Aiken & Aiken

Michele Aiken 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.

• Benefits , ERISA , Pension
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Sheila Aiken 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.

• Benefits , ERISA , Pension
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Michele Aiken March 27th, 2008

Plan document requests seem like a simple matter.  A participant requests a copy of a plan document from the plan sponsor and the plan sponsor provides it, right?  Not always.

Recently, a federal judge awarded a penalty of $50 per day to a pension plan participant because she was not given the plan document she requested.  Additionally, the ex-wife of the plan trustee was the person against whom the penalty was awarded.

ERISA provides a maximum penalty of $110 per day for each day the requested document is not provided.  Plan administrators generally have 30 days from the date of the request to get the document to the requestor. 

Additionally, courts have found that the burden of complying with the request is on the plan administrator.  For instance, even where the participant does not specifically request the plan document, the plan administrator is responsible for providing it when the information that the participant has requested would be found in the document.

In the recent case, the ex-wife of a pension participant asked for the plan documents in mid-1996 after she was awarded $50,000 from her ex-husband’s pension plan in their divorce.  The plan failed to comply with the request and never send the actual plan document. 

U.S. District Judge Oliver W. Wanger of the U.S. District Court for the Eastern District of California rejected the plaintiff’s claim for the $110 per day penalty stating that some documents had been provided.  However, because the plan document had not been provided, he awarded her a $50 per day penalty from June 6, 1996, to September 25, 2005 - a total of $160,310.

This case is just a reminder for employers to ensure that their plan administrators comply with requests for plan documents from participants within the 30 days specified under ERISA.  Additionally, if plan documents are not up-to-date, employers should work with their benefits counsel to get the documents in compliance with current law so they will be ready to respond to requests.  As shown by this recent case, failure to comply can be very costly for employers.

• Benefits , Health Care , Pension
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Sheila Aiken March 19th, 2008

Currently, the IRS allows employers to establish retirement plans for their employees that have certain tax benefits for employers and employees. The main benefits are that the employer’s contribution can be deducted as a business expense when it is made, employees can defer taxes on the funds until they are distributed, and earnings on the employer contributions are tax deferred. There are two main types of plans - Defined Contribution (DC) plans and Defined Benefit (DB) plans.

Defined Contribution (DC) Plans

A DC plan is a type of pension plan where there is an individual account for each participant and for benefits are based solely upon the amount contributed to the participant’s account and their earnings. The annual contribution is defined in the plan document, and the contribution is subject to minimum and maximum allocation rules.

The actual benefit a participant receives from a DC plan upon retirement depends solely on the accumulation of annual contributions and fund earnings. Provided that the sponsoring employer prudently invests the plan assets in the best interests of the plan participants, the employer is not liable for investment losses. In these plans the investment risk is borne by the participants.

There are four categories of DC plans that are allowed. These are profit sharing plans, money purchase plans, stock bonus plans, and target benefit plans. Examples of these plans include 401(K) plans, Savings Incentive Match Plan for Employees (SIMPLE) plans, and Employee Stock Ownership Plans (ESOPs).

Defined Benefit (DB) Plans

A DB plan is defined as “any pension plan other than” a DC plan. These plans are the traditional “pension plans”, where an employer pays their retirees a set monthly benefit until the retiree’s death. In a DB plan, the plan document specifies the benefit due to a participant at retirement.

These plans are subject to minimum funding requirements and must provide a qualified joint and survivor annuity option. The accrued benefit amount is guaranteed to the participant, regardless of any investment fluctuations; therefore, the employer bears the fund’s investment risk, not the participant.

There are generally three types of DB plans, based on the method of calculating the accrued benefit. These are a flat benefit plan, a fixed benefit plan and a unit benefit plan.

Requirements for Plan Qualification

In order to become a “qualified” plan under the Code, all plans must meet certain requirements. Although the substantive requirements under the Code can vary depending on what type of plan is at issue, the fundamental and formal requirements of qualification apply to all “qualified” plans.

The fundamental requirements include that the plan must:

• Be provided for the exclusive benefit of the participants and/or beneficiaries;
• Be established with the intent to be permanent; and
• Prohibit the use of plan assets for anything other than providing plan benefits or paying administrative and investment expenses.

The formal requirements for plan qualification are that the plan:

• must be in effect by the end of the employer’s taxable year in which the deduction is claimed;
• must be documented as a formal, written plan; and
• must be communicated to employees.

Additionally, all qualified plans must follow certain basic requirements, including minimum coverage requirements, non-discrimination requirements, minimum vesting requirements, limitations on benefits and contributions, and distribution requirements.

Qualified retirement plans can be complex and the rules that govern them are very specific. Additionally, the laws relating to these plans can change. One of the most recent laws that affect retirement plans is the Pension Protection Act of 2006 (PPA). Employers should periodically review or have their benefits attorney review their plans to ensure compliance with changing laws. Additionally, when contemplating establishing a plan, employers should work with their benefits attorney to discuss options and find a plan that will work best for them.

• Pension , Retirement
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Michele Aiken March 11th, 2008

On February 29, 2008, the Department of Labor (DOL) proposed an amendment to the existing regulation that establishes when participant contributions become plan assets. Currently, for plans that are subject to the trust requirement, Regulation §2510.3-102 provides that contributions become plan assets on the earlier of:

• The earliest date on which contributions can be reasonably segregated from general assets; or
• The 15^th business day of the month following the month in which the contribution was
  • Withheld from the employee’s wages by the employer, or
  • Received by the employer

The proposed regulation applies to sponsors of plans with fewer than 100 participants at the beginning of the plan year. It allows participant contributions that are deposited within 7 business days to be regarded as having been deposited in a timely manner under §2510.3-102. The proposed regulation also states that the safe harbor applies to loan repayments subject to §2510.3-102.

The proposed regulation does not become effective until the final regulation is issued. However, the DOL has stated that an ERSIA violation will not be asserted against a small plan sponsor which complies with the proposed regulation prior to the release of the final regulation.

The DOL stated in the preamble to the proposed regulation that the issue of contribution timing has remained a source of uncertainty for small employers. In fact, almost 90% of the Voluntary Fiduciary Correction Program applications received by the DOL involve delinquent participant contribution issues. In order to verify whether the safe harbor is applicable and whether your existing remittance policy is acceptable, employers should contact their benefits counsel to review their plans and the processes that are currently in place for remitting participant contributions.

• Pension
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