Aiken & Aiken

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 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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Michele Aiken February 12th, 2008

At the end of 2006, a number of class-action lawsuits were brought against plan sponsors and other plan fiduciaries of several Fortune 500 companies, alleging breach of fiduciary duties for subjecting plan participants to non-disclosed, excessive fees and expenses.  During 2007, some of these suits were dismissed, but the filing of the suits has raised the public’s awareness of the duties of a fiduciary, and heightened the scrutiny of a plan fiduciary’s actions.

In general, an individual becomes a fiduciary either by title or by action.  Under ERISA, plans are usually required to name a specific person, organization or association who will act as fiduciary.  Additionally, ERISA contains a definition of a fiduciary that can create the duties by action:  a fiduciary is a person or entity which takes any of the following actions with regard to a retirement plan -

• Exercises control or influence over the management of the plan or it’s assets
• Provides investment advice on plan assets for compensation
• Has discretionary authority over the plan’s administration

Because of this broad definition, plan sponsors are almost always considered fiduciaries of their retirement plans, even if they have assigned other fiduciaries to manage the plan.

Fiduciaries are required to act with prudence and in the best interests of the plan and its participants and beneficiaries.  Under ERISA, if a fiduciary relies on the outside service providers/organizations in performing his/her duties, the original fiduciary must establish guidelines with which to monitor and ensure that the service provider/organization is acting within the requirements of a fiduciary - that is, prudently and in the best interests of the plan and its participants and beneficiaries.  Additionally, ERISA specifically addresses prohibited transactions that constitute a breach of fiduciary duty.  A plan fiduciary breaches his/her fiduciary duties by engaging in or allowing certain transactions between the plan and a “party-in-interest”, including lending of money, furnishing goods and services, and the using of plan assets for personal benefit. 

All fiduciaries to retirement plans (including plan sponsors) must take their fiduciary responsibilities very seriously.  It is a fiduciary’s duty to fully understand their duties to the plan, as well as the duties owed by all other plan fiduciaries.  A few areas that plan sponsors commonly neglect, which can leave a plan sponsor exposed to fiduciary risk are:

• Ensuring that actual plan operations are in compliance with all governing plan documents and established procedures
• Appointing a policy committee/individual to be responsible for the oversight of the retirement plan’s policies without providing the advice or training on the required duties and responsibilities of a fiduciary
• Appointing an investment committee/individual to be responsible for the oversight of the retirement plan’s investment strategy without providing the advise and training on the required duties and responsibilities of a fiduciary

Employers who sponsor retirement plans are usually considered to be plan fiduciaries under ERISA, and are therefore exposed to the possibility of suits by plan participants for a breach of that fiduciary duty.  Employers should consult with an employee benefits attorney to either develop policies and procedures for their sponsored retirement plan, or review and amend the existing processes.  This advice and assistance can be invaluable in limiting a plan fiduciaries’ exposure to risk.

• Benefits , Pension , Retirement
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