Archive for the 'Pension' Category

ERISA Defined Benefit (DB) Retirement Plans Aren’t Dead Yet

June 19th, 2008

In recent years, the news has been filled with stories of large companies terminating or freezing their DB (pension) plans.  IBM, Sears, Verizon, and United Airlines are just a few of the companies that recently either closed their DB plans to newly hired employees, froze the benefit accumulation for existing participants, or outright terminated the plan. 

The well-publicized problems that some companies have experienced with their pension plans gives the impression that DB plans are no longer viable alternatives as employer-sponsored retirement vehicles.  However, that is not necessarily true.  In the right circumstances, DB plans could be the best option for some companies. 

A DB plan is a qualified retirement plan that is structured to provide a predetermined benefit to plan participants, usually defined in the plan as a specific amount or as a percentage of annual compensation.  Employer contributions to a DB plan are determined annually by an actuary and are non-discretionary.  Generally, the limitation on the annual benefit under a DB plan is the lesser of $185,000 in 2008 or 100% of the participant’s average compensation (limited to $230,000 in 2008) for the three highest consecutive years.  In comparison, the annual limitation for defined contribution (DC) plan contributions for 2008 is $46,000.  DB plans offer the opportunity for small business owners to possibly double or triple the maximum DC contribution limit applicable to 401(k) and profit sharing plans.

DB plans are making a resurgence for certain companies.  DB plans can be wonderful retirement vehicles for small business owners looking to maximize retirement savings in a relatively short time period, while minimizing the company’s tax burden.  Companies that have a predictable earning stream over a long period of time, with significant profits in excess of the owner’s salaries, should look at DB plans when considering their retirement planning strategy.  For example, a physician’s office, a law firm, a small CPA firm, or an investment advisor partnership may find a DB plan to be the best option for them.

A word of caution – while DB plans have many advantages, some of which are detailed above, they are not for every company.  DB plans tend to be more administratively expensive and burdensome than other qualified retirement vehicles, and they have less flexibility when it comes to annual contributions.  However, these drawbacks can be more than offset by the increased annual contribution amounts allowed and the accompanying significant tax savings for the right company. 

Employers interested in establishing a DB plan should consult with professional advisors before making any decisions.  Each employer’s situation is unique and should be objectively reviewed to determine what the best course of action is based on the employer’s own circumstances.  Some of the factors that will need to be considered are:  the company’s employee demographics, the company’s short and long-term growth projections, and the company’s historical revenue stream.  These and other factors can significantly impact whether a DB plan is right for a business.

Please contact our office for more information about whether establishing a DB plan is right for your business.

Heros Earnings Assistance and Relief Tax Act of 2008

June 2nd, 2008

Late last month (May 20th and May 22nd), the House and the Senate, respectively, unanimously approved the Heros Earnings Assistance and Relief Tax Act of 2008 (H.R. 6081).  The bill is now pending President Bush’s signature to enact it as law.  President Bush is expected to sign it.

H.R. 6081, among its many provisions, includes changes to the Internal Revenue Code of 1986, as amended, that may impact certain employee benefits plans.  The provisions of H.R. 6081 are effective at differing dates and include provisions that:

  • Amend existing rules governing cafeteria plans to allow Health Flexible Spending Accounts to distribute account balances to reservists who are called for active duty for indefinite periods or 180 days or more
  • Require qualified retirement plans to provide additional benefits that would have been provided to the participant had he/she resumed employment prior to death to the survivors of plan participants who die during qualified military service
  • Allow employers to make contributions to qualified retirement plans on behalf of participants who die or become disabled in combat
  • Allow employers to treat the day prior to the day of the participant’s death or disability as the day the participant returned to work from military duty so as to provide the retroactive benefit accruals available under USERRA
  • Require qualified plans to treat differential military pay as compensation for plan purposes and as wages subject to withholding
  • Provide a tax credit under certain circumstances for small employers that provide differential military pay
  • Authorize qualified plans to treat participants on active duty for greater than 30 days as terminated in order to access distribution from a qualified retirement plan
  • Make the PPA waiver of the 10% penalty tax for early retirement distributions permanent

As mentioned above, it is expected that President Bush will sign the legislation and it will therefore become law.  Employers should make plans to begin reviewing their plans for areas that need amending to comply with the required provisions.  Additionally, employers should review the non-mandatory provisions to determine whether they wish to amend their plans to allow for these provisions. 

During the plan review, employers need to keep in mind the differing effective and/or application dates of the provisions.  Benefits counsel can assist employers with the review and amendment of plan documents to ensure that plans are updated appropriately.

Is Your ERISA Plan Up-to-Date?

May 29th, 2008

The Employee Retirement Income Security Act was enacted in 1974.  Since then, more than 75 laws have been passed that affect employee benefit plans and the protections afforded them by ERISA.  Many of these subsequent laws have mandated extensive changes to benefit plans.

The following are some of the major laws passed along with a very brief description of a few of the provisions contained within the statute:

  • National Defense Authorization Act (NDAA) – amends the Family and Medical Leave Act (FMLA) to create 2 new FMLA leave entitlements and modifies some Department of Defense contracting requirements.
  • Pension Protection Act of 2006 (PPA) –  makes several modifications to retirement plans including funding requirements for defined benefit plans, authorizing the use of cash balance and hybrid pension plans and requiring more disclosure to plan participants.
  • American Jobs Creation Act of 2004 (AJCA) – provides significant new rules for non-qualified deferred compensation plans, including the enactment of Internal Revenue Code Section 409A.
  • Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) – expands the Medicare program including prescription drug coverage for post-65 and disabled Medicare beneficiaries and provides for a Medicare subsidy, which is excludable from income, payable to employers who provide retiree health coverage that is at least actuarially equivalent to the Medicare drug benefit.
  • Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) – provides significant changes to retirement plans including increasing the allowable participant elective deferrals, allowing “catch-up” contributions, increasing compensation limits for some pension plans and changing the definition of compensation for deduction purposes.
  • Health Insurance Portability and Accountability Act of 1996 (HIPAA) -  limits restrictions that a health plan can place on benefits for preexisting conditions, defines numerous offenses relating to health care and sets civil and criminal penalties for them and establishes regulations for the use and disclosure of Protected Health Information (PHI).
  • Older Workers Benefit Protection Act of 1990 (OWBPA) – allows retirement plans to continue to have minimum age for eligibility and to have subsidized early retirement benefits provided it is voluntary.
  • Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) -  requires specified employers to offer continuation of group health plan coverage to beneficiaries who no longer qualify for coverage due to certain events.
  • Pregnancy Discrimination Act of 1978 (PDA) – requires employers to cover costs of pregnancy, childbirth and related medical conditions under the same terms as other medical conditions.

The above information is just a small portion of what is required by these laws as applied to benefit plans.  Additionally, there are many more laws that impact employee benefits plans then those few described above.  For example, the PPA, in addition to the brief overview already provided, requires additional extensive compliance for retirement plans and makes some of the other changes under previous laws mandatory.

Benefit plans and operational policies and procedures that have not remained current with new requirements are at risk for being non-compliant and subject to fines and penalties.  All employers should review their ERISA plans, including retirement and heath and welfare plans, as well as their operational policies and procedures, to verify that their plans, policies and procedures have been updated and amended for all applicable changes in the law.

Once plans, policies and procedures are current, employers need to remain vigilant to ensure continued compliance with changing laws.  Employment and benefits counsel can assist employers in reviewing and updating their existing plans to ensure compliance with all applicable laws, as well as assisting employers to proactively update their policies, plans and procedures as required for future changes.

Additional Qualified Default Investment Alternatives (QDIA) Guidance from the DOL

May 1st, 2008

The Employee Retirement Income Security Act (ERISA) of 1974 Section 404(c) states that individual account plan fiduciaries are not liable for the investment decisions made by participants provided that participants are allowed the right to control their investment decisions.  Plans that provided for default investment alternatives were considered to fall outside Section 404(c) because these alternatives do not require participants to exercise any control over the investment decisions.

As required by the Pension Protection Act (PPA) of 2006, the Department of Labor (DOL) issued final regulations (29 CFR § 2550.404c-5) in October 2007 which extend the ERISA Section 404(c) fiduciary protections to plans that allow for investments to be made on behalf of participants who fail to exercise control over their investment decisions.  These Qualified Default Investment Alternative (QDIA) regulations were effective as of December 24, 2007.

Under the QDIA regulations, plan sponsors may treat these participants, whose accounts are invested according to default rules because no investment direction was provided, as having exercised investment control.  To do so, plan sponsors must meet the specified notice requirements and the default investments must qualify as QDIAs.  If the plan complies with the QDIA regulations, plan fiduciaries will qualify for protection against liability for investment losses in the default investment accounts.

On April 29, 2008, the DOL released Field Assistance Bulletin No. 2008-03, which provides plan sponsors with additional guidance on the QDIA final regulations.  This bulletin provides answers to some of the most frequently asked questions about the QDIA regulations in areas such as the scope of the regulations, notice requirements, limitation on fees and restrictions, management and asset allocation, capital preservation, and “grandfather” relief.  Some of the issues that are clarified in the Field Assistance Bulletin include:

  • A plan sponsor is not relieved of liability for the management of the QDIA or for the prudent selection and monitoring of the QDIA
  • If the notice and all other requirements under the regulation are satisfied, the fiduciary will be relieved of liability with respect to all assets invested in the QDIA, regardless of whether the assets were contributed prior to the effective date of the regulation (except to the extent otherwise limited by the regulation)
  • The QDIA notice can be, but is not required to be, combined with the notices required under the Internal Revenue Code Sections 401(k)(13) and 414(w)
  • Defaulted participants should be furnished neither less nor more materials than would be provided to participants who direct their own investments in an ERISA 404(c) plan

Additionally, the description of stable value products or funds was amended in order to broaden the “Grandfather” type relief available for assets invested in certain of these products or funds.

It is important for plan sponsors to understand the new guidance and comply if they wish to receive the benefit of the protections offered.  If a plan’s provisions do not comply with these regulations, the plan’s fiduciaries run the risk of breaching their fiduciary duties, exposing themselves to liability to “automatic enrollment” plan participants for investment losses.

Employers and/or plan sponsors of individual account plans that currently provide or want to provide an “automatic enrollment” feature should review their plans to ensure compliance with the new guidance.  Their benefits counsel can assist them to ensure that their plan provisions are in compliance.

Surviving a DOL Audit

April 17th, 2008

The Employee Benefits Security Administration (EBSA) is a division of the U.S. Department of Labor (DOL) which is responsible for “ensuring the integrity of the private employee benefit plan system” in the U.S by enforcing ERISA and Title 18 provisions applicable to benefit plans.  One method that EBSA uses to identify and correct violations is through a DOL audit.  The audits are geared towards voluntary compliance on the part of the employer/plan sponsor, but can result in civil and/or criminal litigation if the efforts at voluntary compliance fail.

The EBSA conducts thousands of employee benefit plan audit each year, with approximately 75% of the audits resulting in at least one violation.  Although the majority of audits focus on civil violations, EBSA can also review plans for criminal violations, and recommend that criminal charges be brought against plan sponsors and/or plan fiduciaries.  Some plan sponsor audits are selected through a random selection process, but more frequently due to other avenues such as information received from another agency or through a participant complaint received by the EBSA Benefit Advisors.

If your plan is chosen for an audit by the DOL, generally the investigator will contact you via a letter advising you of the audit and requesting applicable plan documents.  Additionally, there will usually be an “on-site” review by the investigator that might require interviews with key employees and/or plan fiduciaries.  During the “on-site” review, employers should follow certain procedures:

  • Be courteous and professional with the investigator;
  • Designate 1 or 2 senior employees or an attorney who will be responsible for all contact and communication between the employer and the investigator;
  • Assign the investigator a “work area” during the audit and request the interviewer to refrain from indiscriminately questioning employees;
  • Have counsel prepare any employee or fiduciary prior to a DOL-requested interview and have counsel attend such interview;

After the audit completion, the investigator normally sends a letter to the employer/plan sponsor which summarizes the audit findings and identifies any facts that lead to a conclusion by the EBSA that a violation has occurred.  The letter will also require the employer/plan sponsor to correct the violations, reimburse plan losses plus interest, and advise of any penalties that will be assessed to the employer/plan sponsor for the violation(s).  Employer/plan sponsors have 10 days to respond to the audit findings communication.  This response is where employers/plan sponsors can refute the investigator’s findings, understanding of the facts and/or statutory interpretation.

The best way to survive a DOL audit is to proactively review all your benefit plans with legal counsel at least annually, and more often if any plan was amended during the year, or if the company experienced a significant change in demographics.  However, the second best way to survive a DOL audit relatively unscathed is to contact your benefits attorney as soon as you receive communication from the DOL regarding an audit of your plan(s).  The sooner you involve your attorney in the process, the more time he or she will have to review all documentation and prepare any witnesses.  The more information that is available to your attorney will make it easier for him or her to work with the investigator during the audit as well as providing him or her with the necessary information to refute the investigator’s findings of violations.

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