral under U.S. tax law, but only if an election is made on a timely basis. The new procedures apply to low-risk taxpayers, defined as those with simple tax returns who owe $1,500 or less in tax for any of the covered years. To use the procedures, a taxpayers must file delinquent tax returns along with related information returns for the past three years. The taxpayer also must file delinquent FBARs for the past six years. Additional information can be found on the IRS website here.
Proposed Anti-Cutback Exception for Plan Sponsors in Bankruptcy
The IRS issued proposed regulations allowing an employer in bankruptcy to amend its pension plan to eliminate a lump-sum distribution or other accelerated payment option. Under the proposed rules, four conditions must be satisfied: (i) the plan’s enrolled actuary must certify that the plan’s adjusted funding target attainment percentage is less than 100 percent; (ii) the plan must not permitted to make any “prohibited payments,” (iii) the bankruptcy court must issue an order stating that the adoption of the amendment is necessary to avoid a distress termination or an involuntary termination of the plan prior to completion of the bankruptcy case; and (iv) the PBGC must issue a determination that the amendment is necessary to avoid a distress or involuntary termination of the plan prior to completion of the bankruptcy case and that the plan assets are not sufficient for guaranteed benefits. The preamble to the proposed regulations states that… Continue Reading
No Asset Sale Exception to Withdrawal Liability Applies Where Purchaser Can Reduce Employee Hours Post-Acquisition
The Second Circuit Court of Appeals affirmed a district court holding that a seller was not exempt from withdrawal liability under the Multiemployer Pension Plan Amendments Act because the purchaser of the seller’s assets was not obligated to contribute substantially the same number of contribution base units to the pension fund post-sale as seller had contributed pre-sale. In this case, the “contribution base units” were hours of employee pay. The asset purchase agreement stated that purchaser could lay off employees or take other actions which could reduce the number of contribution base units purchaser was obligated to contribute to the plan. The court found that, before the sale, seller had a year-to-year ongoing ERISA obligation to maintain a threshold level of hours of employee pay. If seller had reduced its contribution base units by 70 percent, or partially ceased its contributions in a given year, it would have been subject… Continue Reading
Eleventh Circuit Holds No Fiduciary Breach in ESOP Stock Drop Case
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.… Continue Reading
Seventh Circuit Holds 10% Tax Applies to IRA Withdrawal Following Rollover
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
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… Continue Reading
Ontario (Canada) Issues Draft Regulations Under the Pension Benefits Act
The Ministry of Finance issued changes to Regulation 909 that would (1) enable the proclamation of the “retired member” provisions in the PBA; (2) implement immediate vesting for plan members and increase the threshold for the small pension payout rule; (3) further clarify the surplus payment rules; and (4) reflect changes to the Income Tax Act (Canada) regarding Individual Pension Plans. Draft Regulations are here. Discussion paper can be found here.
8th Circuit Rules that the Northwest Airlines Post-Bankruptcy Retirement Plan does not Violate ERISA or the ADEA
In affirming the district court’s ruling, the Eighth Circuit Federal Court of Appeals recently held that Northwest Airline’s post-bankruptcy retirement benefit plan (referred to as the “MP3″) did not violate ERISA or the Age Discrimination in Employment Act (ADEA). Following Northwest Airline’s bankruptcy in 2005, the company froze its traditional pension plan and agreed to make contributions on behalf of pilots to a retirement savings account (pro rata to pay). The Air Line Pilots Association (the “Pilots Association”) determined that the frozen pension plan and pro rata to pay contributions led to significant disparity in retirement income between more senior pilots and pilots with less years of service under the frozen pension plan. To address this concern, the Pilots Association and the company created the MP3, which allocated contributions so that all pilots, in combination with the frozen pension plan, would receive “an aggregate replacement income equal to approximately 50… Continue Reading
Early Retirement Supplement Found to be a “Protected Benefit” Due To Plan Drafting
An employer’s defined benefit pension plan defined “accrued benefit” to include early retirement supplemental benefits. However, the plan was amended to eliminate the early retirement supplemental benefit. A participant erroneously received payment of the early retirement supplemental benefit after the amendment and was asked by the employer to repay it to the plan. The employee claimed that elimination of the supplement violated ERISA’s “anti-cutback” rule. The U.S. Court of Appeals for the Fourth Circuit noted that, generally, stand-alone ancillary benefits are not independently protected by ERISA; however, because the plain language of the plan document included the early retirement supplement in its definition of accrued benefits, any change to the amount or existence of the supplement constituted a reduction in the accrued benefit. Accordingly, the court reversed the district court’s summary judgment and remanded for further proceedings consistent with the holding that the supplement was a protected accrued benefit for… Continue Reading
Federal District Court Holds Fiduciaries Liable for Breach for Excessive Fees and Imprudent Investments
The U.S. Federal District Court for the Western District of Missouri determined that plan fiduciaries breached their fiduciary duties by failing to monitor recordkeeping costs, negotiate rebates, and prudently select and retain investment options. This is a federal district court decision and it differs from positions taken by some federal circuit courts which are precedential, but whether this decision is judicial activism or a new trend will need to play out over time. It is a case worth noting in light of the U.S. Department of Labor’s recent initiatives on plan fee disclosure whose compliance deadlines are rapidly approaching. The court considered the revenue sharing agreement with Fidelity for recordkeeping services, as assets of the plan grew, revenue sharing with Fidelity would also grow—even if Fidelity provided no additional services. If assets declined, Fidelity would request a payment to make up the loss of revenue. The fiduciaries never calculated the… Continue Reading
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