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Fifth Circuit Reverses Award of Benefits to Stepchildren and Rejects Imposition of Equitable Adoption into Plan?ÇÖs Definition of ?Ç£Children?Ç¥

In a case involving a thrift plan subject to ERISA, the Fifth Circuit Federal Court of Appeals reversed the district court?ÇÖs decision to award benefits under the plan to a deceased participant?ÇÖs stepchildren. Prior to the challenge by the stepchildren, the plan administrator distributed the participant?ÇÖs benefits to the participant?ÇÖs 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?ÇÖs interpretation. The court concluded that because the plan administrator?ÇÖs interpretation of the term ?Ç£children?Ç¥ was ?Ç£legally correct?Ç¥ and there is nothing in the plan or ERISA requiring the plan administrator to incorporate the concept of equitable adoption into the plan?ÇÖs definition of children, there was no abuse of discretion. As a result, the court reversed the district… Continue Reading

New DOL Guidance Regarding Fee Disclosures and Brokerage Windows

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?ÇÖs failure to designate investment alternatives to avoid disclosure requirements would raise questions under ERISA?ÇÖs fiduciary duties of prudence… Continue Reading

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

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… Continue Reading

DOL Amends Method for Plan Fiduciaries to Report Noncompliant Service Providers

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

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?ÇÖs contributions to a Code Section 401(a) plan are contingent upon the employee?ÇÖs 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

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 59?? 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

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

The U.S. Federal District Court for the Southern District of Texas dismissed stock drop claims brought against the plan fiduciary for BP?ÇÖs 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?ÇÖs 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

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?ÇÖs adjusted funding target attainment percentage drops below 60 percent. A copy of the Revenue Ruling can be found here.

October 2021