Aiken & Aiken

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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Sheila Aiken February 21st, 2008

The Pension Protection Act of 2006 (PPA), Section 1001, required the Department of Labor (DOL) to issue regulations clarifying:

• Whether a domestic relations order (DRO) which is issued after a Qualified Domestic Relations Order (QDRO) or revises a QDRO, will be deemed a QDRO, and

• Whether a QDRO will not be treated as a QDRO due to timely issuance.

On March 6, 2007, the DOL released interim final regulations addressing these issues.  The regulations were effective April 6, 2007, and provide that a DRO will not fail to qualify as a QDRO solely due to the fact that:

• It modifies a prior QDRO,

• It revises another QDRO, or

• It is issued after the participant’s death, divorce, or annuity start date

The regulations do make clear that a DRO that falls into one of the above categories must still otherwise satisfy all of the Internal Revenue Code (IRC) QDRO requirements.  In other words, a DRO that complies with all of the requirements of a QDRO may not fail as a QDRO only on the basis that it modifies or revises a previous QDRO, or that it was not issued prior to death, divorce or the beginning of an annuity.

The DOL final interim regulations give various example situations to illustrate the new rules:

Timing Guidance

• DROs issued after a participant’s death:

o Situation: A plan administrator receives a DRO and deems it deficient. Shortly after this decision, the participant dies while actively employed.

o Regulation: A second DRO that corrects the deficiencies of the first DRO may be considered by the plan administrator for QDRO status even though the participant has died.

• DROs issued after a participant’s divorce:

o Situation: A former spouse submits a DRO which, for purposes of receiving the plan’s death benefit payable, requires that the former spouse to be treated as the participant’s surviving spouse.

o Regulation: If the DRO meets all IRC requirements for QDROs, it does not fail to be treated as a QDRO only on the basis that the ex-spouse no longer meets the definition of a surviving spouse.

• DROs issued after a participant’s annuity start date:

o Situation: A participant and spouse divorce after the participant has begun receiving single life annuity on which the spouse had waived surviving spousal rights.

o Regulation: A DRO which provides that the spouse is to receive ½ of the participant’s single life annuity payments at a future date may be considered for treatment as a QDRO.

Order of Issuance Guidance

• DROs issued subsequent between the same parties:

o Situation: A DRO between a participant and a former spouse is issued that reduces benefits previously awarded via a QDRO to the former spouse.

o Regulation: The second DRO may be a considered a QDRO.

• DROs issued subsequent between different parties:

o Situation: A DRO is issued between a participant and former spouse #1. Participant remarries and another DRO is issued between the participant and former spouse #2.

o Regulation: The second DRO may be a QDRO, but only if the benefits assigned to former spouse #2 are not already assigned to former spouse #1.

Employers need to ensure that their QDRO policy and procedures are updated to reflect these regulations, and that operations have been adjusted as well.  Benefits counsel should be consulted to review and recommend adjustments to the existing procedures to ensure full compliance with the new regulations.

• Pension
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Michele Aiken February 19th, 2008

According to EP Examinations at the IRS, most mistakes that will cause a retirement plan to fail a plan examination are mistakes that could be identified and fixed relatively quickly by a plan sponsor.  However, most plan errors are not found until an agent conducts an examination of the plan.  The top 10 reasons for retirement plan failure found during examinations are:

1. Failure to amend plans for tax law changes within the time required by law
2. Failure to determine contributions using the plan’s definition of compensation
3. Failure to either include eligible employees in the plan or exclude ineligible employees from the plan
4. Failure to satisfy plan loan provisions
5. Allowing impermissible in-service withdrawals
6. Failure to satisfy the minimum distribution rules
7. Adoption of a plan which the employer is not legally permitted to adopt
8. Failure to pass the ADP/ACP nondiscrimination tests
9. Failure to properly provide the minimum top-heavy benefit/contribution to non-key employees
10. Failure to adhere to the contribution limits of IRC 415

Employers should have their plan documents and their plan operations regularly reviewed and analyzed to ensure ongoing compliance and avoid possible future problems.  Problems with plans are easier - and less expensive - to correct when they are caught early.  However, without regular review, catching little problems before they grow into big problems is much more difficult, if not almost impossible.

As an added benefit, an independent outside review of the plan and its operations may not only identify existing problems, but may also assist in spotting opportunities for changes to the plan that will improve benefits for participants or decrease the costs of plan administration.

Errors in retirement plan design or operations almost never get resolved on their own. They usually persist year after year until they’re found and fixed, possibly compounding the original problem with each year that passes.  The IRS has several programs in place that allow employers to correct problems that they self-identify before an examination becomes necessary.  Employers should consult with their benefits counsel to arrange for an independent review of their retirement plans for compliance with recent legal changes and to ensure the plan is operating in accordance with its governing documents.  If an error is found, your benefits counsel can also assist you in working with the IRS to correct the plan before an examination becomes necessary.

Tags: IRS, Retirement

• Pension , Retirement
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