Archive of Weekly News

• Week of March 22, 2010
• Week of March 8 - 1
• Week of March 8 - 2
• Week of February 8
• Week of February 1
• Week of January 4
• Week of December 28
• Week of December 21
• Week of December 14
• Week of November 30
• Week of November 23
• Week of November 17
• Week of November 5
• Week of October 29
• Week of October 22
• Week of October 12
• Week of October 5
• Week of September 7

Weekly News – Week of March 22, 2010

EBSA achieves $1.36 billion in monetary recoveries for FY 2009

The Labor Department’s Employee Benefits Security Administration (EBSA) has announced monetary results of $1.36 billion in fiscal year 2009 for retirement, health, and other employee benefit plans governed by ERISA.

EBSA closed 3,669 civil investigations in FY 2009. In over 72% of those cases, the agency found violations and obtained correction. Criminal offences involving employee benefit plans led to indictment of 115 individuals.

“These results reflect a strong, fair and aggressive program to protect benefits of American workers, retirees and their families,” EBSA Assistant Secretary Phyllis C. Borzi said. “We believe our civil enforcement program demonstrates the success of using targeted investigations,” she added.

The agency also announced the recovery of $124.5 million through the informal resolution of individual complaints. In addition, EBSA handled 365,457 inquiries from the public and conducted more than 1,500 education and outreach events that reached workers, employers, plan officials and Congressional members.

Compliance assistance programs achieved results

The Voluntary Fiduciary Correction Program (VFCP) received 1,692 applications from employers, plan officials, service providers and other fiduciaries to self-correct violations of ERISA. In addition, the Delinquent Filer Voluntary Compliance Program, which helps plan administrators comply with ERISA’s filing requirements, received 26,603 filings.

Labor Department news release, February 25, 2010.

Weekly News – Week of March 8, 2010.

IRS compliance projects identify common errors in small plans and top-heavy 401(k) plans

The IRS has released results and findings from two examination projects under the Learn, Educate, Self Correct and Enforce (LESE) compliance initiative. The projects, which focused on defined contribution plans with less than $250,000 in assets and top-heavy 401(k) plans, highlighted compliance problems among small plans, such as inadequate bonding of plan fiduciaries.

CCH Note: LESE is a compliance initiative started by the IRS in FY 2007 to test and measure compliance levels in retirement plans. Under LESE, the IRS looks to: Learn about retirement plan compliance issues through small examinations; Educate by altering targeted groups to what has been found and IRS expectations about the correction of errors; allow groups to Self-correct plan errors using the Employee Plans Compliance Resolution System (EPCRS); and Enforce compliance by taking a firm position with parties that have not corrected errors. The project results were reported on the LESE Webpage.

DC plans with less than $250,000 in assets

The IRS examination of defined contribution plans with less than $250,000 in assets (but more than $100,000) highlighted (based on approximately 50 examinations of Form 5500 filings) two major problems: (1) Failure to secure adequate bonding and (2) Failure to timely amend plans to comply with current law and regulatory guidance.

Failure to secure adequate bonding.

ERISA §412 specifies that the amount of the bond not be less than 10% of the amount of funds handled, but in no event less than $1,000, nor more than $500,000. The amount of fiduciary bond must be fixed at the beginning of each calendar, policy, or other fiscal year which constitutes the reporting year of the plan. Note, the bond may never be less than $1,000, even if 10% of the amount of funds handled is less than $1,000.

Generally, a bond may not exceed $500,000. However, the Department of Labor (DOL) may impose a bond in excess of $500,000, after due notice and opportunity for hearing to all interested parties. Specifically, ERISA Reg. §2580.412-11 states that no bond shall be required in excess of $500,000, although the DOL may prescribe a bond greater than $500,000, but not greater than 10% of the funds handled.

ERISA does not require that the fidelity bond state a specific dollar amount of coverage, as long as the bond covers at least 10% of the funds handled, with minimum coverage of $1,000 or 10% of funds handled, up to $500,000.

The amount of the fidelity bond is fixed annually. Specifically, the bond must be fixed or estimated at the beginning of the plan’s reporting year (i.e., as soon as after the date when such year begins as the necessary information from the preceding reporting year can practicably be ascertained). However, the amount of the bond must be based on the highest amount of funds handled by the person in the preceding plan year.

Note, because the bond is fixed annually, in the event the amount of funds handled increases during the plan year after the bond is purchased, the bond need not be updated during the plan year to reflect the increase.

Additional bond requirement of plans investing in employer securities.

The Pension Protection Act of 2006 (P.L. 109-280), effective for plan years beginning after 2007, increased the maximum bond required of fiduciaries under plans that invest in employer securities to $1 million.

The Employee Benefits Security Administration (EBSA) has issued a Field Assistance Bulletin (FAB 2008-04, CCH Pension Plan Guide ¶ 19,981Z-2) that provides guidance on fidelity bonding requirements under ERISA §412 that apply to fiduciaries and other individuals handling plan funds or other property. The guidance clarifies: actions that constitute the handling of funds or other plan property that will subject a party to bond; the calculation of the bond amount when multiple plans are covered under a single bond; the application of the $1 million bond maximum to plans that hold employer securities solely as a result of investments in pooled investment funds; and whether third party service providers are subject to the bonding requirements if they handle plan funds.

Failure to timely amend plan to comply with current law and regulatory guidance.

The IRS advices that, because the failure to amend affects the qualified status of the plan, care should be taken to ensure that timely amendments are made. The failure to amend may be resolved, as a last resort, during the examination process through the Audit Closing Agreement Program, which requires the payment of the negotiated sanction. Accordingly, IRS advises that small employers establish operating procedures and internal controls to ensure compliance. In the event a compliance issue is detected on self-audit, the matter should be corrected under EPCRS, prior to examination.

Top-heavy 401(k) plans

The Top-Heavy LESE Project involved approximately 50 examinations of 401(k) plans covering from three to eight participants which were expected to potentially be subject to the top-heavy requirements of Code Sec. 416.

The top six issues revealed by the project were:

(1) Failure to secure adequate bonding under ERISA §412.
(2) Failure to satisfy the Code Sec. 416 top-heavy requirements.
(3) Failure to timely deposit elective deferrals into the plan.
(4) Failure to properly recognize and timely distribute excess contributions.
(5) Failure to properly cover all eligible employees, pursuant to Code Sec. 410.
(6) Failure to properly provide for the required safe harbor contributions for all eligible employees in a designated 401(k) safe harbor plan.

Generally, a 401 (k) plan is top-heavy if, as of the last day of the preceding plan year, the sum of the account, balances of key employee participants (i.e., an officer of the employer with annual compensation in excess of $160,000 (for 2010); a 5% owner of the employer; or a 1% owner of the employer with an annual compensation from the employer of more than $150,000) for the plan year exceeds 60% of the sum of the account balances of all employees under the plan, or the plan is part of a top-heavy group. In the event that the plan is top-heavy, the employer will be required to make a minimum contribution to non-key employees and not merely return elective deferrals to key employees.

The amount of the additional contribution to each non-key employee is generally equal to at least 3% of the employee’s compensation for the entire plan year. The 3% contribution is in addition to elective contributions made on the non-key employee’s behalf.

Employer matching contributions may be credited in satisfaction of the top-heavy contribution obligation. However, elective contributions made to a 401(k) plan on behalf of non-key employees may not be treated as employer contributions for the purpose of meeting the top-heavy minimum contribution requirement.

The IRS identified the following leading causes behind a plan’s failure to provide the required top-heavy contribution:

(1) Failure to test for top-heaviness.
(2) Improper exclusion of an eligible employee.
(3) Omission of top-heavy allocation to an eligible employee.
(4) Allocation errors. Allocation issues primarily consisted of the failure to follow plan terms and allocate the proper amount pursuant to plan terms (resulting in the payment of less than the full minimum top-heavy contribution for certain non-key employees), or the failure to use the proper definition of compensation.

The IRS advises plan sponsors to ensure with the plan administrator or pension professional that the plan is being properly tested each year for top-heavy status. In the event the plan is top-heavy, all eligible participants should be identified and the employer should ensure that plan terms are followed in complying with the Code Sec. 416 rules, including accelerated vesting and the required top-heavy contribution.

IRS Employee Plans News, Winter 2010/Volume 9.

Weekly News – Week of March 8, 2010.

Employers to step up 401(k) matches in 2010: Hewitt study

Employers plan to step up their efforts this year to help workers maximize their 401(k) savings, according to a new survey by Hewitt Associates. High on employer’s priority lists in 2010: restoring company 401(k) matches that were suspended or reduced during the market downfall and adding automated tools and investment features. The findings were based on a study of 162 mid-to large-sized U.S. companies representing 5.7 million employees. According to the Hewitt study, a majority (54%) of employers are less confident today about their employees’ ability to retire with sufficient assets than they were in 2009 (66%). Less than one in five said that they were very confident about their employees’ ability to have enough retirement income to last throughout their retirement years.

Restoration of employer matches

To help employees meet their financial goals in retirement, Hewitt’s survey found that 80% of companies that suspended or reduced their company match in 2009 are planning to restore it in 2010. In addition, study found that nearly half (46%) of employers that do not already offer automatic rebalancing are very or somewhat likely to add it to their plan in 2010. Nearly four in ten (38%) are very or somewhat likely to add automatic contribution escalation to their plan.

Investment services and tools

The Hewitt study also found that an increasing number of employers are offering investment services and tools to help employees make better investment and savings decisions. About half (51%) currently offer online investment guidance and 42% are very or somewhat likely to do so in 2010. In addition, 28% of employers currently offer managed accounts, which allow workers to delegate the overall management of their accounts to an outside professional. One-quarter of companies indicate that are very or somewhat likely to offer managed accounts in the coming year.

“In the last 18 months, employees’ 401(k) accounts took a serious financial hit due to the severe market downturn. Some of them also lost the additional retirements savings that their 401(k) employer match provided,” explained Pamela Hess, Hewitt’s director of retirement research. She noted that, while there has been marked growth in 401(k) balances since the market recovery began, too many employees are not saving and investing in a way that will help them achieve their retirement goals. “Employers are trying to do their part to help—which is why they are restoring their matching contributions and offering features and tools that push workers to save more throughout their working years,” Hess said.

Hewitt Associates press release, February 8, 2010.

Weekly News – Week of February 8, 2010.

Bankruptcy did not relieve plan administrator of reporting duties under ERISA

The plan administrator of a 401(k) plan was ordered by an Administrative Law Judge to pay the $86,500 penalty assessed by EBSA for violating the annual reporting requirements under ERISA.

The administrator appealed EBSA’s civil penalty assessment for violating ERISA by failing to file a complete and accurate Form 5500 for the 2004 plan year. The report was rejected because the administrator failed to attach an acceptable independent qualified accountant’s opinion and a schedule of assets held for investments.

The court found that the administrator’s bankruptcy did not relieve the administrator of its duties and that it deliberately elected to sell its business locations without preserving the plan records as required by ERISA. According to the decision, compliance with the annual reporting requirements alone preserves the intention of ERISA, which is to protect the rights of the employees whose money is being held by the plan. The administrator’s excuse and apologies for why it failed to maintain records and file a compliant report cannot substitute for that protection, the Administrative Law Judge ruled.

Labor Department news release, January 15, 2010.

Weekly News – Week of February 1, 2010.

EBSA final regs provide 7-day safe harbor for contributions to small plans

The Employee Benefits Security Administration (EBSA) has issued final regulations, applicable primarily to defined contribution plans with fewer than 100 participants at the beginning of the plan year, that provide a seven-business-day safe harbor period for employers to deposit participant contributions. Thus, for small contributory pension and welfare benefit plans, amounts deposited no later than the seventh business day following the day in which the amounts are received by an employer or withheld from a participant’s wages will be deemed contributed to the plan on the earliest date on which the contributions could be reasonably be segregated from the employer’s general assets.

EBSA has also amended the regulations to explicitly subject repayments of participant loans to the same rules as other participant contributions (i.e., for both the general rule and for the safe harbor).

Compliance uncertainty under current rules

Under the current rules, employers are obligated to transfer participant contributions into pension plans by the earliest date on which such contributions can reasonably be segregated from the employers’ general assets, but in no event later than the 15th business day of the month following the month in which participant contributions are received by the employers (i.e., elective deferrals) or would have been payable to the participants in cash (withheld from participants’ wages). For SIMPLE IRAs, participant contributions must be transferred no later than the 30th calendar day following the month in which the contribution amounts would otherwise be payable to the participants in cash. The maximum time period for welfare benefit plans is no later than 90 days from the date on which the participant contribution amounts are received by the employers or the date on which the amounts would be payable to the participants in cash.

According to EBSA, there has been continued confusion on the part of the plan sponsors and their advisers as to whether their remittances of participant contributions into plans were compliant with the rules, or left employers subject to the penalty for violating ERISA’s requirements governing the holding of plan assets. The vast majority of applications under the Voluntary Fiduciary Correction Program (VFCP), nearly 90% involve delinquent employee contribution violations, EBSA notes.

Safe harbor to help small plans with compliance certainty

EBSA concluded that it is in the best interests of plan sponsors and participants/beneficiaries to amend the regulations to establish a safe harbor that will provide a higher degree of compliance certainty as to when participant contributions will be considered to have been deposited with the plan in a timely fashion. The final regulations, except for a few minor changes, are the same as the proposed regulations, according to EBSA.

EBSA’s responses to comments

Several commenters requested an increase in the number of days of the safe harbor period—for example, 10 days, 12 days, and 14 days. EBSA decided to retain the seven-business day safe harbor period. Based on data collected while investigating possible failures to timely deposit participant contributions, EBSA determined that a seven-day safe harbor would allow most employers with small plans to take advantage of the safe harbor and to benefit from the certainty of compliance. The general rule will accommodate small employers that have difficulties with meeting the seven-day safe harbor period. EBSA further explained that the safe harbor is available on a deposit-by-deposit basis. Therefore, the failure to meet the safe harbor during one payroll period will not result in the application of the general rule for the entire plan year.

Some commenters also objected to the seven-day safe harbor, thinking that the safe harbor was mandatory. EBSA added a new paragraph to the regulations, clarifying that the safe harbor is not the exclusive means for employers to meet their obligation to timely deposit participant contributions or loan repayments on the earliest date on which contributions and repayments can reasonably be segregated from the employers’ general assets.

In response to commenters’ questions concerning applicability of the safe harbor to SIMPLE IRAs and to salary reduction SEPs, EBSA stated that the general rule and the safe harbor are applicable to participant contributions to any plan, including SIMPLE IRAs and salary reduction SEPs.

After consideration of comments concerning a safe harbor for large plans, EBSA did not expand the safe harbor to cover the plans with 100 or more participants because of lack of information and data sufficient to evaluate current practices of the employers and to assess the costs, benefits, and risks to participants of extending the safe harbor to large plans.

Weekly News – Week of January 4, 2010.

IRS issues 2009 cumulative list of changes in plan qualification requirements

For purposes of the determination letter program, the IRS has issued its 2009 Cumulative List of Changes in Plan Qualification Requirements (the 2009 Cumulative List). The 2009 Cumulative List is to be used primarily by plan sponsors of individually designed plans that are in the Cycle E submission period; that is, single-employer plans where the last digit of the employer identification number of the plan sponsor is 5 or 0, or a Code Sec. 414(d) governmental plan for which an election has been made by the plan sponsor to treat Cycle E as the initial Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) remedial amendment cycle for the plan.

List highlights new 2009 provisions

The 2009 Cumulative List contains those plan qualification requirements listed in 2004, 2005, 2006, 2007, and 2008 Cumulative Lists as well as additional 2009 plan qualification requirements. Some of the newly added qualification requirements for 2009 include:

• Final regulations under Code Sec. 401(a)(9) permit a governmental plan to comply with the required minimum distribution rules by using a reasonable and good faith interpretation of the statute.
• Final regulations under Code Sec. 401(k), Code Sec. 401(m), and Code Sec. 414(w).
• Rev. Rul. 2009-30 clarifies the use of escalator provisions in automatic contribution arrangements that allow for an adjustment in the amount of an employee’s default contributions based on increases in pay.
• Notice 2009-65 supplies sample amendments that plan sponsors can use to add automatic contribution features to their plans.
• Rev. Proc. 2009-43 provides procedures for the automatic revocation of an election by a multiemployer defined benefit plan to freeze its funding status under WRERA Sec. 204(a).
• Rev. Rul. 2009-31 and Rev. Rul. 2009-32 provide guidance that allows certain qualified profit-sharing or 401(k) plans to be amended to permit contributions of the dollar equivalent of employees’ unused paid time off.

The IRS will start accepting determination letter applications for Cycle E plans beginning on February 1, 2010. The 12-month submission period for Cycle E plans will end on January 31, 2011.

Weekly News – Week of December 28

Unfinished Business

At the end of 2009 year legislative wrap up Congress has left some unfinished business relating to pension plans. Two of the more pressing issues left unresolved are funding relief for recent pension asset losses and Roth conversions.

• Funding relief. The single employer relief is expected to provide for extension for the amortization period for losses by permitting payments of interest only on losses for two years, followed by seven year amortization. Also under consideration is an alternative of 15-year amortization of the 2008 losses. Maintenance of effort requirements or curbs on extensive pay, such as those in the Pomeroy-Tiberi bill (HR 3936), may be included with the relief. Extended amortization would also be available to multiemployer plans. Funding relief could travel with a package of tax extenders that Senate Finance Committee Chairman Baucus and Ranking Member Grassley have pledged to act on early next year. The relief would be a revenue raiser, and could help pay for the tax extenders package.
• Roth conversions. Effective January 1, 2010, the income limits are lifted on conversion of traditional IRAs to Roth IRAs. However, plan participants have to take distributions from qualified plans to qualify for Roth treatment. The American Society of Pension Professionals and Actuaries has been working to educate lawmakers on the negative impact this inequity will have on qualified plans, and asking them to permit conversions to Roth accounts in 401(k) and 403(b) plans. The progress has been made, but without year-end tax legislation there was no viable path to getting the problem corrected before year end.

Weekly News – Week of December 21

Tax technical corrections bill with employee benefit provisions introduced in House

The Tax Technical Corrections Bill of 2009 (H.R. 4169), which contains several employee benefits provisions, was introduced in the House on December 2, 2009 by Ways and Means Committee Chairman Charles B. Rangel (D-NY) and ranking member Dave Camp (R-MI). The bipartisan bill would make technical corrections to five existing tax laws: the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), the Emergency Economic Stabilization Act of 2008 (P.L 110-343), the Heroes Earnings Assistance and Relief Act of 2008 (P.L. 110-245), the Economic Stimulus Act of 2008 (P.L. 110-185), and the Tax Technical Corrections Act of 2007 (P.L. 110-172). A companion measure is expected to be introduced by the bipartisan leadership of the Senate Finance Committee.

Employee benefit provisions
The legislation would make technical corrections to the nonqualified deferred compensation rules under Code Sec. 457A. Among other things, the bill would clarify congressional intent concerning when a partnership is a nonqualified entity for purposes of complying with the rules of Code Sec. 457A that any compensation that is deferred under the plan of a nonqualified entity is includable in the employee’s gross income when there is no substantial risk of forfeiture.

The bill also makes a number of technical amendments to the Heroes Earnings Assistance and Relief Tax Act of 2008, including provisions relating to the special period of limitation when uniformed services retired pay is reduced as a result of an award of disability compensation, the temporary credit for employer deferential wage payments to employees who are active duty members of the uniformed services, and the disposition of unused health benefits in flexible spending accounts.

Weekly News – Week of December 14

IRS Provides One-Year Extension to Adopt Certain PPA Related Amendments

IRS Notice 2009-97 (issued on Friday, 12/11/09) extends by one year – to the last day of the 2010 plan year – the deadline for amending qualified retirement plans to reflect certain provisions of the Pension Protection Act (PPA) and the Worker, Retiree and Employer Recovery Act of 2008 (WRERA). The amendment only delays the deadline (to the last day of the 2010 plan year) and only applies to amendments regarding –

• The IRS Section 436 funding-based benefit limitations for single employer defined benefit plans,
• Many, but not all, of the special requirements relating to hybrid plans under Sections 411(a)(13) and 411(b)(5). For example, the deadline for amendments changing vesting schedules and implementing the market rate of return rules is extended, while the deadline for an amendment specifying that the present value of the accrued benefit is equal to the account balance is not extended, and
• The diversification requirements for defined contribution plans that provide for investment in company stock under Section 401 (a)(35).

The notice also provides relief from Section 411(d)(6) anti-cutback rules for plan amendments implementing the funding-based benefit limitations that meet the extended deadline, and suggests that limited Section 411(d)(6) relief will be provided in forthcoming final regulations for hybrid plan amendments made before the last day of the 2010 plan year.

The notice does not provide a blanket extension of the amendment deadline for all plan document changes that are required to comply with or to implement changes made by PPA or WRERA. The notice states that Section 411(d)(6) anti-cutback relief will not be granted for amendments made after the original PPA deadline, except for the limited class of amendments described above. In particular, there is no extended deadline and no expanded Section 411(d)(6) relief for plan amendments addressing the PPA changes to the Section 417(e) provisions specifying the “applicable interest rate” and the “applicable mortality table.” There has been no extension of the deadline to comply with the written plan requirement of the 403(b) regulations. All 403(b) plans, other than certain church plans, must be adopted or amended no later than December 31, 2009. Exactitude for each detail is not required, but the document must represent a good faith attempt to comply with the final 403(b) regulations. The IRS has formally announced that plans which amend into IRS-approved prototypes or which apply for a determination letter will have a remedial amendment period in which to correct mistakes in the document, but the document must be in place before the end of the year.

You may remove (but are not required to remove) these provisions from the PPA amendments that we have provided. However, the remaining provisions of the PPA amendments must still be adopted by the last day of the 2009 plan year. Therefore, due to the timing of the IRS Notice, there will not be updated PPA amendments that have these provisions removed provided. If you do or have adopted a PPA amendment with these provisions in place, you have lost nothing.

Remember, the PPA deadline is the last day of the 2009 plan year. A calendar year cannot wait until April 30, 2010 to adopt this amendment.

Weekly News - Week of November 30

Congressman Takes Aim at Cross-testing and Vesting

On November 19, Congressman Lloyd Doggett (D-TX 25th) introduced HR 4126, The Retirement Fairness Act of 2009. The bill’s stated purpose is to “prevent the overstatement of benefits payable to non-highly compensated employees under qualified plans”. The proposal would:

• Modify IRS Section 401(a)(4) so that
  • Cross-testing of benefits and contributions is prohibited. Cash balance plans would be an exception to the rule, tested on the basis of contributions.
  • Only vested benefits are considered for non-highly compensated employees in discrimination testing; and
• Modify IRS Section 410(b) so non-highly compensated employees that work less than 2080 hours per year would be counted as fractional employees.

The bill has 16 original co-sponsors, all Democrats. Seven, in addition to Mr. Doggett, are on the Ways and Means Committee. Although HR 4126 has been referred to the Ways and Means Committee, there are no immediate plans to consider this legislation. However, ASPPA has already met with Mr. Doggett’s staff to express concern about the bill. We are also meeting with other Members of Ways and Means and their staff to educate them on the important role cross testing plays in providing meaningful benefits to rank and file employees, and the devastating effect proposals such as those in HR 4126 would have on private pension system, especially employees of small business.

ASPPA also will be targeting Ways and Means members in a grass roots effort this week. If you live or work in a state with Ways and Means member, you may be receiving an email as early as tomorrow asking you to contact the member and tell them about the harm that would come from this proposal. We are optimistic that this proposal can be stopped in the Ways and Means Committee. We will launch a broader grass roots effort at a later date if the proposal appears to be gaining traction.

Weekly News – Week of November 23

IRS issues Cash Balance Plan relief

The IRS has issued an announcement providing relief for sponsors of statutory hybrid plans, such as cash balance plans, that must amend the interest crediting rate in those plans.

The IRS expects to issue final and proposed regulations on hybrid plans in the near future. Pending that guidance, plan sponsors may rely on this announcement. The upcoming regulations will include rules interpreting the requirement in Code Sec. 411(b)(5)(B)(i) that such plans not have an interest crediting rate in excess of a market rate of return. These provisions are not expected to go into effect before the first plan year that begins on or after January 1, 2011.

It is also anticipated that, once the final regulations are issued, an amendment to a statutory hybrid plan with an interest crediting rate that is in excess of a market rate of return that is adopted prior to the effective date of those regulations will not violate Code Sec. 411(d)(6) merely because it reduces the future interest crediting rate on participants' account balances to the extent necessary to constitute a permissible rate under those regulations. Finally, it is anticipated that future guidance will provide that an ERISA §204(h) notice, regarding a plan amendment that changes a statutory hybrid plan's interest crediting rate, may be provided up to 30 days after the effective date of the amendment, for amendments adopted by the last day of the first plan year that begins on or after January 1, 2009, and after November 10, 2009, but only if the amendment is effective not later than the first day of the first plan year that begins on or after January 1, 2010.

The announcement is posted below.

Effective Date of Regulations Under § 411(b)(5)(B)(i); Relief Under § 411(d)(6); and Notice to Pension Plan Participants

Announcement 2009-82

The Treasury Department and the Internal Revenue Service are announcing relief for sponsors of statutory hybrid plans that must amend the interest crediting rate in those plans. Plan sponsors may rely on this announcement pending publication of the anticipated additional guidance described below.

Treasury and the Service expect to issue in the near future final regulations and proposed regulations relating to statutory hybrid plans. The regulations will include rules interpreting the requirement in § 411(b)(5)(B)(i) of the Internal Revenue Code that such plans not have an interest crediting rate in excess of a market rate of return. The rules in the regulations specifying permissible market rates of return are not expected to go into effect before the first plan year that begins on or after January 1, 2011.

In addition, it is anticipated that Treasury and the Service will exercise the authority under § 1.411(d)-4, A-2(b)(2)(i) of the Treasury regulations to provide that, once final regulations regarding the market rate of return requirements are issued, an amendment to a statutory hybrid plan with an interest crediting rate that is in excess of a market rate of return under those final regulations that is adopted prior to the effective date of those final regulations will not violate § 411(d)(6) merely because it reduces the future interest crediting rate on participants' account balances to the extent necessary to constitute a permissible rate under those final regulations. Under this anticipated guidance, § 411(d)(6) will not operate to bar such an amendment, even if the amendment is adopted after the last day of the first plan year that begins on or after January 1, 2009, and therefore is not an amendment described in section 1107 of the Pension Protection Act of 2006 (PPA '06), Pub. L. 109-280. Section 1107 of PPA '06 provides, in general, that a plan will not fail to satisfy § 411(d)(6) as a result of amendments that are adopted pursuant to PPA '06 or regulations thereunder by the last day of the first plan year that begins on or after January 1, 2009.

Finally, it is anticipated that future guidance will include a special timing rule for providing section 204(h) notice, as defined in § 54.4980F-1, Q&A-4, to participants and other applicable individuals with respect to an amendment that changes a statutory hybrid plan's interest crediting rate that is adopted by the last day of the first plan year that begins on or after January 1, 2009 (that is, by the end of the period described in section 1107 of PPA '06) and after November 10, 2009. Under this special timing rule, any required section 204(h) notice relating to such an amendment will be permitted to be provided as late as 30 days after the effective date of the amendment. It is expected that this relief will apply to an amendment only if the amendment is effective not later than the first day of the first plan year that begins on or after January 1, 2010.

For further information regarding this announcement, please email RetirementPlanQuestions@irs.gov.

Weekly News – Week of November 17

Pension funding relief bill introduced in House

Pension funding relief legislation has been introduced in the House by Rep. Earl Pomeroy (D-ND) and Rep. Pat Tiberi (R-OH). The Preserve Benefits and Jobs Bill (H.R. 3936), introduced on October 27, 2009, is designed to provide the funding relief necessary to prevent employers from having to either freeze their pension plans or cut their workforce to make up for pension losses.

“Our country is showing some signs of financial recovery, but exceedingly large pension costs will hamper both job growth and capital investment that are needed to grow the economy,” Congressman Pomeroy said. “The cornerstone of this bill is temporary pension funding relief that eases an employer’s obligation to make up for the investment losses that pension plans experienced in 2008 by making significantly greater contributions in the coming years. At the same time, employers would get important assurances that their retirement benefits will continue to grow. I believe this bill is an important step in ensuring workers’ lifetime income security in retirement,” Pomeroy added.

The bill would continue the relief enacted last year in the Worker, Retiree, and Employer Recovery Act (WRERA; P.L. 110-458) that was designed to help significantly underfunded single-employer plans avoid the requirement to freeze benefit accruals. The bill would also protect future retirees by prohibiting pension plans from being drained by the payment of lump-sum ad hoc benefits to certain individuals.

The Preserve Benefits and Jobs Bill would provide struggling employers with the elective choices of (1) an extended contribution schedule of nine years with payments during the first two years consisting of interest only; or (2) a fifteen-year payment schedule. To take advantage of the longer payment schedules, employers would have to guarantee to offer ongoing retirement benefits and comply with certain conditions. Multiemployer plans that meet a solvency test would also be eligible for relief. Two options would allow employers to repay recent losses over a 30-year period, and employers would be unable to increase plan benefits for two years. The bill would also update PBGC benefit guarantees.

PBGC maximum monthly benefit guarantee remains the same for 2010.

The PBGC has announced that the maximum monthly insurance benefit for participants in underfunded pension plans terminating in 2010 is $4,500 per month or $54,000 per year for those who retire at age 65.

The maximum benefit is adjusted for retirees taking earlier retirement or electing survivors’ benefits. A participant may receive benefits in excess of the maximum guarantee if certain conditions apply. ERISA requires that the maximum guaranteed amount be adjusted annually based on changes in the Social Security contribution and benefit base. The PBGC maximum insurance benefit is indexed to a contribution and benefit base in Social Security law. Because that amount does not increase for 2010, the PBGC maximum insurance benefit is unchanged from 2009.

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Weekly News – Week of November 5

TARGET DATE FUNDS UNDER CONGRESSIONAL MICROSCOPE

A testimony was given on October 28, 2008 before the Special Committee on Aging, United States Senate, by Phyllis C. Borzi Assistant Secretary of Labor Employee Benefits Security Administration.

Borzi stated that EBSA is committed to promoting policies that encourage retirement savings and protect employer-sponsored benefits. The growth of target date funds as an investment option in participant-directed individual account plans over the past few years has been significant. At the end of 2008, an estimated 75 percent of 401(k) plans offered target date funds as an investment option. Target-date funds have been under scrutiny this past year for exposing investors and plan participants to the market downturn. Many funds with the same target retirement date have investments that differ significantly. Some are invested more aggressively in stocks. Such differences in target date funds, and associated differences in recent investment performance, have prompted questions about whether plan fiduciaries and workers have an adequate understanding of target date funds, and their benefits, risks and costs.

EBSA is responsible for administering and enforcing the fiduciary, reporting, and disclosure provisions of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). EBSA oversees approximately 700,000 private pension plans, including almost 460,000 participant-directed individual account plans such as 401(k)-type plans and approximately 49,000 defined benefit plans, and millions of private health and welfare plans that are subject to ERISA. As of 2006, at least 60 percent of private-sector employees participated in defined contribution plans that allow for participant direction, with these plans covering more than 58 million active participants and holding about $2.7 trillion in assets.

Growth of Target Date Funds

Target date funds (also called "lifecycle" funds) generally are investment products that allocate their investments among various asset classes and automatically shift that allocation toward more conservative investments as a "target" retirement date approaches. This shift in asset allocation, often referred to as a fund's "glide path," may differ significantly among funds with the same target date; even among investment professionals, there is no "perfect" mix.

At year-end 2008, 75 percent of 401(k) plans offered target date funds as an investment option. These plans offered target date funds to 72 percent of participants in section 401(k) plans. Among participants offered target date funds, 42 percent held at least some portion of their plan account in them at year-end 2008.

At the end of the first quarter of 2009, the amount of employer sponsored defined contribution plan assets invested in target date funds totaled $145 billion. This figure was down from the second quarter of 2008, when the amount of employer-sponsored defined contribution plan assets invested in target date funds totaled $186 billion. Even with this difference, the amount of employer-sponsored defined contribution plan assets invested in target date funds has grown significantly over the past decade from $18 billion in 2000, $37 billion in 2003, and $87 billion in 2005.

Target date funds have rapidly gained in popularity since they were introduced in 1996.

The attraction is obvious. They offered a simple solution to the retirement conundrum of picking mutual funds for one’s 401(k)—pick one fund that does it all, offering diversification and shifting from equities to bonds as you grow older and ripening just in time for your retirement. In short, they were designed to take all the thinking away from the investor—a risk-conscious retirement vehicle on auto-pilot.

Qualified Default Investment Alternatives Guidance

In 2006, Congress-in an effort to increase retirement savings by those workers generally reluctant to take an active role in their retirement plans-included in the Pension Protection Act (PPA) provisions to encourage 401(k) plan sponsors to implement automatic enrollment programs. Among other encouragements, the PPA promoted the broader use of automatic enrollment in self-directed defined contribution plans by providing new fiduciary relief under ERISA for plan fiduciaries investing participant assets in certain types of default investment alternatives in the absence of participant investment direction. Under longstanding ERISA provisions, fiduciaries are generally relieved from responsibility for participants' exercise of control over their own accounts, as long as those participants are provided with prudently selected investment options. Under this PPA provision, a participant is deemed to have exercised control over assets in his or her account if, in the absence of investment direction from the participant, the plan fiduciary invests the assets in a qualified default investment alternative (QDIA).

In 2007, the Department published a final regulation describing the types of investments that constitute qualified default investment alternatives (QDIAs) and providing relief under ERISA for fiduciaries that select a QDIA for their plan. The regulation specifies three categories of investments that can qualify as QDIAs. One of the categories is an age-based investment fund that changes over time such as a lifecyle or target-date fund that is selected for a participant based on the participant's age, target retirement date or life expectancy. The QDIA regulation defines a target date fund as an investment that: (1) applies generally accepted investment theories; (2) is diversified so as to minimize the risk of larges losses: and (3) is designed to provide varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures based on the participant's age, target retirement date, or life expectancy.

The regulation does not contain any requirements regarding the composition of target date funds. Nor does it specify a required ratio of stocks and bonds as the fund nears its target. The preamble to the final regulation reiterates that a fiduciary continues to have the obligation to prudently evaluate, select and monitor any investment option that will be made available to the plan's participants and beneficiaries, regardless of whether the plan includes an automatic enrollment feature or whether the fiduciary seeks to comply with the QDIA regulation. When the Department proposed the QDIA regulation in 2006, it received more than 120 comments, which were generally favorable toward target date funds being included as a QDIA.

Impact of the Economic Downturn on Target Date Funds

The design of target date funds was intended to simplify investing for the typical American, who may not have the time, interest, or expertise to sort through dozens of funds to determine the right mix of investments to suit their retirement needs or risk tolerance. Following the enactment of the Pension Protection Act and issuance of the Department's QDIA regulation, many 401(k) plans changed their default investment funds for their automatically-enrolled participants to QDIAs. For example, in 2007, 22 percent of Vanguard's defined contribution pension plans were utilizing a QDIA and 84 percent of these plans used a target date fund as their automatic enrollment vehicle.

The financial downturn that started in 2008 increased volatility and lowered returns of target date funds. Many target date funds designed for people recently in or near retirement had large losses. For example, funds with target dates labeled 2010 lost as much as 41 percent last year. On average, participants invested in target date funds dated 2010 and 2015 lost about a quarter of their value in 2008. Many of these funds typically held about half of the holdings in stocks, following glide paths that did not significantly reduce that percentage for 5 years or more after the average investor retired. The average fund in the 2050 category declined 39 percent in 2008, while the S&P 500 Index dropped 38 percent.

Responding to these developments, the Senate Aging Committee began an investigation of certain target date funds marketed to 401(k) plans. In preliminary findings shared with the Department and the Securities and Exchange Commission (SEC), the Committee found a wide range of objectives, portfolio compositions, and risks among same-year target date funds. In particular, Chairman Kohl expressed concern over what he called "significant differences" in equity holdings among eight "2010" target date funds, which ranged from eight to 68 percent of assets in funds designed to match risk and return goals for a worker intending to retire in 2010. In relaying this information, the Committee expressed concern that, given these variations, some investors may be investing in target date funds without being aware of the financial risk. In letters to both the Department and the SEC, Chairman Kohl urged the two agencies to commence a review of target date funds.

Joint DOL/SEC Hearing on Target Date Funds

On June 18, 2009, the Department and the SEC held a joint day-long hearing on issues relating to investments in target date funds and similar investment options by 401(k) plan participants and other investors. The purpose of the hearing was to determine whether additional guidance by either agency would be helpful. The hearing addressed a variety of topics, including: investor and plan participant considerations; exploration of glide paths and underlying investments; plan sponsor considerations; utilization of target date funds in defined contribution plans; understanding, selecting and monitoring target date funds; and disclosures relating to target date funds. The hearing consisted of nine panels, with 39 organizations testifying. A variety of organizations also submitted supplemental testimony and other materials.

A variety of issues, problems and options were discussed at the hearing with certain themes emerging from the testimony. Nonetheless, the panelists generally believed that target date funds continue to be an extremely beneficial investment option for the majority of plan participants. One common concern related to the widely divergent allocations to equities and fixed-income investments, with some concerns expressed as to whether strict limits should be imposed on equity and fixed-income allocations within target date funds. A majority of the panelists were against any sort of mandated one-size-fits all or "range" requirement for target date funds; rather, some argued that customization and choice were ultimately good for the participant.

Several issues were raised with regard to the "glide path," which refers to the shift in asset allocation as the target date approaches. One panelist discussed that while a glide path generally implements the principles of diversification, rebalancing, and reallocation, glide path variations generally reflect the preferences and judgment of the individual investment manager. Some panelists agreed that target date funds should contain some equity exposure at the point of retirement, and that glide paths should continue to progress after the target date. This further led to a discussion of whether target date fund glide paths should continue to change "to" the target date or "through" the target date, with some panelists arguing that glide paths should continue to vary beyond the target date.

Many panelists focused on the importance of disclosure and the challenges that exist with regard to full and clear communication about the sometimes complicated aspects of these funds. In particular, it was suggested that target date funds disclose whether the fund's glide path is designed to manage assets to or through retirement.

Several panelists suggested that the Department should consider reviewing the QDIA language and determining whether a higher standard should be established for fiduciaries when selecting a particular QDIA. Some panelists suggested that the Department and the SEC set mandatory glide path parameters.

Department of Labor Oversight, Recent Regulatory Projects, and Next Steps

Since the June hearing, the Department has been reviewing the testimony presented and the other materials submitted for the public record, collecting additional data on target date fund characteristics and performance, and considering possible initiatives to ensure that plan fiduciaries and participants have an adequate understanding of target date funds, and their benefits, risks and costs. In order to ensure a coordinated approach, we have been working with the SEC, which is responsible for administering federal securities laws that address disclosures to investors in target date funds structured as mutual funds. Of the target date funds available, mutual funds comprise approximately 78 percent of target date funds.

In EBSA's oversight role, we assist plan fiduciaries and others in understanding their obligations under ERISA through comprehensive education and outreach, and regulatory programs. EBSA also provides oversight through its enforcement program. EBSA investigates issues related to plan investments focused on plan fiduciaries and service providers such as investment advisors, pension consultants, and investment managers.

Enforcement

Title I of ERISA establishes standards of fiduciary conduct for persons who are responsible for the administration and management of benefit plans. ERISA protects participants and beneficiaries by holding plan fiduciaries accountable for prudently selecting service providers and plan investments. In carrying out this responsibility, plan fiduciaries must follow a prudent process taking into account relevant information relating to the plan and the investments available under the plan.

EBSA identifies potential investigations related to a number of investment issues. These range from the prudence of investments, to improper receipt or payment of fees relating to plan assets, to self-dealing, or conflicts of interest. For selection of investments an investigation would focus on whether the plan fiduciary acted prudently in selecting or recommending the investment. An investigator would review whether the plan fiduciary performed proper due diligence in selecting an investment for the plan and followed a prudent process.

Under ERISA, plan fiduciaries are not liable for plan losses merely because an investment lost money but because they acted imprudently in selecting and monitoring the investment. Accordingly, when investigators review the selection of investments, they will generally focus on the procedures used by a plan fiduciary, rather than the ultimate performance of the asset.

Education and Outreach

To help educate plan sponsors and fiduciaries about their obligations under ERISA, EBSA's education and outreach program provides information to fiduciaries about their responsibilities, focusing on specific topics such as selecting and monitoring service providers and investment options, and automatic enrollment. These initiatives include publications as well as seminars. Specific publications include "Meeting Your Fiduciary Responsibilities," "Understanding Retirement Plan Fees and Expenses," "Automatic Enrollment 401(k) Plans for Small Businesses" and "Adding Automatic Enrollment to Your 401(k) Plan." EBSA also provides two tip sheets to help plan sponsors select plan service providers: "Selecting and Monitoring Pension Consultants - Tips For Plan Fiduciaries" and "Tips For Selecting and Monitoring Service Providers For Your Employee Benefit Plan."

Our campaign, "Getting It Right - Know Your Fiduciary Responsibilities," includes nationwide educational seminars and webcasts to help plan sponsors understand the law. The campaign focuses on fiduciary responsibilities. EBSA has conducted 31 fiduciary education seminars since May 2004 in different cities throughout the United States. EBSA also has conducted 65 health benefits education seminars, covering nearly every state, since 2001. Beginning in February 2005, these seminars added a focus on fiduciary responsibilities. EBSA will continue to provide seminars in additional locations under each program.

In order to help participants understand investment choices offered through their plan and automatic enrollment, EBSA has recently updated the publication "What You Should Know About Your Retirement Plan" and "Savings Fitness - A Guide to Your Money and Your Financial Future." Other publications providing education in this area include "A Look at 401(k) Plan Fees for Employees" and "Taking the Mystery Out of Retirement Planning."

EBSA continues to expand available information, including adding seminars, webcasts and other outreach, and updating our materials as new guidance is issued.

Regulatory and Other Initiatives

The Department is considering a number of initiatives to assist plan fiduciaries and participants and beneficiaries in understanding the benefits, risks, and costs of plan investment options, including target date funds. For instance, one of our ongoing regulatory initiatives involves improving disclosure to plan participants concerning their plan investment options. As part of this initiative, we are considering what disclosure should be made about target date funds. We are similarly re-examining the Department's QDIA regulation to ensure that meaningful disclosure is provided to participants when the plan's default investment is a target date fund.

We also are considering whether the Department can assist plan fiduciaries by providing more specific guidelines for selecting and monitoring target date funds for their plans, whether as a default investment or more generally as one of investment options offered by the plan.

A related regulatory initiative is the Department's activity related to investment advice. The Department intends to withdraw the final rule implementing the investment advice provisions of the Pension Protection Act of 2006 (PPA) and accompanying class exemption that the Department published in January 2009. We intend to issue a new proposed rule that will support affordable and unbiased investment advice for 401(k)-type plans and IRAs. The new rule will provide participants access to quality investment advice that will assist participants in choosing investments, including target date funds.

Finally, we understand that this Committee is concerned about fee levels associated with some target date funds. As you know, the Department is engaged in regulatory projects relating to the disclosure of fees to plan sponsors and participants, and it is our hope that adequate disclosure will be an added step in protecting participants in these plans. Borzi said.

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Weekly News – Week of October 29

GAO recommends policy changes to reduce 401(k) plan “leakage”

In a report to the Chairman of the Senate’s Special Committee on Aging, the Government Accountability Office (GAO) has recommended several policy changes that could reduce the long-term effects of the 401(k) plan “leakage.”

The GAO report notes that there are three principal forms of 401(k) plan leakage: (1) cashouts at separation from employment that are not rolled over into another retirement account, (2) hardship withdrawals, and (3) loans. This leakage can result in a permanent loss of retirement savings.

Causes of 401(k) leakage
The incidence and the amount of the principal forms of leakage from 401(k) plans have remained relatively steady, the GAO found. Approximately 15% of participants initiated some form of leakage from their retirement plans, according to an analysis of U.S. Census Bureau survey data collected in 1998, 2003, and 2006. The incidence and the amount of hardship withdrawals and loans changed little through 2008, according to data the GAO received from selected major 401(k) accounts at job separation can result in the largest amounts of leakage and the greatest proportional loss in retirement savings, the GAO report found.

GAO recommendations
In this report, the GAO suggests that, to help participants recover more quickly from a hardship situation, Congress consider changing the requirement for the 6-month contribution suspension following a hardship withdrawal. Other experts noted that this provision seemed to contradict the goal of creating retirement income. One expert cited, as an example, an employee who needed an infusion of cash for a discrete, one-time event, such as a home purchase. Other experts characterized the suspension period as excessive and more of an inconvenience than an effective deterrent to taking hardship withdrawals.

In addition, the GAO recommends that the Secretary of Labor promote greater participant education, stressing the importance of preserving retirement savings, and that the Secretary of Treasury clarify and enhance loan exhaustion provisions to ensure that participants do not initiate unnecessary leakage through hardship withdrawals.

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Weekly News — Week of October 22

Final regulations on 401(k) safe harbors and cash balance plans are priority items, TE/GE official says

Final regulations on 401(k) safe harbor plans and cash balance plans are among the items to be included in the 2009-2010 IRS Priority Guidance Plan (PGP), according to Alan Tawshunsky, IRS deputy associate chief counsel (employee benefits), Tax Exempt and Government Entities. Appearing on October 8, 2009, at an American Law Institute-American Bar Association conference on pension, welfare and deferred compensation plans, Tawshunsky described a host of upcoming IRS guidance items. Tawshunsky, who said that he was expressing his own views and was not speaking on behalf of the IRS, said that he expects the 2009-2010 PGP to be issued shortly.

In May 2009, the IRS issued proposed regulations allowing employers sponsoring a safe harbor 401(k) or 403(b) plan to reduce or suspend non-elective contributions during the year. Plans to finalize these regulations are expected to be on the IRS priority guidance list, Tawshunsky said. In addition, he said, the IRS will finalize proposed regulations that were issued at the end of 2007 on cash balance plans and will issue proposed regulations on provisions limiting payments to a market rate of return. He said these rules are a “high priority.”

Tawshunsky also expects the following guidance to be on the IRS’s priority list:

• Final regulations on the Code Sec. 401(a)(35) diversification requirements applicable to defined contribution plans, reflecting the Pension Protection Act of 2006 (PPA;P.L.109-280).
• Guidance allowing assets of 403(b) tax-sheltered annuities to be included in a group trust.
• A determination letter program for 403(b) plans that will address prototype plans.
• Substantive guidance on DB-K plans under Code Sec.414(x).
• Guidance on funding rules for multiemployer plans.
• Final regulations on calculating income including under a failed Code Sec. 409A plan. In addition, the IRS plans to update the Code Sec. 409A voluntary correction program and will consider providing relief for correcting plan documents.
• Final rules under Code Sec. 423, addressing employee stock purchase plans.
• Proposed rules on Code Sec. 457(f) deferred compensation plans (for tax-exempt entities) that violate Code Sec. 457(b).
• Proposed regulations or other guidance under Code Sec. 457A, on foreign deferred compensation plans maintained by tax-indifferent employers.

The IRS also plans to push back to 2011 or later the effective date for cafeteria plan regulations, which were initially proposed to be effective in 2010, Tawshunsky said.

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Weekly News – Week of October 12

NEW 402(f) NOTICES

The IRS has issued two separate 402(f) notices: one notice for distributions from a Roth account and another notice for distributions not from a Roth account. The IRS has updated the notices for the automatic IRA rollover rules, Roth contributions, PPA, PPA technical corrections and TIPRA (Tax Increase Prevention and Reconciliation Act of 2005). The new notices reflect the mandatory non-spouse rollover rule change and the change in the Roth conversion rules, both of which become effective January 1, 2010.

Code §402(f) requires a qualified plan to provide a participant receiving an eligible rollover distribution with a written explanation of the direct rollover rules, plans eligible for rollover, mandatory income tax withholding rules and the tax consequences if the participant does not roll over the distribution. A 403(b) plan and a governmental 457(b) plan also must provide the notice to participants. The new notices reflect the PPA changes to the timing of the notice. The plan must provide the notice between 30 and 180 days before the distribution. The regulations permit the participant to waive the minimum 30-day period and receive the distribution earlier.

The IRS guidance indicates that a plan should provide the non-Roth notice to a participant who does not have a Roth account and the Roth notice to a participant with a Roth account. If a participant has both a Roth and a pre-tax account, the plan should provide both notices. The IRS considers a plan which uses its notices to be in compliance with the notice requirement (i.e., safe harbor explanation). However, a plan may modify the notices to reflect information relevant to the plan. For example, the plan may eliminate language regarding after-tax contributions or employer securities if the plan does not include such contributions or investments. The guidance also points out that if law changes affect the notices, the plan should no longer use the notices. (IRS Notice 2009-68)

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Weekly News - Week of October 5

Michelle’s Law Amendments- HRA Plans and Cafeteria Plans With Health Care Reimbursement Accounts

Michelle’s law goes into effect for group health plan years beginning after October 9, 2009. The law affects group health plans that provide coverage to dependents enrolled in the plan or coverage on the basis of being a student at a postsecondary educational institution. The group health plans that provide this type of dependent coverage must continue coverage for dependents that leave school due to a medically necessary leave of absence.

All HRA plans and most Cafeteria plans will require an amendment for Michelle’s law. Only Cafeteria plans with Health Care Reimbursement Account features will require amendment. HRA and Cafeteria Reimbursement Account plans provide reimbursement for Eligible Expenses excludable under Code section 105(b). Code section 105(b) covers medical expenses (Code section 213(d) expenses) for dependents as defined under Internal Revenue Code Section 152 (with some modifications). Section 152(c)(3) provides that a dependent includes a qualifying child “who is a student who has not attained the age of 24.” Because Code section 152 was not amended under Michelle’s law, HRA and Cafeteria Plans are required to amend so that they provide continuing coverage to dependents who are under age 24 and who leave school due to a medically necessary leave of absence (for a period up to one year).

Michelle’s Law Amendment will be effective as of the first day of the Plan Year that begins on or after October 9, 2009. Under the proposed Cafeteria plan regulations, Cafeteria plans with a calendar year plan would be required to amend the plan by December 31, 2009. HRA plans may amend for Michelle’s Law at any time before the end of the plan year that begins on or after October 9, 2009.

All Cafeteria plans and HRA plans generated on or after October 7, 2009 need to have Michelle’s law changes incorporated in the Plan Document.

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Weekly News - Week of September 7

House Education and Labor Committee
approves 401(k) fee disclosure bill

The House Education and Labor Committee, on June 24, 2009, approved the 401(k) Fair Disclosure and Pension Security Bill (H.R. 2989), legislation aimed at providing more transparent disclosures of 401(k) plan fees. The bill, which passed on a vote of 29 to 17, is an amended version of the 401(k) Fair Disclosure for Retirement Security Bill (H.R. 1984), sponsored by Rep. George Miller (D-CA), chairman of the Education and Labor Committee, and incorporates provisions of the Conflicted Investment Advise Bill (H.R. 1988), sponsored by Rep. Robert Andrews (D-NJ). In addition, the bill has been amended to provide funding relief to defined benefit plans.
The version of H.R. 2989 adopted by the Education and Labor Committee would require 401(k) plans to disclose fees in one dollar figure taken from participants’ accounts in an employee’s quarterly statement. 401(k) service providers would be required to disclose to employers all fees assessed against the participant’s account, broken down into four categories: administrative fees, investment management fees, transaction fees, and other fees. In addition, service providers would be required to disclose any financial relationships or potential conflicts of interest to plan sponsors. Under the bill, 401(k)-type plans that seek limited employer liability would be required to include at least one index fund in their investment line-up. An amendment adopted in Committee would provide temporary funding relief for single- and multiemployer defined benefit plans.
A spokesman for the Education and Labor Committee said that Rep. Miller will determine the next step for the legislation after consulting with the House Ways and Means Committee, which also has jurisdiction over 401(k) plans. Meanwhile, a similar bill, introduced by Senate Special Committee on Aging Chairman Herb Kohl (D-WI), and Sen. Tom Harkin (D-IA), is pending in Senate.

Five years of service is valid “normal retirement age” in pre-2006 plan

A pre-2006 cash balance plan did not violate ERISA when it defined “normal retirement age” to be five years of service with the employer, the U.S. Court of Appeals in Chicago (CA-7) has ruled.

Plan design
In designing its pre-2006 cash balance plan, an employer attempted to minimize the impact of the so-called “whipsaw” calculation, which required plans calculating a lump-sum distribution to add the current balance in an employee’s “account” any interest promised through “ normal retirement age”, and then discount that sum back to present value via use of a prescribed interest rate. (The Pension Protection Act of 2006 eliminated use of the “whipsaw” calculation.)
The employer’s solution was to define “normal retirement age” as the age reached by any given employee after five years of service, which was also when, under the plan’s vesting rules, employees were first entitled to ask for a lump-sum distribution upon termination of employment. By using this definition of “normal retirement age,” the plan could effectively avoid the whipsaw calculation and distribute only the current balance of the worker’s “account.”
A former employee who received more than $500,000 in lump-sum benefits when he left the employer at age 55 filed suit, arguing that the plan’s definition of “normal retirement age” violated ERISA and unlawfully denied him the value of ten years of “investment credits” under the plan. The district court found for the employer.

ERISA’s definition
The appellate court concluded that ERISA did not bar the employer from defining “normal retirement age” as it did. ERISA §3(24)(A) gives a plan wide discretion in how it defines retirement age. ERISA does not require “normal retirement age” to be the same for every employee, nor does the law require it to be defined as the age when most people retire, whether in the employer’s industry or in the U.S. population generally.
The court also rejected the relevance of 2007 IRS regulations requiring a plan’s normal retirement age to mirror the typical retirement age for its industry. Those regulations only have prospective effect, the court said.

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