Employee Benefits Blog : Employee Benefits & Executive Compensation Lawyers & Attorneys: McDermott Will & Emery Law Firm

by Lisa K. Loesel, Todd A. Solomon, Jacob Mattinson and Brian J. Tiemann

Two recent cases challenging benefit eligibility for same-sex spouses highlight the need for employer-sponsored retirement and welfare plans to clearly define "spouse" for eligibility purposes. Employers may want to review their plan documents to determine whether plan amendments are needed to clarify benefit eligibility for same-sex spouses in light of the upcoming ruling by the Supreme Court of the United States on the constitutionality of the federal Defense of Marriage Act.

To read the full article, click here.

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by Joseph S. Adams and Jeffrey M. Holdvogt

In a corporate spin-off, both the existing company and the new company (spinco) must consider the implications for employees, employee benefit plans and executive compensation arrangements.  Benefit plans and compensation arrangements can represent significant liabilities and responsibilities, and typically are expressly allocated in an employee matters agreement (EMA).  This article provides a brief summary of some of the key employee benefit plans issues to consider in a spin-off.

To read the full article, click here. 

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by Joseph S. Adams, Anne S. Becker, Karen A. Simonsen and Ashley McCarthy

Recent U.S. Department of Labor (DOL) guidance underscores the need for plan fiduciaries to rigorously examine and monitor target date fund (TDFs), and potentially explore the use of custom or non-proprietary TDFs.

To read the full article, click here.

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by Mary K. Samsa, Todd A. Solomon and Joseph K. Urwitz

The Internal Revenue Service (IRS) recently released a revenue procedure establishing a new program for the pre-approval of 403(b) plans.  The program opens June 28, 2013, and the IRS will begin accepting applications for opinion and advisory letters on whether the form of prototype plans and volume submitter plans meet the requirements of Code Section 403(b).

To read the full article, click here.

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by Jonathan J. Boyles, Paul J. Compernolle and David Diaz

The U.S. Court of Appeals for the Seventh Circuit ruled that owners can be personally liable for multiemployer withdrawal liability where the owner leases property to its own closely held corporation.  The decision highlights the dangers of related-party transactions, failing to observe business formalities and holding property personally.

To read the full article, click here.

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by Anne S. Becker, Stephen Pavlick and Kary Crassweller

The U.S. Department of Labor (DOL) recently issued guidance on the new disclosure requirements for single-employer defined benefit plans under the Moving Ahead for Progress in the 21st Century Act (MAP-21).  Plan administrators of single-employer defined benefit plans that meet certain requirements must disclose the effect of MAP-21 on the plan’s funding and the plan sponsor’s minimum required contribution to the plan.  The new guidance sets forth technical questions and answers, and includes a model supplement to the model annual funding notice that may be used to comply with the new disclosure requirements.  Because calendar year plans must provide the required disclosures by April 30, 2013, plan sponsors should ensure their plans’ annual funding notices incorporate the most recent guidance from the DOL.

To read the full article, click here.

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by Andrew C. Liazos, Todd A. Solomon and Kary Crassweller

The Internal Revenue Service recently published final regulations under the Foreign Account Tax Compliance Act (FATCA), which are effective immediately.  FATCA imposes significant reporting obligations on both non-U.S. foreign financial institutions (FFIs) and U.S. taxpayers holding foreign financial accounts.  A non-U.S. retirement plan may be subject to FATCA reporting responsibilities as an FFI unless there is an available exemption.  Failure to comply with applicable reporting requirements may trigger substantial withholding taxes and penalties.  This On The Subject summarizes what you need to know about FATCA for both plans and participants.

To read the full article, click here.

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by Mary K. Samsa, Todd A. Solomon and Joseph K. Urwitz

On February 21, 2013, the Internal Revenue Service (IRS) added to its “self-help” resources a new “403(b) Plan Fix-It Guide” to provide guidance more specifically directed at 403(b) plan sponsors that identify qualification or operational plan failures under their 403(b) plans.  Additionally, the IRS issued as a companion piece a booklet entitled “Voluntary Correction Program Submission Kit,” which provides more detailed directions to 403(b) plan sponsors on how to complete and file a correction filing with the IRS specifically relating to the failure to adopt a written 403(b) plan document.

This new “fix-it” tool addresses 10 potential errors (likely the most common 403(b) plan errors), including, but not limited to, ineligible organizations offering 403(b) plans, failure to adopt a written plan document as required by the final 403(b) regulations, violation of the universal availability rule, failure to appropriately limit elective deferrals and failure to follow the underlying terms of the plan document.  Although these types of failures are not necessarily new (i.e., they could have occurred in prior years), the IRS is slowly bringing 403(b) plans under more scrutiny as the dollars being contributed to these types of plans continue to increase.  The IRS is developing more expertise in this area and is training more agents to be able to identify the particular differences between 401(k) plans and 403(b) plans, and the specific nuances and legal requirements of operating 403(b) plans.  Since the 403(b) regulations were issued in 2007, this is the first step in which the IRS is taking a more active role to ensure compliance under these types of plans.

Revenue Procedures 2013-12 (Employee Plans Compliance Resolution System, or EPCRS) may be used with respect to any 403(b) plan corrections going forward.  It incorporates in greater detail the “403(b) Plan Fix-It Guide.”  Although prior EPCRS guidance such as Revenue Procedure 2008-50 was often applied to 403(b) plans by analogy for correcting errors, new Revenue Procedure 2013-12 is drafted to be directly applicable to 403(b) plans.  Consequently, given the IRS movement toward greater scrutiny of 403(b) plans, tax-exempt organizations that have not recently conducted any type of internal compliance review are encouraged to review, at a minimum, the mistakes highlighted in the “403(b) Plan Fix-It Guide” to determine whether greater analysis is required with respect the compliance and operation of their 403(b) plans.

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by Anne S. Becker, Natalie M. Nathanson and Brian A. Benko

The Internal Revenue Service (IRS) recently released a draft revised Form 5300 and its instructions.  Form 5300, the Application for Determination for Employee Benefit Plan, is generally used to request an IRS determination that an individually designed retirement plan meets the requirements for tax qualification under Sections 401(a) and 501(a) of the Internal Revenue Code.  Because the draft revised Form 5300 contains numerous changes, plan sponsors and their advisors will need to carefully review the revised instructions, once they are finalized, in anticipation of submitting a Form 5300.  Although the IRS did not propose an effective date for the revised Form 5300, it could replace the current version effective for determination letter submissions filed as early as February 1, 2013 (i.e., effective for Cycle C filers).

To read the full article, click here.

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by Michael T. Graham, Elizabeth A. Savard and Patrick D. Ryan

The U.S. Court of Appeals for the Second Circuit’s holding in Kirkendall v. Halliburton, Inc. reaffirms that a benefit plan’s claims procedures must be drafted clearly and in language to be understood by a reasonable participant.  If participants are permitted to avoid a plan’s administrative claims process, there are significant impacts on a plan’s defense of a lawsuit, including application of a de novo standard of review to a benefit determination rather than the deferential arbitrary and capricious standard.

To read the full article, click here.

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by Lisa K. Loesel, Mary K. Samsa and Kary Crassweller

The Internal Revenue Service (IRS) recently updated the Employee Plans Compliance Resolution System (EPCRS), the comprehensive system of correction programs for sponsors of qualified retirement plans.  The components of EPCRS continue to be the Self-Correction Program, the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program.  This newsletter describes some of the significant changes to EPCRS, including revisions to the VCP submission procedures and enhanced access for 403(b) plans.

To read the full article, click here.

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by Nancy S. Gerrie, Elizabeth A. Savard and Joseph K. Urwitz

The American Taxpayer Relief Act of 2012 (the "fiscal cliff" bill) allows employers to amend 401(k), 403(b) and governmental 457(b) plans to permit participants to convert pre-tax account balances to Roth account balances.  Previously, such conversions were permitted only when the pre-tax amounts could be distributed.

To read the full article, click here.

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by Stephen Pavlick, Susan Schaefer and Kary Crassweller

The Internal Revenue Service (IRS) issued Notice 2012-70, extending the deadline for plan sponsors of defined benefit plans to adopt amendments to comply with Section 436 of the Internal Revenue Code (the Code), which generally imposes plan benefit payment and amendment restrictions if a defined benefit plan’s funding dips below specified levels. 

Background

Code Section 436 sets forth a series of limitations on the accrual and payment of benefits under an underfunded defined benefit plan (see “New Notice Requirements Effective November 1, 2012 for Single Employer Pension Plans with Funding-Related Restrictions” for more information).  Under previous IRS guidance, (see “IRS Extends Year-End Deadline for Pension Plan Amendments Under Code Section 436” for more information), the deadline for adopting the Code Section 436 amendment to reflect such funding-based restrictions was generally the last day of the plan year beginning on or after January 1, 2012 (e.g., December 31, 2012, for calendar year plans).   

New Deadlines

On November 21, the IRS extended the deadline for adopting the required Section 436 amendment to the latest of the following: 

• The last day of the plan year beginning on or after January 1, 2013 (e.g., December 31, 2013, for calendar year plans)
• The last day of the plan year for which Code Section 436 is first effective for the plan
• The due date (including extensions) of the employer’s tax return for the tax year that contains the first day of the plan year for which Code Section 436 is first effective for the plan 

However, plan sponsors submitting determination letter applications on or after February 1, 2013, for individually designed plans must adopt the Code Section 436 amendment prior to submitting the application.  Determination letter applications that are filed prior to February 1, 2013 (Cycle B plans), do not need to include provisions complying with Code Section 436.

Notice 2012-70 also extends the relief period under the anti-cutback requirements of Code Section 411(d)(6), which generally provide that a tax-qualified defined benefit plan may not be amended to reduce or eliminate a participant’s accrued benefit.      

Defined benefit plan sponsors should review the new guidance to determine the proper deadline for Code Section 436 amendments for their plans.  For more information on this guidance, please contact your regular McDermott attorney or one of the listed authors.

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by Michael T. Graham, Stephen Pavlick and Patrick D. Ryan

The Pension Benefit Guaranty Corporation (PBGC) has announced a new pilot program that should substantially modify its enforcement strategy regarding pension liability for facility closures under ERISA Section 4062(e).  Under this new program, PBGC will no longer assess liability against creditworthy companies or small plans, and instead will focus its enforcement efforts on larger companies in questionable financial health.

To read the full article, click here.

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Wednesday, December 5, 2012
7:30 – 9:30 am CST

UBS Tower
One North Wacker Drive, 2nd Floor
Michigan II Ballroom
(Northeast Corner of Wacker & Madison)

To register, please click here.

This year will be remembered as another year of rapid change in employee benefits.  The year-end tasks are plentiful, but if you live in fear of a missed deadline, then let our retirement and welfare experts guide you through the home stretch and assist with your year-end task lists as we review this year’s employee benefits regulatory and legislative developments.

Speakers
Joni Andrioff, Shareholder, Littler Mendelson
Susan Nash, Partner, McDermott Will & Emery
 

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by Diane Morgenthaler, Maureen O'Brien and Kary Crassweller

Recently the Internal Revenue Service provided the first set of guidance on the new notice requirements for single employer defined benefit plans subject to funding-related restrictions under Section 436 of the Internal Revenue Code.  This guidance includes information on notice recipients, content, delivery and timing.  Because significant penalties apply to a notice failure, plan sponsors need to carefully review this new guidance. 

To read the full article, click here.

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by Jeffrey Holdvogt, Diane Morgenthaler and Adrienne Walker Porter

The Internal Revenue Service recently announced cost-of-living adjustments (COLA) to the applicable dollar limits on various employer-sponsored retirement and welfare plans for 2013.  Although many dollar limits currently in effect for 2012 will change, some limits will remain unchanged for 2013.  McDermott Will & Emery has prepared a chart of these 2013 COLA changes.

To read the full article, click here.

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by Jeffrey M. Holdvogt and Susan Peters Schaefer

The Internal Revenue Service (IRS) recently discontinued its letter forwarding service for missing participants or beneficiaries entitled to a benefit under an employee retirement plan.  Until now, retirement plan sponsors have frequently used the IRS letter forwarding service as a way to locate missing participants or beneficiaries to whom benefits are owed under a retirement plan.  Following this discontinuance, plan sponsors will need to utilize another more expensive government forwarding service or utilize internet search tools, commercial locater services and credit report agencies to locate missing retirement plan participants.

To read the full article, click here.

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by David G. Noren and Ruth Wimer

It has now been 30 years since the U.S. Congress enacted Section 404A to "rescue" U.S. taxpayers with global operations maintaining large foreign pension plans through branches, disregarded entities, partnerships or controlled foreign corporations.  Section 404A was intended to allow a deduction or a reduction in earnings and profits (E&P) as applicable, in a manner that would mirror what would apply had the foreign pension plan instead been a U.S.-qualified pension plan under Section 401(a).  However, without an affirmative election by the U.S. taxpayer under Section 404A, in most instances the deduction or reduction in E&P is seriously compromised.

To read the full article, click here.
 

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by Diane M. Morgenthaler, Elizabeth A. Savard and Maggie McTigue

The U.S. Department of Labor (DOL) recently issued new and welcome guidance for fiduciaries of account-based retirement plans by withdrawing its controversial guidance on fee disclosures for brokerage windows, self-directed brokerage accounts and similar arrangements (SDBAs).  For now, the DOL has reverted to its prior regulatoqury guidance that fee disclosures with respect to particular investment options that participants select through an SDBA are not required, unless the SDBA option is specifically identified as available under the retirement plan.  This new guidance removes the burden of monitoring the number of participants invested in a particular option through the SDBA and of making fee disclosures with respect to certain SDBA options.

Background

As described in our June 12, 2012, newsletter, the DOL issued Field Assistance Bulletin (FAB) 2012-02 on May 7, 2012, to provide additional guidance on the participant fee disclosure requirements for defined contribution plans with participant-directed investments.  Historically plan fiduciaries have taken the position that they are not responsible for monitoring the particular investment options participants select though an SDBA.  However, in Q&A-30 of FAB 2012-02, the DOL indicated that plan fiduciaries may need to make participant fee disclosures with respect to an investment option that is only available through the SDBA if a significant number of participants elected to invest in that option.  This position surprised many plan administrators because it was inconsistent with prevailing interpretations of prior DOL guidance.  In addition, the DOL was criticized for issuing their position in an FAB rather than through a rulemaking process that would have given interested parties notice and an opportunity to comment.

New Guidance

In response to requests from benefits industry groups and other interested parties, the DOL issued FAB 2012-02R, which withdraws the prior Q&A-30 and replaces it with a new Q&A-39.  Under Q&A-39, an investment option is a designated investment alternative for purposes of the participant fee disclosure rules only if it has been specifically identified as available under the plan.  Thus, fee disclosures generally will not be required for investment options that participants select through an SDBA.

Q&A-39 is welcome guidance for fiduciaries of plans with SDBAs, as it removes the burden of monitoring the number of participants invested in a particular option through the SDBA and of making fee disclosures with respect to certain SDBA options.  Fiduciaries are still bound by the general ERISA fiduciary duties of prudence and loyalty to participants who use SDBAs, including taking into account the nature and quality of services provided in connection with the SDBA.  The DOL also noted that while plans are not required to have a particular number of designated investment alternatives, the failure to designate any investment alternatives (for example, to avoid fee disclosure obligations) would raise questions under the general fiduciary duties of prudence and loyalty.

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by Maureen O'Brien

Legal review of employee benefit plan issues represents a key opportunity for private equity funds to protect and enhance the value of their investments.  Below are some important considerations to bear in mind when structuring and negotiating transactions.

Potential Areas of Non-Compliance

Dealing with historical benefit plan non-compliance can be costly and distracting to a new management team.  An effective review of a target company’s employee benefit plans can foster a successful execution of a fund’s business plan by reducing ongoing risks, saving costs, helping to ensure a smooth transition for employees, and better positioning portfolio companies for future add-on acquisitions and the private equity fund’s eventual exit.

Potential Areas of Joint and Several Liability 

Certain employee benefit plans carry unfunded liabilities that are joint and several liabilities of the sponsoring employee or participating employer and each member of that employer’s “controlled group.”  The controlled group generally consists of all entities, whether or not incorporated, that are connected through common ownership of 80 percent or more by vote or value.  Under some theories, the entire private equity fund and its portfolio companies may be deemed to be part of the controlled group and thus jointly and severally liable for such liabilities.

Single-Employer Plans
Single-employer defined benefit pension plans often carry significant unfunded termination liabilities that can adversely affect the plan sponsor’s balance sheet.  Private equity funds should be cautious of rules that impose joint and several liabilities for unfunded termination liabilities and annual minimum funding contributions among members of the controlled group.

Multi-Employer Plans
A private equity fund acquiring a direct or indirect interest in 80 percent or more of the target may be liable for any withdrawal liability or missed contributions.  Many U.S. multi-employer defined benefit pension plans assess significant liabilities against employers that cease participation in such plans (referred to as “withdrawal liability”).  A key consideration for multi-employer plans is identifying and managing potential (and often significant) withdrawal liabilities in due diligence.  In addition, multi-employer defined benefit pension plan liabilities can be deemed to be joint and several liabilities of the entire controlled group.  Further, in an asset transaction, withdrawal liability is automatically triggered and assessed on the seller and its controlled group.  Private equity buyers should be aware that sellers sometimes may seek to shift such burdens to the buyer in the purchase agreement.

Positioning for the Future – Structuring the Post-Acquisition Entity 

The definitive purchase agreement should contain provisions to manage the benefit plan obligations of the private equity fund and its target.  After closing, acquisition targets typically must establish and administer new employee benefit plans.  This is particularly relevant in carve-out scenarios where the target had been participating in the employee benefit plans of a much larger parent company.  Proper documentation and corporate governance is key to ensuring compliance with relevant rules and regulations.  In particular, sellers often seek to require that buyers replicate current employee benefit plans at the seller.  However, a replication of such plans may not make business sense for the size and cash flow of the target.  In the welfare area, the most costly plans to establish are retiree welfare benefit plans.  In the pension area, typically defined contribution, rather than defined benefit, plans are established.

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by Nancy S. Gerrie, Natalie M. Nathanson, Todd A. Solomon and Lisa K. Loesel

The new 401(k) participant fee disclosure rules issued by the U.S. Department of Labor require plan administrators with calendar year plans to send disclosures to plan participants by August 30, 2012.  The top 10 things to consider in complying with the new rules are described in this publication in Q&A format.

To read the full article, click here. 

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by Nancy S. Gerrie, Jeffrey M. Holdvogt and Brian J. Tiemann

Puerto Rico and U.S. laws affecting retirement plans have changed extensively in the last few years.  Puerto Rico adopted a new tax code in 2011, and both the U.S. and Puerto Rico Treasury Departments issued a number of rulings that have a significant impact on employers that sponsor retirement plans benefiting Puerto Rico employees.  Action is required on many of these changes by the end of 2012 or early 2013.

Read the full article here.

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by Mary K. Samsa, Todd A. Solomon and Joseph K. Urwitz

Recently issued U.S. Department of Labor guidance indicates limitations on the use of an exemption from the Employee Retirement Income Security Act of 1974, as amended (ERISA), for certain 403(b) Plans.

To read the full article, click here. 

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by John A. Litwinski and Chris C. Scheithauer

Recently, the U.S. Court of Appeals for the Sixth Circuit held that a 401(k) plan participant who sued under the Employee Retirement Income Security Act (ERISA) for losses in connection with a company stock fund that suffered a drop must show losses on a “net basis” during the class period to have constitutional standing.  This decision has great significance in addressing plaintiffs’ standing and class certification in so-called ERISA “stock-drop” cases, often filed after a company’s stock price falls.

Read the full article here.

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by Elizabeth A. Savard, Karen A. Simonsen and Lisa K. Loesel

For most defined contribution plans, initial annual fee disclosures are due to participants by August 30, 2012. In order to facilitate compliance with the new fee disclosure rules, the U.S. Department of Labor recently issued Field Assistance Bulletin 2012-02, which provides helpful commentary on 38 common disclosure questions, including disclosure of administrative expenses and brokerage window fees.

To read the full article, please visit:  http://www.mwe.com/New-DOL-Guidance-Amplifies-Participant-Fee-Disclosure-Rules-06-12-2012/.

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by Maureen O'Brien and Karen Simonsen. 

In October 2010, the U.S. Department of Labor (DOL) issued final regulations requiring plan administrators to disclose certain plan and investment-related information, including fee and expense information, to participants and beneficiaries in 401(k) plans and other participant-directed individual account plans.  In February 2012, the DOL issued final regulations under section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA) requiring certain covered service providers to furnish specified information to plan administrators so that they may comply with their disclosure obligations in the participant-level disclosure regulations. On May 7, 2012, the DOL published additional guidance addressing frequently asked questions concerning the participant disclosure regulations and the service provider disclosure regulations.

The new guidance consists of 38 questions and answers addressing, among other topics, revenue sharing disclosures, brokerage window disclosures, designated investment alternatives, transition rules, and form and content of investment-related information.  Plan administrators should review the new guidance now to determine if any changes to participant disclosures are required prior to the initial/annual disclosure deadline of August 30, 2012. 

A detailed analysis of the new guidance from McDermott is forthcoming in the near future.  For now, click here to link to the new guidance.  To listen to McDermott’s webinar on participant fee disclosure and service provider disclosures, click here. 

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by Michael T. Graham, Maureen O'Brien and Ashley McCarthy.   

A recent federal district court decision defeats a long-standing assumption that a foreign corporate parent would not be subject to personal jurisdiction for a suit seeking payment of pension liabilities merely by acquiring a U.S. subsidiary.

To read the full article, click here. 

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by Michael T. Graham, Joseph S. Adams and Patrick D. Ryan. 

The PBGC announced that it may lessen ERISA Section 4062(e) enforcement for employers in strong or moderately strong financial condition.  However, the PBGC will continue to enforce its prior Proposed Rule on ERISA Section 4062(e) liability.

To read the full article, click here. 

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by Ira B.  Mirsky, Karen A. Simonsen, Todd A. Solomon and Adrienne Walker Porter

The Foreign Account Tax Compliance Act (FATCA) requires certain U.S. taxpayers holding foreign financial assets, including an interest under a foreign pension or deferred compensation plan and foreign equity awards, to report those interests beginning with this tax filing season.  Taxpayers who fail to meet their obligation to file Form 8938 are subject to significant penalties.

To read the full article, click here. 

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by Nancy S. Gerrie and Jeffrey M. Holdvogt

The Puerto Rico Treasury Department recently issued guidance (Circular Letter No. 12-02) allowing certain retirement plans qualified under the Puerto Rico Internal Revenue Code, including dual-qualified plans that are also qualified under the U.S. Internal Revenue Code, to file a copy of Form 5500 or Form 5500-SF as the plan’s annual Puerto Rico return in lieu of filing Puerto Rico Form 480.7(OE).  The new procedures, effective beginning with the annual filing for the 2011 tax year, will allow retirement plans sponsors with employees in Puerto Rico to satisfy their annual Puerto Rico filing requirement with Form 5500.

The Puerto Rico Internal Revenue Code generally requires employers that maintain a retirement plan qualified in Puerto Rico to file, on an annual basis, Form 480.7(OE), Information Return of Income Tax-Exempt Organizations.  However, for tax years beginning on and after January 1, 2011, employers that maintain plans that are subject to the provisions of Title I of the Employee Retirement Income Security Act (ERISA), and that have previously submitted an application to the Puerto Rico Treasury Department for a determination that the plan is qualified under the Puerto Rico Internal Revenue Code, may comply with the annual Puerto Rico filing requirement by filing a copy of the corresponding Form 5500 or Form 5500-SF as the plan’s annual return in lieu of filing Puerto Rico Form 480.7(OE).

Plan sponsors that elect to file Form 5500 to satisfy the Puerto Rico annual return requirement must still complete the part of Form 480.7(OE) containing the biographical data of the plan on the first page of Form 480.7(OE) and attach a copy of Form 5500 as the annual filing.  Either Form 5500 or Form 480.7(OE) must be filed by July 31 following the calendar year close or the last day of the seventh month following the fiscal year close of the trust (if Form 480.7(OE) is filed) or the plan year (if Form 5500 is filed), unless a request is filed for an automatic extension to October 15 following the close of the year for a calendar plan year.  Plan sponsors that request an extension of time to file the Form 5500 with the U.S. Department of Labor still must request an extension of time for the Puerto Rico filing separately by filing Model SC 2644 prior to the filing deadline of the Form 480.7(OE).  The Puerto Rico Internal Revenue Code imposes a penalty of $500 per form for failure to timely file the annual report.

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by Joseph S. Adams, Stephen Pavlick and David Diaz

Two years after the Internal Revenue Service (IRS) and U.S. Department of Labor (DOL) jointly issued a high-profile Request for Information regarding how defined contribution plans can better provide lifetime income, the IRS and Department of the Treasury have issued some initial guidance.  DOL guidance, expected to further underscore the importance of the issue, is anticipated “in the near future.”

To read the full article, please click here. 

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by Stephen Pavlick, Daniel Senecoff and Alan Nesburg

Under some defined benefit plans, participants receive a portion of the benefit as an annuity and a portion as a lump sum.  Sponsors of such plans should review the method used for calculating these benefits, particularly annuity benefits, to determine whether the combined value of both portions meets the minimum present value requirements for lump sums.  Recent proposed IRS regulations include an interpretation of current law that may differ from the way some plans have been administered.

To read the full article, click here. 

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by Diane Morgenthaler, Susan Schaefer and Lisa Loesel

The U.S. Department of Labor recently issued guidelines for the electronic distribution of mandatory investment and fee disclosures for participants in self-directed account plans subject to ERISA.  This guidance may help plan administrators implement the new rules for the disclosure of quarterly and annual plan-related information, but still contains affirmative participant approval requirements for the electronic distribution of all initial disclosure notices and mandated investment-related information to participants.  Prior to August 2012, plan sponsors and administrators of calendar-year plans should familiarize themselves with the new guidelines to determine what mandatory disclosures will be made in electronic format (if any), and whether their plans have sufficient systems and administrative capabilities to provide the mandatory disclosures in an electronic format.

To read the full article, please click here. 

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by Natalie M. Nathanson, Stephen Pavlick and Adrienne Walker Porter

New Internal Revenue Service (IRS) Form 8955-SSA (the Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits) replaces the Schedule SSA of the Form 5500 annual report.  Section 6057(a) of the Internal Revenue Code requires plan administrators of retirement plans subject to the vesting standards under the Employee Retirement Income Security Act of 1974 to report information on separated participants with deferred vested benefits that have not commenced.  Starting with the 2009 plan year, plan administrators are required to provide information on separated participants with deferred vested benefits on the new IRS Form 8955-SSA.  Form 8955-SSA will generally be required to be filed by the last day of the seventh month after the plan year ends, but the IRS extended the general filing deadline for the 2009 and 2010 plan years until the later of January 17, 2012, or the due date that generally applies for filing Form 8955-SSA for the 2010 plan year.

To read the full article, please click here. 
 

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by Nancy S. Gerrie and Jeffrey M. Holdvogt

On December 21, 2011, the U.S. Internal Revenue Service (IRS) issued Notice 2012-6, which provides welcome relief for U.S. employers with qualified employee retirement plans that cover Puerto Rico employees. Notice 2012-6 provides that the IRS will extend the deadline for employers sponsoring plans that are tax-qualified only in Puerto Rico (ERISA Section 1022(i)(1) Plans) to continue to pool assets with U.S.-qualified plans in group and master trusts described in Revenue Ruling 81-100 (81-100 group trusts) until further notice, provided the plan was participating in the trust as of January 10, 2011, or holds assets that had been held by a qualified plan immediately prior to the transfer of those assets to an ERISA Section 1022(i)(1) Plan pursuant to a spin-off from a U.S.-qualified plan under Revenue Ruling 2008-40.

Notice 2012-6 also extends the deadline for sponsors of retirement plans qualified in both the United States and Puerto Rico (dual-qualified plans) to spin off and transfer assets attributable to Puerto Rico employees to ERISA Section 1022(i)(1) Plans, with the resulting plan assets considered Puerto Rico-source income and not subject to U.S. tax.

There are now two separate deadlines:

1. First, in recognition of the fact that Puerto Rico adopted a new tax code in 2011 with significant changes to the requirements for qualified retirement plans, the IRS has extended the general deadline to December 31, 2012, for dual-qualified plans to make transfers to Puerto Rico-only plans, in order to give plan sponsors time to consider the effect of the changes made by the new tax code.
2. Second, in recognition of the fact that the IRS has not yet issued definitive guidance on the ability of an ERISA Section 1022(i)(1) Plan to participate in 81-100 group trusts, the IRS has extended the deadline for dual-qualified plans that participate in an 81-100 group trust to some future deadline, presumably after the IRS reaches a conclusion on the ability of a dual-qualified plan to participate in an 81-100 group trust, as described in Revenue Ruling 2011-1.

For more information on the issues related to participation of ERISA Section 1022(i)(1) Plans in 80-100 group trusts, see “IRS Permits Puerto Rico-Qualified Plans to Participate in U.S. Group and Master Trusts for Transition Period, Extends Deadline for Puerto Rico Spin-Offs.”

For more information on the issues plan sponsors should consider with respect to a dual-qualified plan spin-off and transfer of assets attributable to Puerto Rico employees to ERISA section 1022(i)(1) plans, see “IRS Sets Deadline for Transfers from Dual-Qualified to Puerto Rico-Only Qualified Plans.”

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by Diane M. Morgenthaler, Natalie M. Nathanson and Maureen O'Brien

The IRS recently extended the deadline for defined benefit plan sponsors to adopt amendments to comply with Section 436 of the Internal Revenue Code of 1986, as amended (the Code).  Code Section 436 was added by the Pension Protection Act of 2006 (PPA) and contains limitations on benefit payments and accruals for defined benefit plans that do not meet the funding targets required by PPA. 

Please click here for a discussion of the new deadlines.

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by Jonathan J. Boyles, Karen A. Simonsen and Ashley McCarthy

The U.S. Department of Labor recently withdrew a proposed regulation that would have substantially expanded the definition of “fiduciary” under federal employee benefits law.  The regulation will be re-proposed in early 2012, although it is unclear whether any proposal will be finalized prior to the 2012 presidential election.

To read the full article, click here.

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by Joseph S. Adams, Anne S. Becker and Stephen Pavlick

In October 2011, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued Notice 2011-85 (Notice), announcing their intent to extend certain requirements applicable to hybrid pension plans such as cash balance plans.  Given the highly technical nature of cash balance plans and the related government guidance, it is important to carefully understand the scope of the relief.  In a separate matter affecting cash balance plans, the Pension Benefit Guaranty Corporation also recently published a proposed rule on terminating cash balance and hybrid plans.  The proposed rule is intended to implement changes made by the Pension Protection Act of 2006. Comments on the proposed rule are due December 30, 2011. 

Please click here for more information on this recent guidance.

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Friday, November 18, 2011
10:00 – 11:00 am CST

As the year draws to a close, please join us for a focused and concise update on the most important employee benefit issues. 

Mark your calendars
McDermott Will & Emery will present a 60-minute complimentary webcast, hosted by the leaders of our employee benefits and compensation practice, that will highlight key year-end considerations for:

• Health and welfare benefits
• Qualified and non-qualified retirement plan
• Plan fiduciary and investment management
• Executive compensation
• Fringe benefits
• Domestic partner benefits

Who should attend
All vice presidents of human resources, in-house counsel, compensation and benefits directors, chief financial officers and others responsible for overseeing corporate or executive benefits and/or retirement plans.

To register, please click here. 

For more information, please contact McDermott Events.

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by Ralph E. DeJong, Todd A. Solomon and Patrick D. Ryan

Revenue Procedure 2011-44 modifies the procedures for submitting a private letter ruling request that a retirement plan constitutes a church plan to include a requirement that the applicant provide a notice to certain interested persons. The guidance provides rules regarding the timing and method for providing the notice as well as a Model Notice that applicants can modify as required.

Letter ruling applicants are required to provide a notice to each plan participant, beneficiary, QDRO alternate payee, and any employee organization representing employees who are plan participants (the interested parties). The notice informs recipients that the plan is not protected by ERISA's statutory protections, including eligibility rules, vesting rules and minimum funding requirements.

A request for a letter ruling filed on or after September 26, 2011 must include a copy of the notice along with a statement that the notice was provided interested parties. An applicant whose letter ruling request is pending with the Internal Revenue Service (IRS) on September 26, 2011 must submit by November 25, 2011, a copy of the notice along with a cover letter containing a statement that references the pending request and the date the notice was provided to interested persons. The IRS may consider the letter ruling request as withdrawn if the notice is submitted after the November 25, 2011 deadline. If the applicant fails to submit the notice, the IRS will not rule on the pending request.

Plan sponsors with pending letter ruling requests should provide the notice to interested parties as soon as possible, and provide a copy to the IRS no later than November 25, 2011.

To read the full article, click here.

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by Raymond Fernando, Michael Graham, Maureen O'Brien and Maggie McTigue

Recently, the Third Circuit held that withdrawal liability triggered after a bankruptcy filing date may be apportioned to pre- and post-petition service for the debtor, and that the withdrawal liability attributable to post-petition service may be entitled to priority over general unsecured claims under the Bankruptcy Code.  Employers that participate in a multiemployer pension plan should determine the claims impact of withdrawal in light of this court decision and also assess whether filing for bankruptcy protection outside of the Third Circuit is appropriate.

Please click here for more information.

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by Joseph S. Adams, Maureen O'Brien and Patrick D. Ryan

On September 14, 2011, the Pension Benefit Guaranty Corporation (PBGC) issued a notice (Notice) that provides relief to pension plans from penalties associated with certain late payment of premiums and situations involving the failure to properly elect the alternative premium funding target (APFT) to calculate the variable rate premium (VRP).  According to PBGC’s press release, the agency was granting premium-related relief as part of a continuing effort to ease regulatory burdens on its customers. Plan sponsors and industry groups continue to request that the PBGC expand premium penalty relief. 

Click here for additional information.

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by Jilali Maazouz and Sébastien Le Coeur

Background

In 2004, the Fédération Nationale du Crédit Agricole (FNCA) hired Mr. Rossi as one of its senior managers. Mr Rossi. was entitled to a defined-benefit pension, provided he was still employed by FNCA upon retirement. In 2006, FNCA dismissed Mr. Rossi for poor performance. 

The Paris Court of Appeals held his dismissal unfair, but refused to award him damages for the lost opportunity to receive a defined-benefit pension. Mr. Rossi appealed to the Cour de Cassation, the French Supreme Court.

Decision

The French Supreme Court upheld the condition that the employee must still be employed by the company upon retirement in order to benefit from a pension. On this basis, Mr. Rossi’s claim to a pension was dismissed. However, the French Supreme Court held that, where the dismissal is found to be unfair, the employee sustains a loss caused by the lost opportunity to remain employed until retirement and benefit from a pension. On this basis, Mr. Rossi’s claim was allowed.

The Paris Court of Appeals will decide within the next couple of months the amount of damages Mr. Rossi is entitled to as compensation for that lost opportunity.

What Does This Mean for Employers?

When assessing the cost of dismissing a manager and preparing a settlement negotiation, the employer must now evaluate damages for the lost opportunity to benefit from a defined-benefit pension. The French Supreme Court offers no guidelines on this, which makes it a rather difficult task. The employer will first need to assess the probability that the employee would have stayed with the company until retirement. This will then have to be balanced with the amount the employee would have been entitled to. In many cases, the employee may also claim damages for the lost opportunity to make a profit on stock options. 

Settlement claims with senior managers look likely to become more challenging. To avoid disputes and future, additional expense, it is worth seeking expert advice at the beginning of the dismissal process.  

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by Karen A. Simonsen, Todd A. Solomon and Patrick D. Ryan

The Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury Department, and the Internal Revenue Service (IRS), recently issued three notices, FinCEN Notices 2011-1 and 2011-2 and IRS Notice 2011-54. Each notice granted an extension of the filing deadline for the Report of Foreign Bank and Financial Accounts (FBAR), IRS Form TD-F 90-22.1 to different groups of individuals with signature or other authority over certain foreign financial accounts for various filing years. Refer to our previous On the Subject for a discussion of whether an individual has signature or other authority over a foreign financial account.While the extensions provide welcome relief, some June 30, 2011 filing obligations still remain.

FinCEN Notice 2011-1

On May 31, 2011, FinCEN issued Notice 2011-1 (subsequently clarified on June 6, 2011), which grants a one-year extension of the filing deadline for the FBAR for the 2010 tax year, from June 30, 2011 to June 30, 2012, to some individuals with signature or other authority over certain foreign financial accounts.

The one-year extension relief provided in FinCEN Notice 2011-1 is limited to certain employees and officers of a publicly traded company or U.S. Securities and Exchange Commission (SEC) registrant who have signature or other authority over, but no financial interest in, a foreign financial account. The relief does not apply to an employee or officer of an entity that is not a publicly traded company or of a non-SEC registrant that has signature or other authority, but no financial interest in, a foreign financial account.

IRS Notice 2011-54

On June 16, 2011, the IRS issued IRS Notice 2011-54, granting additional relief to persons with signature or other authority over, but no financial interest in, a foreign financial account held during calendar year 2009 or earlier calendar years. Previously, the IRS extended the FBAR filing deadline to June 30, 2011 for persons with signature or other authority over, but no financial interest in, a foreign financial account for 2009 and earlier calendar years. The IRS issued IRS Notice 2011-54 in reaction to concerns that individuals with signature authority over, but no financial interest in, a foreign financial account were encountering difficulty compiling the data necessary to complete the FBAR for 2009 and earlier calendar years. 

IRS Notice 2011-54 extends the FBAR filing deadline from June 30, 2011 until November 1, 2011 for all persons with signature authority over, but no financial interest in, a foreign financial account in 2009 or earlier calendar years. The deadline for the 2010 calendar year remains June 30, 2011.

FinCEN Notice 2011-2

On June 17, 2011, FinCEN issued FinCEN Notice 2011-2, which grants a one-year extension of the FBAR filing deadline, from June 30, 2011 to June 30, 2012, to officers and employees of investment advisors registered with the SEC with signature or other authority over, but no financial interest in, the foreign financial accounts of an investment company that is not registered with the SEC. The relief applies to FBARs for calendar year 2010 as well as FBARs for calendar year 2009 and earlier years.

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by Alan D. Nesburg, PC and Maureen O'Brien

On June 14, 2011, the Pension Benefit Guaranty Corporation (PBGC) issued final regulations that apply to single-employer pension plans maintained by employers in bankruptcy. These regulations implement a change made by the Pension Protection Act of 2006 (PPA). The change affects the amount of benefits payable by the PBGC to participants.

If an underfunded pension plan terminates during the plan sponsor’s bankruptcy, the termination date is either agreed to by the plan administrator and the PBGC, or the date is set judicially. Before the PPA, the plan termination date was used to determine both the amount of and eligibility for benefits guaranteed by the PBGC to participants.

The PPA amended the Employee Income Retirement Security Act of 1974 (ERISA) to substitute the bankruptcy filing date for the plan termination date for these two important purposes: determining the amount of participants’ guaranteed benefits under Section 4022 of ERISA and determining whether benefits are guaranteed under Section 4044 of ERISA.

The new PBGC regulations include these provisions: 

• Guaranteed benefits are based on the amount of a participant’s service and compensation as of the bankruptcy filing date.
• The maximum guaranteed benefit, the phase-in limit, and the accrued-at-normal limit are all determined as of the bankruptcy filing date.
• Only nonforfeitable benefits as of the bankruptcy filing date are guaranteed.
• Subsidized early retirement benefits (or disability or other benefits) to which a participant becomes entitled between the bankruptcy filing date and the actual termination date of the plan will continue in pay status (or may go into pay status), but the amount of the benefit is reduced to reflect that the subsidy (or other benefit) is not guaranteed.
• Benefits in priority category 3 under Section 4044 of ERISA are benefits in pay status or that could have been in pay status three years before the bankruptcy filing date (priority category 3 benefits are guaranteed by the PBGC).
• If a plan has more than one contributing sponsor and all contributing sponsors did not file for bankruptcy on the same date, PBGC will determine the bankruptcy filing date based on the individual facts and circumstances.

Importantly, under PPA the bankruptcy filing date was not substituted for the plan termination date for all purposes. The termination date still controls for purposes of determining both the amount of a plan’s unfunded liabilities and the parties responsible for those liabilities under Section 4062 of ERISA. 

The regulations have an effective date of July 14, 2011, but the PPA change applies if bankruptcy proceedings were initiated on or after September 16, 2006. Plan sponsors that have filed for bankruptcy or are considering such a filing should contact their regular McDermott attorney to discuss the effect of the new regulations.

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by Stephen Pavlick and Nancy S. Gerrie

The Supreme Court of the United States in the CIGNA decision confirms, in what may be hailed as a victory for plan sponsors, that information contained in a summary plan description does not itself constitute the “terms” of a benefit plan for purposes of filing claims for benefits.  However, the majority’s assertion that participants have a vast arsenal of equitable relief under ERISA section 502(a)(3) will likely invigorate both participants and plaintiffs’ attorneys.  Because the surcharge remedy is one of the few equitable remedies that provide monetary relief, a likely increase in claims alleging notice violations and seeking a surcharge to plan participants is anticipated.

To read the full article, click here.

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by Chris C. Scheithauer and Joseph S. Adams

As previously described in this blog earlier this year, a divided Seventh Circuit panel reversed summary judgment in favor of Kraft Foods Global, Inc. in a class action involving allegedly excessive fees in the Kraft 401(k) plan.  Shortly thereafter, Kraft petitioned for rehearing of the case by the entire Seventh Circuit Court of Appeals en banc.  Further, a “friend of the court” brief submitted jointly by The ERISA Industry Committee (ERIC), the American Benefits Council (ABC), the Profit Sharing/401k Council of America (PSCA), and U.S. Chamber of Commerce urged the Seventh Circuit to rehear the case en banc.

However, on May 26, 2011, in a single page opinion, the Seventh Circuit denied Kraft’s motion, noting that no judge in active service for the Seventh Circuit requested a vote on the petition for rehearing en banc and that the original three judge panel voted 2-1 against rehearing the case – the same split as in the panel’s original order reversing summary judgment. 

As a result, the Seventh Circuit’s original order reversing summary judgment will likely be the “go-to” cite for plaintiffs’ attorneys seeking to escape summary judgment on excessive fee claims.  However, as noted by the dissent in that order, the Seventh Circuit’s decision “will only serve to steer [fiduciaries’] attention toward avoiding litigation instead of managing employee wealth.”

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by Maureen O'Brien, Karen A. Simonsen and Adrienne Walker Porter

Pension plans use swaps to manage interest rate risks and other risks and to reduce volatility with respect to funding obligations.  The Dodd-Frank Act established a comprehensive regulatory framework for swaps.  The legislation was enacted to reduce risk, increase transparency and promote market integrity within the financial system, including the comprehensive regulation and required registration of swap dealers and major swap participants.

The Dodd-Frank Act has introduced new challenges in managing risks and liabilities of pension plans by subjecting ERISA plans to new requirements under the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).  If pension plans are unable to use swaps, plan costs and funding volatility could rise sharply.  This would undermine participants’ retirement security and would force employers to reserve, in the aggregate, billions of additional dollars to address increased funding volatility.  In order to meet the rulemaking objectives specified under the Dodd-Frank Act, regulators and Congress have introduced significant changes that may impact how pension plans manage their funded status.

• In December of 2010, the CFTC released proposed regulations outlining business conduct standards for swap dealers and major swap participants.  The regulations highlighted the issue that swap dealers engaging in typical business activities with respect to “special entities” could be treated as ERISA fiduciaries.  (The Dodd-Frank Act provides that a special entity includes an employee benefit plan.)  ERISA provides that, generally, any transaction between a fiduciary and the ERISA plan with respect to which it owes fiduciary duties is prohibited.  Therefore, in effect, the proposed regulations may preclude swap dealers from entering into swap transactions with employee benefit plans subject to ERISA. Additionally, the Department of Labor’s proposed rule relating to the definition of the term “fiduciary” under ERISA may include advisors that perform plan asset valuations, which is an activity conducted by swap dealers under the CFTC proposed regulations.
• On April 12, 2011, the CFTC issued proposed regulations establishing minimum initial and variation margin requirements for non-cleared swaps entered into by CFTC-regulated swap dealers and major swap participants. Under the proposed rules, pension plans would be included in the category of high-risk financial entities, subject to the most stringent requirements.  Such high-risk financial entities are required to post collateral and are limited to the type of assets that may be used to post margin.  This change could significantly increase the cost of managing pension plans.
• On May 4, 2011, the U.S. House of Representatives Agriculture Committee approved H.R. 1573, legislation providing the CFTC and SEC with 18 additional months to finalize many of the rules relating to swaps.  The rules defining swaps-related products and participants and the rules relating to reporting recordkeeping, however, are to be finalized by July 15, 2011.  The CFTC also recently released a notice reopening the comment period for many of the proposed regulations related to the Dodd-Frank Act. 

Plan sponsors should continue to monitor the regulatory and legislative activity surrounding pension plans’ ability to use swaps under the Dodd-Frank Act.

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by Nancy S. Gerrie, Stephen Pavlick and Brian A. Benko

Maintaining a retirement plan's qualified status comes with certain administrative burdens.  For employers, few burdens are more onerous than required plan amendments. Throughout the year, employers are informed that they need to adopt a plan amendment because of recent changes to the law.  Some amendments appear to lack a purpose.  After all, what is the worst that could happen if a plan's compensation definition does not include the transportation fringe benefit, especially where participants are not offered transportation fringe benefits?  Recently, in Christy & Swan Profit Sharing Plan v. Commissioner of Internal Revenue, T.C. Memo 2001-62 (Mar. 15, 2011), the Tax Court explained the importance of adopting all required amendments.

In Christy & Swan Profit Sharing Plan, the Tax Court retroactively revoked a one-participant plan's qualified status because it had not adopted timely amendments to comply with recent law changes.  In particular, the plan had not been amended to include qualified transportation fringe benefits in the definition of compensation, as required by the Community Renewal Tax Relief Act of 2000.  Additionally, the plan did not amend the definition of eligible retirement plan to include annuity contracts and eligible deferred compensation plans, as required by the Economic Growth and Tax Relief Reconciliation Act of 2001.  Instead of adopting these required amendments, the plan relied on a general "declaration" stating that the plan was amended by general reference to incorporate all statutory and regulatory amendments necessary to retain qualified status.  The Internal Revenue Service (IRS) notified the plan of its deficient terms and explained the options available under the audit closing agreement program under the Employee Plans Correction Resolution Program (EPCRS).  The plan's sole participant, however, chose not to participate in EPCRS.

The arguments for and against plan disqualification, in this case, highlight the importance of maintaining a plan document that complies with all qualification requirements.  The argument against disqualification was that the plan did not need to be amended for statutory changes that would have no effect on its operation.  In other words, the plan claimed that the amendments had no meaningful purpose.  The argument in favor of disqualification was that the plan was required to satisfy the qualification requirements in form and in operation.  The plan's failure to amend for statutory changes must be made in the context of what might have happened, not what actually happened, i.e., the employer may offer transportation fringe benefits in the future.

In granting summary judgment in favor of the IRS, the Tax Court unequivocally resolved the dispute by stating the following: "The requirements that a plan must satisfy for qualification under section 401(a) must be strictly met.  Vague, general references in plan correspondence to such requirements are insufficient."

The Tax Court’s ruling reminds all plan sponsors of the importance of timely adopting required amendments.

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by Diane M. Morgenthaler, Lisa K. Loesel and Paul J. Compernolle

The U.S. Department of Labor (DOL) issued proposed regulations that require additional disclosures for a participant’s investment in qualified default investment alternatives (QDIAs) and target retirement date funds (TDFs).  The DOL had two primary reasons for issuing these proposed regulations.  First, the DOL provided more guidance and specifics on the content for participant disclosures under existing QDIA regulations.  Second, following the 2008 market decline and recent public hearings on TDFs, the DOL believed that participants would benefit from additional disclosures regarding investments in TDFs. 

The proposed regulations will be effective 90 days following publication of the final regulations in the Federal Register.  Although the comment period for the proposed regulations has expired, the DOL has not indicated when final regulations will be published.  If adopted in their current form, the proposed regulations would amend two existing sets of final regulations:  (1) the final QDIA regulations issued on October 24, 2007, and (2) the final enhanced participant disclosure regulations issued on October 14, 2010.  The DOL’s proposed regulations modify existing QDIA regulations by greatly expanding the required content of QDIA notices.  The DOL's proposed regulations also modify the participant disclosure requirements by adding special disclosure rules for TDFs.  Assuming the final regulations are substantially similar to the proposed regulations, compliance with these additional disclosure rules will require significant effort from plan sponsors, plan fiduciaries and plan administrators.  For more information on these proposed regulations, click here.
 

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by Nancy Ross and Chris Scheithauer

On April 11, 2011, a divided Seventh Circuit panel reversed summary judgment in favor of Kraft Foods Global, Inc. in a class action ERISA breach of fiduciary duty case involving “excessive fees” claims in connection with Kraft’s 401(k) plan. The main take away from the decision is that fiduciaries must continue to be diligent and thoroughly consider plan administration issues and document why decisions were made or not made or practices followed, even on decisions and practices once thought to be routine or common industry standards. By following such a prudent practice, fiduciaries will substantially increase their ability to defend challenges concerning fiduciary conduct.

In Kraft, plaintiffs alleged three primary claims considered on appeal: that the use of a unitized company stock fund as an investment option was improper; that the plan’s recordkeeping fees were too high and imprudently monitored; and that the fiduciaries imprudently allowed the plan trustee to retain interest income from “float.” 

In a 2-1 decision, the panel ruled that the plaintiffs could proceed to trial on their theory that the unitized company stock fund was imprudently designed because of “investment drag” and “transaction drag” that is inherent with the widely popular unitized funds. Like most company stock funds, Kraft plan participants held units of the fund rather than directly holding shares of company stock. The plaintiffs alleged that the fiduciaries should have considered the “drag” that unitized funds cause on gains (and losses). The Seventh Circuit ruled that there was no evidence that the fiduciaries ever consciously decided in favor of a unitized plan finding that the benefits of a unitized fund outweighed the downsides, or whether they just ignored the issue. According to the majority, that was sufficient to proceed to trial. In a strongly worded dissent, Judge Cudahy called the plaintiffs’ theories on this, and others in the case, an “implausible class action based on nitpicking with respect to perfectly legitimate practices of fiduciaries.”

The majority further reversed summary judgment for the defendants on whether the recordkeeping fees were too high. The plaintiffs argued that the fiduciaries should have solicited competitive bids from other recordkeepers about every three years. Kraft had used the same recordkeeper since 1995, without a competitive bid, although Kraft received advice from several third-party independent consultants that the fees were reasonable. The plaintiffs submitted an opinion from an expert finding that the fees were excessive. In a decision with potentially wide-sweeping ramifications, the Seventh Circuit held that while the defendants’ reliance on the contemporaneous opinions of outside independent consultants that the fees were reasonable may be enough to prevail at trial, it was not enough to overcome the plaintiffs’ contrary admissible expert opinion at summary judgment which created a genuine issue of fact. The use of a consultant cannot “whitewash” otherwise unreasonable fees and a trier of fact could conclude that the defendants did not satisfy their duty solely through the use of independent consultants to ensure that the recordkeeping fees were reasonable. The dissent argued that the fiduciaries’ use of an outside consultant to confirm the reasonableness of the fees showed a prudent process and asked “what the majority’s holding means for ERISA fiduciaries” and “what is adequate to support a fee without the fear of litigation?” As noted by the dissent, this decision “will only serve to steer [fiduciaries] attention toward avoiding litigation instead of managing employee wealth.”

The Seventh Circuit upheld summary judgment for the defendants on whether the float income the trustee received was a reasonable part of the trustee’s overall compensation, because the fiduciaries proved that they received reports showing the float income and the plaintiffs failed to offer admissible evidence that such information was not considered.

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by Nancy S. Gerrie, Jeffrey M. Holdvogt and Brian J. Tiemann

The Commonwealth of Puerto Rico recently adopted a new Internal Revenue Code (PR Code) that contains numerous changes to sections governing qualified retirement plans. The new PR Code will require significant changes to documents and administration for both dual-qualified plans (i.e., plans qualified under both the U.S. and Puerto Rico Internal Revenue Codes) and Puerto Rico-only qualified retirement plans. Many of the changes are effective in 2011.

In general, the new qualified retirement plan provisions in the PR Code make changes to more closely mirror provisions applicable to U.S. qualified retirement plans. For example, qualified retirement plans in Puerto Rico are now subject to annual benefit and contribution limits similar to limits under Section 415 of the U.S. Code and annual compensation limits similar to limits under Section 401(a)(17) of the U.S. Code. However, the PR Code continues to have significant differences from the U.S. Code with respect to qualified plans. For example, limits on deferred contributions and catch-up contributions to a cash or deferred arrangement continue to be lower than the limits under the U.S. Code. In addition, although the definition of highly compensated employee for nondiscrimination testing purposes is now much more similar to the definition under the U.S. Code, it still has some significant differences from the definition applicable to U.S. qualified plans. The new PR Code also still does not permit all U.S. plan design options, such as Roth-type contributions, nor does it specifically address other U.S. plan features such as pass-through of dividends from employee stock ownership plans.

Sponsors of both dual-qualified and Puerto Rico-only qualified retirement plans should begin working with advisors to update plan documents and administration for compliance with the new PR Code as soon as possible. For more details on specific plan implications of the new PR Code, see New Puerto Rico Tax Code Means Significant Changes to Retirement Plans for Puerto Rico Employees.

In addition, sponsors of both dual-qualified and Puerto Rico-only qualified plans should continue to keep in mind potential restrictions on participation in U.S. group and master trusts following the end of the transition period announced in IRS Revenue Ruling 2011-1. For more information on Puerto Rico plan participation in U.S. group and master trusts, see IRS Permits Puerto Rico-Qualified Plans to Participate in U.S. Group and Master Trusts for Transition Period, Extends Deadline for Puerto Rico Spin-Offs.

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by Philip Castrogiovanni and Todd A. Solomon

In Revenue Ruling 2011-7, the IRS addresses the requirements for a plan sponsor to terminate a 403(b) plan, and the tax consequences to participants of doing so.  Particularly, the IRS addresses termination of 403(b) plans consisting of employee deferrals and employer contributions whose assets are invested in individual annuity contracts, custodial accounts and regulated investment companies, as well as termination of a 403(b) money purchase pension plan.  The guidance is helpful in administering the final 403(b) regulations, as the specific requirements to terminate a 403(b) plan were not addressed in detail in those regulations.

Please click here for more information.

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by Joseph S. Adams, Todd A. Solomon and Brian J. Tiemann

Employers should take action now to prepare for requests for benefit coverage from employees planning to enter into a civil union once a new law legalizing civil unions for same-sex or opposite-sex partners takes effect in Illinois on June 1, 2011. The most common requests for benefits for a civil union partner are likely to be coverage under the employer’s medical, dental and vision plans, and survivor annuity coverage under defined benefit pension plans.

Medical, Dental and Vision Benefits. Employers with medical, dental or vision plans insured with contracts issued in Illinois will be required to extend coverage to an employee’s civil union partner if the plan provides coverage for other employees’ spouses. Employers that are required to or that voluntarily choose to extend such coverage to an employee’s civil union partner will need to ensure that the employee is properly taxed on these benefits. Because civil unions are not recognized under federal law, employers must impute income to the employee for federal income tax purposes, unless the partner qualifies as a “dependent” of the employee pursuant to Section 152 of the Internal Revenue Code. However, because civil union partners in Illinois are entitled to all of the rights and benefits as spouses, the value of employer-provided medical, dental and vision coverage is not taxable for Illinois state income tax purposes.

Retirement Benefits. The Illinois civil union law will not require non-government employers with qualified retirement plans to extend spousal benefits to civil union partners since these plans are regulated solely by federal law. However, employers may want to consider amending their plans if they want to provide full parity in benefits for civil union partners. Employers with defined contribution plans may want to identify civil union partners as default beneficiaries in the event an employee fails to designate a beneficiary or if the beneficiary predeceases the employee. Another option with respect to defined contribution plans is to permit an employee to obtain an optional hardship withdrawal for IRS-recognized expenses related to a civil union partner. Employers with defined benefit pension plans may want to permit an employee’s benefit to be paid over the joint life of the employee and his or her civil union partner and/or to allow a civil union partner to receive a death benefit if the employee dies before retirement.

More information on the employee benefit plan implications of the legalization of civil unions in Illinois can be found here.

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by Nancy S. Gerrie, Jeffrey M. Holdvogt and Andrew C. Liazos

On December 16, 2010, the U.S. Internal Revenue Service (IRS) issued Revenue Ruling 2011-1, which permits employers sponsoring employee retirement plans that are tax-qualified only in Puerto Rico to continue to pool assets with U.S. qualified plans in group and master trusts, described in Revenue Ruling 81-100, until further notice. Revenue Ruling 2011-1 also extends the deadline previously provided in Revenue Ruling 2008-40 from December 31, 2010 to December 31, 2011 for sponsors of retirement plans qualified in both the U.S. and Puerto Rico to spin off and transfer assets attributable to Puerto Rico employees to Puerto Rico-only qualified plans.

The ruling provides Puerto Rico plan sponsors, institutional investors and trustees with certainty that plans qualified only in Puerto Rico can continue to participate in U.S. group and master trusts until further notice, without facing potential disqualification of the participating U.S. plans and trusts. However, the ruling only provides transition relief. Permanent relief is needed to allow Puerto Rico-only plans to continue to pool assets with U.S. plans in group and master trusts. Employers that sponsor Puerto Rico-only qualified retirement plans should consider efforts to convince the IRS of the importance of group and master trusts in the administration of Puerto Rico-qualified retirement plans.

The ruling also gives plan sponsors additional time to consider the pros and cons of transferring assets from dual-qualified plans to Puerto Rico-only qualified plans under Revenue Ruling 2008-40.

For more information on the impact of Revenue Ruling 2011-1 on employers sponsoring Puerto Rico tax-qualified retirement plans click here.

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On November 15, 2010, representatives from a number of law firms (including McDermott, Will & Emery LLP) and trade associations sent a letter to the Internal Revenue Service (IRS) asking that the IRS clarify its position on the treatment of Puerto Rico-qualified plans under Revenue Ruling 81-100.  The letter was sent following the publication of a September 14, 2010 letter from the IRS to Senator Arlen Spector, which suggested that the assets from a Puerto Rico-qualified plan cannot be invested with the assets of a U.S.-qualified plan without disqualifying the U.S. plan and trust.  The IRS’s position in the letter to Senator Spector was contrary to their position in numerous prior private letter rulings.  This position also was not articulated in Revenue Ruling 2008-40, which provides a transition period that ends on December 31, 2010 for plan sponsors to transfer benefits from a dual-qualified plan to a Puerto Rico-only qualified plan.

The IRS’s position on this issue is critical for employers that sponsor qualified plans for Puerto Rico employees.  Many plan sponsors participate in, or would like to participate in, investment funds that pool Puerto Rico and U.S. qualified plan assets in group trust or master trust arrangements that have been called into question by the IRS.  Puerto Rico retirement plan assets are often too small to meet minimum investment requirements and cannot obtain the same investments at the same costs as U.S. qualified plans.  Due to the uncertainty, we’ve seen institutional investment sponsors prevent Puerto Rico retirement plans from participating in investments maintained by group trusts, resulting in Puerto Rico employees having fewer investment options and higher fees for their retirement plan.  Sponsors of dual-qualified plans may also have delayed spinning of plan benefits from dual-qualified plans to Puerto Rico-only qualified plans under Revenue Ruling 2008-40 as a result of the uncertainty.

The letter to the IRS from employer representatives asks the IRS to consider and provide guidance that expressly permits U.S. qualified retirement plans to pool assets with Puerto Rico-qualified retirement plans in a group trust or master trust arrangement or, in the absence of such guidance, announce that group trusts and master trusts can continue to pool U.S. and Puerto Rico plan assets for a transition period.  The letter also asks the IRS to delay the December 31, 2010 deadline for spinning of plan assets from dual-qualified plans to Puerto Rico-only qualified plans so that plan sponsors can study the impact of the IRS’s decision with respect to group trusts and master trusts.

Our understanding is that the IRS is seriously considering this matter and may issue guidance shortly. McDermott, Will & Emery LLP is closely following this issue.  Look for updates in the Employee Benefits Blog if guidance is released.

More information on transfers from dual-qualified plans to Puerto Rico-only qualified plans under Revenue Ruling 2008-40 can be found here.

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by Paul J. Compernolle, Lisa K. Loesel and Karen A. Simonsen

On October 14, 2010, the U.S. Department of Labor (DOL) issued final regulations that require enhanced fee disclosures to participants in 401(k) plans and other defined contribution plans subject to the Employee Retirement Income Security Act (ERISA) with participant-directed investments. The DOL believes that participants previously did not have sufficient information to make informed investment decisions, and believes these new requirements provide enhanced and necessary investment information to participants. The new regulations are effective on January 1, 2012, for plans with a calendar year plan year.  

The new regulations require disclosure of two major categories of information: “plan-related information” and “investment-related information. Some of these mandatory disclosures were previously included in ERISA 404(c) regulations. However, compliance with ERISA 404(c) regulations is voluntary, and thus, not all participants have previously received the information required under this new guidance.

Implementation of these new disclosure rules will require significant effort from plan administrators and plan service providers. Plan administrators should familiarize themselves with these new disclosure regulations and start working with service providers and investment issuers to ensure a smooth transition.

For more information on the timing of the new disclosures and the types of information that are considered plan-related information and investment-related information click here.

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by Joseph S. Adams, Michael T. Graham, Diane M. Morganthaler, Maureen O'Brien, David E. Rogers and Patrick D. Ryan

The Pension Benefit Guaranty Corporation (PBGC) has issued proposed guidance interpreting Section 4062(e) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), which requires defined benefit pension plan sponsors to notify the PBGC when more than 20 percent of plan participants are separated from employment when a facility or operation is shut down or ceased by an employer.  The PBGC’s latest proposed rule greatly expands the universe of potential Section 4062(e) event triggers, reiterating the PBGC’s recent aggressive pursuit to monitor underfunded defined benefit pension plans. 

The proposed rule reverses prior PBGC guidance suggesting that asset sales were immune from Section 4062(e)’s reach. The proposed rule also stretches the terminology in Section 4062(e) to provide the PBGC with discretion to impose Section 4062(e) liability on a wide variety of employer business decisions that were once thought exempt from that section. For example, the proposed rule’s definitions and interpretations of key terminology in Section 4062(e) including terms and phrases like “operation,” “facility,” “cessation,” “separation,” “result,” and “Active Participant Base,” grants the PBGC broad powers to assert that Section 4062(e) events have occurred. 

The PBGC determines Section 4062(e) liabilities by multiplying (a) the liability that would have occurred if the defined benefit plan had been terminated by the PBGC immediately after the cessation date multiplied by (b) the ratio of the number of affected participants to the Active Participant Base (as newly defined under the proposed regulations). Depending on the funded status of the defined benefit plan, this liability can be significant.

Employers that sponsor defined benefit plans and that are considering layoffs, sales, product line discontinuances, plant closings or similar workforce restructurings should contact employee benefits counsel to determine if such actions could result in a Section 4062(e) event. 

Click here for a MWE White Paper containing a detailed analysis of the new proposed regulations.

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by Joseph S. Adams, Paul J. Compernolle, Jeffrey M. Holdvogt, Maureen O'Brien, Patrick D. Ryan and Elizabeth A. Savard

Employers sponsoring 401(k) or 403(b) plans should give immediate consideration to recently enacted legislation that allows participants to convert their retirement accounts in such plans to Roth accounts in 2010 and avoid some of the plan sponsor concerns that existed under prior law. With a potential increase in individual income tax rates looming in 2011, plan sponsors may be under pressure from executives and other plan participants to permit such conversions prior to the end of the year. 

Click here to read a the full article.

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