Category Archives: ERISA

Today in ERISA History

Jan. 6, 2006 – The Dept. of Labor issues Advisory Opinion 2006-01a. It addresses whether a real estate transaction between an Individual Retirement Account (IRA) and an S-Corp and an LLC owned in part by the same person is a prohibited transaction under Internal Revenue Code section 4975.

The idea proposed by the parties was that several individuals would form an LLC, which would purchase land, build a warehouse, and lease the warehouse to a S-Corp.

The LLC owning the property would be partially financed by self-directed IRAs owned by the individuals who owned or managed the S-Corp. Specifically, the investors in the LLC would be:

    Individual A’s IRA: 49%
    Individual B’s IRA: 31%
    Individual C: 20%

The S-Corp leasing the property is owned by:

    Individual A and his wife: 68%
    Individual C: 32%

The individuals with management responsibility for both the LLC and the S-Corp were:

    Individual B, who was the comptroller of the S-Corp.
    Individual B and Individual C, who managed the LLC.

In Advisory Opinion 2006-01a, the Dept. of Labor discusses the Internal Revenue Code’s prohibitions against any direct or indirect sale, exchange or leasing of any property between a plan and a “disqualified person”, and determines that this leasing of property between the LLC and the S-Corp would be a prohibited transaction under Code section 4975 for Individual A’s IRA.

On Feb. 3, 2011, the Dept. of Labor releases Advisory Opinion 2011-04a, which cites to Advisory Opinion 2006-01a in finding that another real estate transaction between an IRA held by a family trust purchasing the promissory note secured by an apartment building owned and managed by the trustees of the family trust was a prohibited transaction.

Today in ERISA History

Jan. 3, 1973 – ERISA, the Employee Retirement Income Security Act of 1974, is introduced in the U.S. House of Representatives by Rep. John Herman Dent (PA-21) as H.R. 2.

On the same day, it is referred to the House committee on Education and the Workforce.

One of the interesting things about ERISA as a bill is that it only had one co-sponsor – Carl D. Perkins representing Kentucky’s 7th Congressional District.

John Herman Dent was born in 1908. Before being elected to Congress, he was a member of the United Rubber Workers and held a number of leadership positions in that union. He served as Congressman for Pennsylvania’s 21st district from Jan. 27, 1958 until Jan. 3, 1979. He died on April 4, 1988. (Hat tip to Wikipedia)

Happy 39th Birthday ERISA

President Ford signing ERISA into law
Happy birthday ERISA! The Employee Retirement Income Security Act of 1974, was signed into law by President Gerald Ford on Sept. 2, 1974 and became Public Law 93-46.

401(k) Hardship Distributions to Repair Storm Damage from Sandy

With so much damage caused by Hurricane Sandy, many people will be exploring every possibility, including their 401(k) plan account balance, to pay for repairs. Hardship distributions are an optional provision in 401(k) plans, meaning that 401(k) plans can permit hardship distributions but they are not required to permit hardship distributions. So the first step is checking the plan document to see if the plan permits hardship distributions.

If the 401(k) permits hardship distributions, Treas. Reg. 1.401(k)-1(d)(3)(iii)(B)(6) says one of the reasons a 401(k) plan can make a hardship distribution is:

“(6) Expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income).”

In a Retirement Plans FAQs Regarding Hardship Distributions posted on the IRS’ website, the IRS says:

“8. Are there special hardship distributions available for hurricanes and natural disasters?

Generally, there are no special rules for hardship distributions on account of hurricanes or other natural disasters. You should follow the regular hardship distribution rules and show that you have an immediate and heavy financial need and, in some cases, have exhausted other resources. Your plan will list the specific criteria it uses to determine if a participant is eligible for a hardship distribution. Expenses for repairing damage to an employee’s principal residence may automatically qualify.

Occasionally, when a hurricane or other natural disaster is especially devastating, legislation is passed that provides for special plan distributions and loans that would otherwise not be available to employees. For example, in 2005 a law was passed to help individuals and businesses affected by Hurricane Katrina.

See Tax Relief in Disaster Situations and Publication 547, Casualties, Disasters, and Thefts, for disaster area relief.”

Today in ERISA History

Nov. 13, 1981 – The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) was introduced in the U.S. House of Representatives by Rep. Pete Stark (CA) as H.R. 4961.

TEFRA was signed into law by President Ronald Reagan on Sept. 3, 1982, becoming Public Law 97-248.

TEFRA modified some of the changes made by the Economic Recovery Tax Act of 1981 (ERTA), which had dramatically lowered income tax rate from a maximum rate of 96% to a maximum rate of 50%. Concerned that such a dramatic reduction in the tax rates would cause large budget deficits, TEFRA was passed to alleviate some of ERTA’s impact by increasing the tax received by the federal government through removing tax deductions and not increasing tax rates.

TEFRA made a number of changes to qualified plans, including adding limits on contributions and benefits, loans to participants, retirement savings for church employees, contributions for disabled employees, partial rollovers for IRA distributions, and new recordkeeping requirements.

TEFRA was incorporated into plan documents as the TEFRA/DEFRA/REA generation of plan documents, which came before the TRA’86 generation of plan document. If you search the current generation of plan documents, the EGTRRA plan documents, you will find a paragraph specifically referencing TEFRA.

Today in ERISA History

Oct. 8, 2008 – The Emergency Economic Stabilization Act of 2008 (EESA), public law 110-343, is signed into law by President George W. Bush. EESA contained a number of provisions, including creating the Troubled Asset Relief Program (TARP) and the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA).

MHPAEA amended ERISA section 712 to require that if a group health plan, or health insurance coverage offered in connection with a group health plan, offered coverage for mental health and substance abuse, the coverage must be equal for psychological disorders, alcoholism, and drug addiction. This change was emphasized by MPAEA changing the term “mental health benefits” to “mental health and substance disorder benefits” everywhere in the Code where “mental health benefits” had previously appeared.

MHPAEA was generally effective one year after the enactment date, which meant that it was effective for plan years beginning on or after Oct. 3, 2009. For calendar year plans, this meant MHPAEA was effective for plan years beginning Jan. 1, 2010.

Today in ERISA History

Sept. 4, 2009 – The Dept. of Labor issues proposed regulations on Civil Penalties under ERISA section 502(c)(8). ERISA section 502(c)(8) was added by the Pension Protection Act of 2006. It grants authority to the Secretary of Labor to assess civil penalties not to exceed $1,100 per day against any plan sponsor of a multiemployer plan for violating certain sections of ERISA section 305 and Internal Revenue Code section 432. ERISA section 3(37) defines multiemployer plans as plans to which more than one employer contributes and are maintained pursuant to one or more collective bargaining agreements.

ERISA section 305 sets forth time frames in which the plan sponsor of a multiemployer plan must notify participants, beneficiaries, and the bargaining parties, along with the PBGC and Secretary of Labor about the critical or endangered status of the plan.

These regulations explain how the maximum penalty amounts are computed, identifies the circumstances under which a penalty must be assessed, sets forth certain procedural rules for service by the DOL and filing by a plan sponsor, and provides a plan sponsor a means to contest an assessment by the DOL by requesting an administrative hearing.

The DOL received one comment about these proposed regulations, and they were finalized on Feb. 26, 2010. The final regulations on Civil Penalties under ERISA section 502(c)(8) were effective on March 29, 2010.

Today in ERISA History

Aug. 27, 1976DOL Advisory Opinion 76-1 is published in the Federal Register and becomes effective. In Advisory Opinion 76-1, the Dept. of Labor states the procedures which must be followed when requesting an Advisory Opinion. It is still cited at the bottom of each Advisory Opinion the DOL issues. For example, Advisory Opinion 2012-05A, issued on July 20, 2012, says:

“This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions.”

It also states the sections of ERISA for which the DOL will not issue an Advisory Opinion.

Today in ERISA History

Aug. 23, 1984 – The Retirement Equity Act of 1984 (REA), Pub. L. 98-397, is signed into law by President Ronald Reagan. REA made a number of significant changes which have become a part of our daily plan language, including QDROs, QJSA, and Code secton 417.

President Reagan’s statement when signing REA included these comments:

“Existing pension rules, when originally enacted, did not fully anticipate the dual roles many women have come to play as both members of the paid labor force and as wives and mothers during periods of full-time work in the home. Provisions in many pension plans now operate in ways that fail to recognize paid work performed by women at certain periods in their lives and penalize them for time spent in childrearing. To address this inequity, the Retirement Equity Act lowers the age limits on participation and vesting, permitting more pension credits to be earned during the early working years when women are most likely to be employed. The legislation also eases break-in-service rules so that parents who bear children and stay home to care for them in the early years will no longer lose the pension credits they previously earned while working.

The Retirement Equity Act also clarifies that each person in a marriage has a right to benefit from the other’s pension. No longer will one member of a married couple be able to sign away survivor benefits for the other. A spouse’s written consent now will be required on any decision not to provide survivors’ protection. The legislation also helps assure that when a vested employee dies before retirement, the employee’s surviving spouse will benefit from the pension credits the employee has earned, and it restricts considerably the latitude now allowed pension plans to impose additional conditions on survivors’ benefits. Survivors’ benefits will be paid automatically in more instances than now. In addition, the bill makes it clear that State courts can allocate pension rights in divorce cases and other domestic relations settlements.”

The Internal Revenue Manual also contains a summary of REA and its impact on qualified plans.

404(a)(5) Fee Disclosure: When Participant Means All Employees

With the 404(a)(5) fee disclosure deadline approaching fast, I’ve been fielding a lot of questions about what must be disclosed, when it must be disclosed by, and who it must be disclosed to. One of the trickier parts of new Labor Reg. 2550.404a-5 is answering the “who” question.

Labor Reg. 2550.404a-5(b)(1) says:

“In general. The plan administrator of a covered individual account plan must comply with the disclosure requirements set forth in paragraphs (c) and (d) of this section with respect to each participant or beneficiary that, pursuant to the terms of the plan, has the right to direct the investment of assets held in, or contributed to, his or her individual account. Compliance with paragraphs (c) and (d) of this section will satisfy the duty to make the regular and periodic disclosures described in paragraph (a) of this section, provided that the information contained in such disclosures is complete and accurate. A plan administrator will not be liable for the completeness and accuracy of information used to satisfy these disclosure requirements when the plan administrator reasonably and in good faith relies on information received from or provided by a plan service provider or the issuer of a designated investment alternative.”

Normally, it is easy to identify who the participants and beneficiaries are for plan purposes. The plan document contains a definition of each term, and the plan administrator applies that definition when determining who the participants and beneficiaries are for compliance purposes.

For complying with Labor Reg. 2550.404a-5, the Dept. of Labor has thrown a curve at plan administrators. In the preamble to the final regulations, the DOL says:

“Several commenters suggested that the Department clarify, and in some cases modify, the scope of the proposal as to the specific participants and beneficiaries of covered plans to which the rule applies. The proposed rule required disclosures to each participant and beneficiary of the plan that ‘‘pursuant to the terms of the plan, has the right to direct the investment of assets held in, or contributed to his or her individual account.’’ The question presented by the commenters was whether disclosures must be furnished to all eligible employees or only those who actually participate in the plan. Consistent with the definition of ‘‘participant’’ under section 3(7) of ERISA, disclosures must be made to all employees that are eligible to participate under the terms of the plan, without regard to whether the participant has actually become enrolled in the plan.”

A quick check of ERISA section 3(7) reveals that the DOL is correct on this one if you read ERISA section 3(7) very broadly. ERISA section 3(7) says:

“(7) The term “participant” means any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer or members of such organization, or whose beneficiaries may be eligible to receive any such benefit.”

For more fee disclosure tips and to make compliance easier, we’ve put together a guide to the Final 404(a)(5) Regulations. It combines Labor Reg. 2550.404a-5 with current guidance in a easy-to-follow format along with a self-study module which Enrolled Retirement Plan Agents can complete for continuing education credit.