Budget Deal Increases PBGC Fees

The text of the budget deal is now available, and, despite the rumors over the last several months, there are not many changes which affect pension and retirement plans other than an increase in PBGC fees. The text of the bill is here, and the changes to PBGC fees are in section 703, which starts on page 65 of 77 pages.

ERISA Hotties 2006: Where Are They Now

I was looking for something, and stumbled upon this post in Above the Law on Sept. 8, 2006 naming the 12 female nominees for the 1st Annual ERISA Lawyer Hotties Contest. I won’t ruin the suspense by naming the nominees (you will need to click to the article) but, since it has been almost seven years, where are they now? And how did this honor affect their careers? Post away in the comments if you have any information.

Note: Nominee #5, B. Janell Grenier, died on Oct. 14, 2010. She was a fantastic attorney and is greatly missed.

Cincinnati Explores Solving $870 Million Pension Shortfall: Pension System Funding is 61%

James Pilcher’s article published in the Cincinnati Enquirer – “Observers Say City Pension is a Frankenstein’s Monster” – discusses different proposals to solve Cincinnati’s $870 million shortfall in their pension system, including requiring the city to pay off its $870 million liability within 10 years or freezing the current pension plans and replacing them with a defined contribution plan.

“Cincinnati’s pension system is sick, and critically so, some observers say. This illness not only threatens the city’s current and retired workers, but also could hurt taxpayers, those receiving city services and even projects such as the planned streetcar. Longer term, some even say the pension system’s ailments could grow into something worse – a bankruptcy filing like the one Detroit was forced into this summer.”…rest of article

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.

District Court Says No to IRS About RTRPs, Are ERPAs, Enrolled Actuaries or EAs Next?

Almost a month has passed since the U.S. District Court of the District of Columbia issued its opinion about IRS Circular 230 on Jan. 18, 2013, and I’m a little surprised by the lack of discussion about this opinion in ERISA circles because it may be a game-changer when it comes to the IRS permitting non-attorneys to practice before the IRS.

In Loving v. Internal Revenue Service, No. 12-385 (Jan. 18, 2013), the U.S. District Court of the District of Columbia granted summary judgment to three paid tax return preparers who complained that the 2011 addition of section 10.3(f) to IRS Circular 230, creating the category of Registered Tax Return Preparer, would force them to close their businesses if they were forced to comply with Circular 230. Specifically, the Court enumerated the new Circular 230 requirements imposed on those three paid tax return preparers as “annual fees, the entrance exam, and the hefty continuing-education requirement”.

To those of us who practice before the IRS on a daily basis, complying with IRS Circular 230 is nothing new. In my History of Circular 230 class, I was taught that the IRS promulgated Circular 230 in 1966. According to the Court’s 22-page opinion, Circular 230 actually has its origins in an 1884 statute, 31 U.S.C. section 330, which “allows the IRS to regulate “representatives” who “practice” before it.” (quotation marks around “representatives” and “practice” provided by the Court).

Section 10.2(a)(4) of Circular 230 defines practice before the IRS as:

“(4) Practice before the Internal Revenue Service comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing documents; filing documents; corresponding and communicating with the Internal Revenue Service; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and representing a client at conferences, hearings, and meetings.”

The Court stated the issue before it “turns on whether certain tax-return preparers are representatives who practice before the IRS, and thus are properly subject to the new IRS regulations.” (the new IRS regulations are the 2011 changes to Circular 230). Even though the three tax return preparers are in the business of preparing and filing IRS Form 1040s for unrelated taxpayers, the Court found that they are not representatives who practice before the IRS, and thus were not subject to the new IRS regulations.

According to the Court’s opinion, the IRS argued that “each agency has inherent authority to regulate those who practice before it.” Unlike most agencies, who permit only attorneys to represent the interests of unrelated parties, the IRS has always taken a more pragmatic approach, permitting non-attorneys to represent the interests of unrelated parties before the IRS based upon criteria stated in Circular 230. For example, many years ago, the IRS recognized that Enrolled Actuaries bring a unique understanding to the application of 22 different Internal Revenue Code sections as they pertain to pension and retirement plans, and thus added Section 10.3(d) to Circular 230. This pragmatic approach turned out to be cost-effective for everyone involved. Namely, the IRS could speak directly with the Enrolled Actuary for the plan instead of taking the more circuitous route of speaking to an attorney who could call the Enrolled Actuary for the plan, relay the IRS’ question about an actuarial calculation, obtain the Enrolled Actuary’s response to the question, and then relay the response to the IRS.

Several years after the IRS added Section 10.3(d) to Circular 230, it then added section 10.3(e), permitting Enrolled Retirement Plan Agents, or ERPAs, to practice before the IRS.

In determining whether the IRS can permit non-attorneys to practice before the IRS, the Court focused on the language of 31 U.S.C. section 330(a)(2), which “allows the Secretary to ‘require that the representative demonstrate…(D) competency to advise and assist persons in presenting their cases.” The Court says that it is this language, which “does not disclose who these covered ‘representatives’ are. But it does tell us what the representatives do – what their “practice” is, in the words of both subsections: representatives ‘advise and assist persons in presenting their cases.”

The Court then goes on to say that:

“This statutory equating of ‘practice’ with advising and assisting the presentation of a case provides the first strike against the IRS’ interpretation. Filing a tax return would never, in normal usage, be described as ‘presenting a case.’ At the time of filing, the taxpayer has no dispute with the IRS; there is no ‘case’ to present.”

If, as the Court says, filing a tax return was not included in the statutory framework of Circular 230 practice before the IRS, and if practice before the IRS only includes representing taxpayers who are involved in a dispute with the IRS, such as an appeal, then filing a determination letter application or an EPCRS VCP Application with IRS Employee Plans would also not be included.

After the opinion was issued by the Court, a representative of the IRS said the Service will be working with the Dept. of Justice to appeal this decision.

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.

Time to Vote for Your Favorite Law Blog

The American Bar Association’s list of the top 100 blawgs is out, and voting is open. Voting is open from now to Friday, Dec. 21st.

Once again, no ERISA-related blogs are on the list, but, as we all know, everyone on the list, and everyone reading the list, either has a qualified plan, or should have a qualified plan, so, as Cub fans say, there is always next year. I am happy to see that TaxProf made the list again this year (even though I was expecting it because he has made every ABA Top 100 Blog list since the ABA has been compiling the list). TaxProf is written by Prof. Paul Caron of the University of Cincinnati College of Law. (Go Bearcats!) This is the last year I will share a UC Law connection with Prof. Caron because he is moving to Pepperdine at the end of this school year.

Oddest blog on the list is ZombieLaw by Josh Warren, which is devoted to documenting when judges and litigators cite to the living dead. I haven’t had a chance to read many entries, but am hoping it is somewhere between The Walking Dead and Jerry Garcia post-1995, but for lawyers and judges.

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.

Govt Accountability Office Releases Report on Multiple Employer Plans

The Government Accountability Office (GAO) has released their report on Multiple Employer Plans. Officially, it is the Report to the Chairman, Committee on Health, Education, Labor, and Pensions, U.S. Senate on Private Sector Pensions: Federal Agencies Should Collect Data and Coordinate Oversight of Multiple Employer Plans.

The GAO says they did this study because:

“millions of U.S. workers lack access to employer-sponsored pension plans and that some small businesses, which offered plans at lower rates than large businesses, may be deterred by the cost of plan administration. MEPs, a type of pension plan maintained by more than one employer, have been supported as an option that could expand coverage by lowering administrative costs. For this report, GAO examined (1) the characteristics of private-sector MEPs, (2) the advantages and disadvantages of MEPs and how their perceived advantages are used to market them, and (3) how IRS and Labor regulate MEPs.”

The report is an interesting read because it does a good job summarizing the MEP industry at this point in time, and discusses the issues caused by lack of coordination between the IRS and the Dept. of Labor in regulating MEPs, including how the DOL issued two recent advisory opinions finding that open MEPs are not single employer benefit plans under Title I of ERISA, while the IRS has found at least one open MEP, operating since 2003, qualified for preferential tax treatment.

In the report, the GAO makes 3 recommendations:

    1. the DOL lead an effort to collect data on the employers that participate in multiple employer plans;
    2. the DOL and IRS formalize their coordination with regard to statutory interpretation efforts with respect to multiple employer plans; and
    3. the DOL and IRS should jointly develop guidance on the establishment and operation of multiple employer plans.

The GAO notes that agencies generally agree with the GAO’s recommendations.

On a personal note, I’ve found one of the issues with trying to analyze the 5500 data on MEPs is that the plans are not great about marking the correct box on Line A of Form 5500 identifying the plan as a multiple employer plan. Form 5500 Line A contains 4 choices – a multiemployer plan; a single employer plan; a multiple employer plan; or a DFE.

Another option for identifying multiple employer plans might be through the IRS’ determination letter program. Rev. Proc. 2007-44 assigns multiple employer plans to Cycle B, which means that the plans are required to restate onto an updated plan document by Jan. 31, 2013. Even though it is not required, most, if not all, multiple employer plans will also file a determination letter application with the IRS, asking the IRS to review their plan document to ensure that it meets the IRS requirements for a Cycle B plan document stated in IRS Notice 2011-97. Maybe the first step toward coordinating efforts between the DOL and IRS when it comes to multiple employer plans is for the agencies to compare the plans which identify themselves as a MEP on Form 5500 with the number of plans which identify themselves to the IRS as a MEP when filing a determination letter application.