Category Archives: Regulations

The Dept. of Labor Addresses When Bankruptcy Meets ERISA

When Bankruptcy Meets ERISA is not the latest Gary Marshall film or the sequel to Sleepless in Seattle, it is the very real mess created when a plan sponsor files Chapter 7 bankruptcy. In the last month, there has been so much written about Hostess disappearing, and almost nothing written about Hostess’ pension plan disappearing, which I think is the real Hostess story – it is not about a future without Twinkies, but about the men and women who made the Twinkies facing a future where Hostess made their vested retirement benefits disappear. Unfortunately, Hostess is not alone. Over the last several years, there are a number of companies, and one U.S. Territory (the Northern Mariana Islands Retirement Fund) which have looked to a bankruptcy court to resolve their underfunded pension issues.

Since the first step to solving a problem is recognizing that it exists, the Dept. of Labor has taken the lead on this one ahead of the bankruptcy courts. Last week, the Dept. of Labor released new proposed regulations updating the Abandoned Plan Program, in part to address this situation. The preamble states:

“Pursuant to these proposed amendments, chapter 7 plans would be considered abandoned upon the Bankruptcy Court’s entry of an order for relief with respect to the plan sponsor’s bankruptcy proceeding. The bankruptcy trustee or a designee would be eligible to terminate and wind up such plans under procedures similar to those provided under the Department’s current Abandoned Plan Regulations. If the bankruptcy trustee winds up the plan under the Abandoned Plan Program, the trustee’s expenses would have to be consistent with industry rates for similar services ordinarily charged by qualified termination administrators that are not bankruptcy trustees. The proposed amendment to the class exemption would permit bankruptcy trustees, as with qualified termination administrators under the current Abandoned Plan Regulations, to pay themselves from the assets of the plan (a prohibited transaction) for terminating and winding up a chapter 7 plan under an industry rates standard.”

The regs are a little long but well worth reading, and it is great to see the DOL tackle this issue. I’m hoping the bankruptcy courts recognize that winding up a qualified plan is not something a bankruptcy trustee can pick up on the fly, and that the bankruptcy trustees will be permitted to bring in ERISA experts on terminating plans and distributing the assets.

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.

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.

Today in ERISA History

Aug. 6, 2007 – The IRS issues proposed regulations on cafeteria plans. They are comprehensive regulations which incorporate previous guidance into this one set of proposed regulations and withdraw previous regulations issued in 1984, 1986, 1989, 1997 and 2000. These proposed regulations for cafeteria plans were part of an effort by the IRS to issue comprehensive regulations for a number of types of plans, including cafeteria plans and 403(b) plans. Like the Final 403(b) Regulations, these proposed regulations for cafeteria plans required a written plan document.

These regulations have not been finalized. History and Congress overtook the regulatory process when the Affordable Care Act became law, which requires a rewrite some of these regulations in addition to some new regulations.

Today in ERISA History

July 26, 2007 – The IRS issues final regulations on Revised Regulations Concerning Section 403(b) Tax-Sheltered Annuity Contracts, also known as the Final 403(b) Regulations. They are a comprehensive update encompassing 40 years of guidance relating to 403(b) plans.

One of the key provisions added by the Final 403(b) Regulations was a written plan requirement for 403(b) plans. After several extensions of the deadline, the IRS finally required 403(b) plans to adopt a written plan document complying with the Final 403(b) Regulations by Dec. 31, 2009 which is effective on Jan. 1, 2009. Recognizing that one of the issues plan sponsors have with this requirement is that the only way to ensure their plan document complies with the Final 403(b) Regulations is to request a private letter ruling as the IRS has not pre-approved any 403(b) plan document, in Notice 2009-3, the IRS announces that it will be opening a pre-approved plan document program for 403(b) plans, adding individually designed 403(b) plans to the 5-year restatement cycle contained in Rev. Proc. 2007-44, creating a determination letter program for 403(b) plans and adding more 403(b) corrections to the IRS’ EPCRS program. In early 2012, the IRS informally announced that the 403(b) pre-approved plan document program and the changes to EPCRS are coming in the next several months.

On Oct. 26, 2010, the IRS published corrections to the 2007 Final 403(b) Regulations.

Fixing a 408(b)(2) Fee Disclosure Failure

By July 1, 2012, most plan fiduciaries and service providers complied with the Final 408(b)(2) Fee Disclosure Regulations by disclosing information about service provider compensation and potential conflicts of interest. For those that didn’t, the Final 408(b)(2) Fee Disclosure Regulations require responsible plan fiduciaries to file a notice with the Dept. of Labor to obtain relief from ERISA’s prohibited transaction provisions. On July 16, 2012, the DOL issued a Final Rule explaining where and how to file that notice.

Effective Sept. 14, 2012, the DOL is setting up a webpage to allow responsible plan fiduciaries to electronically file those notices with the Department. The DOL has also established a new address if the responsible plan fiduciary decides to mail the notice to the Department instead of filing it electronically. In the Final Rule on Amendment Relating to Reasonable Contract or Arrangement Under Section 408(b)(2) – Fee Disclosure/Web Page, the DOL has amended Labor Reg. 2550.408b-2(c)(1)(ix)(F) to add that the notice required by Labor Reg. 2550.408b-2(c)(1)(ix)(C) can be furnished to the DOL electronically in accordance with instructions published by the Department or the notice can be mailed to the DOL at the address contained in the regulation.

After this change, the language of Labor Reg. 2550.408b-2(c)(1)(ix) now says:

    (ix) Exemption for responsible plan fiduciary. Pursuant to section 408(a) of the Act, the restrictions of section 406(a)(1)(C) and (D) of the Act shall not apply to a responsible plan fiduciary, notwithstanding any failure by a covered service provider to disclose information required by paragraph (c)(1)(iv) or (vi) of this section, if the following conditions are met:

      (A) The responsible plan fiduciary did not know that the covered service provider failed or would fail to make required disclosures and reasonably believed that the covered service provider disclosed the information required by paragraph (c)(1)(iv) or (vi) of this section;

      (B) The responsible plan fiduciary, upon discovering that the covered service provider failed to disclose the required information, requests in writing that the covered service provider furnish such information;

      (C) If the covered service provider fails to comply with such written request within 90 days of the request, then the responsible plan fiduciary notifies the Department of Labor of the covered service provider’s failure, in accordance with paragraph (c)(1)(ix)(E) of this section;

      (D) The notice shall contain the following information—

        (1) The name of the covered plan;

        (2) The plan number used for the covered plan’s Annual Report;

        (3) The plan sponsor’s name, address, and EIN;

        (4) The name, address, and telephone number of the responsible plan fiduciary;

        (5) The name, address, phone number, and, if known, EIN of the covered service provider;

        (6) A description of the services provided to the covered plan;

        (7) A description of the information that the covered service provider failed to disclose;

        (8) The date on which such information was requested in writing from the covered service provider; and

        (9) A statement as to whether the covered service provider continues to provide services to the plan;

      (E) The notice shall be filed with the Department not later than 30 days following the earlier of—

        (1) The covered service provider’s refusal to furnish the information requested by the written request described in paragraph (c)(1)(ix)(B) of this section; or

        (2) 90 days after the written request referred to in paragraph (c)(1)(ix)(B) of this section is made;

      (F) The notice required by paragraph (c)(1)(ix)(C) of this section shall be furnished to the U.S. Department of Labor electronically in accordance with instructions published by the Department; or may sent to the following address: U.S. Department of Labor, Employee Benefits Security Administration, Office of Enforcement, P.O. Box 75296, Washington, DC 20013; and

      (G) If the covered service provider fails to comply with the written request referred to in paragraph (c)(1)(ix)(C) of this section within 90 days of such request, the responsible plan fiduciary shall determine whether to terminate or continue the contract or arrangement consistent with its duty of prudence under section 404 of the Act. If the requested information relates to future services and is not disclosed promptly after the end of the 90-day period, then the responsible plan fiduciary shall terminate the contract or arrangement as expeditiously as possible, consistent with such duty of prudence.

Today in ERISA History

May 22, 2007 – The IRS publishes Final Regulations on Distributions from a Pension Plan Upon Attainment of Normal Retirement Age. They add paragraphs (b)(2), (b)(3) and (b)(4) to Treas. Reg. 1.401(a)-1 about normal retirement age definitions in qualified plans. Treas. Reg. 1.401(a)-1(b)(2)(i) says: “The normal retirement age under a plan must be an age that is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed.”

This creates a compliance issue because there is no readily available and reliable source which provides the typical retirement ages for most industries.

These regulations are promulgated under Code section 411(a)(8), which defines “normal retirement age” as the earlier of:

(a) the time a participant attains normal retirement age under the plan or

(b) the later of the time a plan participant attains age 65 or the 5th anniversary of the time a plan participant commenced participation in the plan.

The regulations contain a safe harbor for plans using a normal retirement age of age 62 or later.

For plans using a normal retirement age between age 55 to age 62, the regulations create a facts-and-circumstances test to determine whether the normal retirement age is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employees.

For plans using a normal retirement age lower than age 55, the regulations say that it will be presumed to be earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed unless the Commissioner of the IRS determines that the age is not unreasonably based on all the facts and circumstances or all of the participants in the plan are qualified public safety employees which meet the age 50 safe harbor for qualified public safety employees.

Today in ERISA History

May 4, 1998 – The Pension Benefit Guaranty Corporation (PBGC) issues final regulations on Mergers and Transfers Between Multiemployer Plans, 63 FR 24421. They clarify how the rules are to be applied to plans terminated by mass withdrawal. These final regulations are effective June 3, 1998.

Treas. Reg. 1.414(f)-1(a)(2) defines a multiemployer plan as a plan maintained for the plan year pursuant to one or more collective bargaining agreements between employee representatives and more than one employer.

At the time, ERISA sections 4231(a) and (b) required multiemployer plans to satisfy 4 requirements unless otherwise provided in regulations prescribed by the PBGC:

    1. The PBGC must receive 120 days’ advance notice of the transaction;
    2. Accrued benefits must not be reduced;
    3. There must be no reasonable likelihood that benefits will be suspended as a result of plan insolvency; and
    4. An actuarial valuation of each affected plan must have been performed as prescribed in ERISA section 4231(b)(4).

These regulations are the “unless otherwise provided in regulations prescribed by the PBGC”.

Today in ERISA History

April 27, 1995 – The Dept. of Labor announces the Delinquent Filer Voluntary Compliance Program (DFVCP), 60 FR 20874. It is intended to encourage, through the assessment of reduced civil penalties, delinquent plan administrators to comply with their annual reporting obligations under Title I of ERISA.

At the time, ERISA section 502(c)(2) permits the Secretary of Labor to assess civil penalties of up to $1,000 a day against plan administrators who fail or refuse to file complete and timely annual reports (Form 5500) as required by ERISA section 101(b)(4). These fines are personally assessed against the plan administrator and cannot be paid with plan assets. Delinquent filers who utilize the DFVCP program within 12 months afer the date on which the annual report was due, without regard to any extensions, are assessed a penalty of $50 per day for each day the annual report is filed after the due date, up to a maximum of $2,5000 for Form 5500 filers and up to a maximum of $1,000 for Form 5500-C filers. If the delinquent filing is made more than 12 months after the date on which the annual report is due, without regard to extensions, the maximum penalty is $5,000 for Form 5500 filers and $2,000 for Form 5500-C filers.

In 2002, the DOL updates the DFVCP program to adjust the civil penalty structure by lowering the civil penalty assessments from $50 per day to $10 per day. The maximum amounts are also adjusted to $750 for small plans and $2,000 for large plans. An additional per-plan cap is added to address concerns that the cumulative effect of failing to file multiple annual reports will create a penalty too large for a small plan administrator to pay. A per plan cap of $1,500 is added for small plans, and a per plan cap of $4,000 is added for large plans. The adjustment is designed to further encourage and facilitate voluntary compliance by plan administrators with ERISA’s annual reporting requirements.

Treasury Official Discusses Annuities for 401(k) Plans

In Mark Iwry: Bringing Annuities to 401(k)s, Ben Steverman of Businessweek asks J. Mark Iwry, senior adviser to the Secretary of the Treasury and deputy assistant secretary for retirement and health policy, a series of Q&As about the new proposed regulations on annuities in 401(k) plans. In the article, published on April 17, 2012, Mr. Iwry says that by allowing 401(k) plan to include annuities as one of the investment options available to participants, the plan will be able to help participants manage “longevity risk” – the risk that they will outlive the account balance in their retirement plan.

The proposed regulations, Longevity Annuity Contracts, were released by the IRS on Feb. 3, 2012. They permit tax-qualified defined contribution plans, including 401(k), 403(b), and govt. 457 plans, along with Code section 408 IRAs, to purchase longevity annuity contracts. The IRS requests written comments about these proposed regulations by May 3, 2012.