The US Court of Appeals for the Eighth Circuit recently affirmed a Minnesota district court’s dismissal of a claim against Wells Fargo & Company (Wells Fargo) under ERISA. A former employee had alleged Wells Fargo breached fiduciary duties by retaining Wells Fargo’s own investment funds as a 401(k) option, and defaulting to those funds when plan participants failed to elect another option.

In holding that the former employee failed to state a claim, the court in Meiners v. Wells Fargo & Co. reasoned that the plaintiff failed to plead facts showing the Wells Fargo investment funds were an imprudent choice. Specifically, the court found that the plaintiff’s allegations that an allegedly comparable fund performed better was not sufficient, especially given the other fund’s differing investment strategy. The court’s prior decision in Braden v. Wal-Mart Stores, Inc. established that plaintiffs could show that “a prudent fiduciary in like circumstances” would have selected a different fund by providing a basis for comparison–in other words, a benchmark. However, the Eighth Circuit declined the plaintiff’s invitation to extend the rationale of Braden by allowing a plaintiff to demonstrate imprudence with a benchmark that only possesses some similarities to the fund at issue.

The Eighth Circuit’s decision is in line with other courts’ rejection of ERISA claims based on the plaintiffs’ subjective views of which funds are the best overall investment. A US district court judge for the Northern District of Illinois recently labeled such breach of fiduciary duty claims “paternalistic” while dismissing a class action against Northwestern University.

The Internal Revenue Service (IRS) has again extended the temporary nondiscrimination relief for closed defined benefit plans. This extended relief is intended to enable closed pension plans (defined as pension plans that have been closed to new participants before December 13, 2013 but continue to provide ongoing benefit accruals for certain participants) to more easily satisfy certain nondiscrimination testing requirements. In most cases where the relief applies, the closed defined benefit plan is aggregated with a defined contribution plan to satisfy the nondiscrimination testing requirements. The relief assists the aggregated plan in passing nondiscrimination requirements that apply to accrued benefits and to certain rights and features relating to those benefits.

The original nondiscrimination testing relief for closed pension plans was provided in a 2014 IRS Notice. This relief was already extended on three prior occasions, and the most recent IRS Notice further extends the relief until the end of plan years that begin before 2020, as long as the conditions of the original 2014 IRS Notice continue to be satisfied. In 2019, the IRS also intends to issue final regulations under Section 401(a)(4) of the tax code that address the nondiscrimination requirements for closed pension plans. Until then, the IRS indicated that plan sponsors can rely on the proposed 2016 IRS regulations under Section 401(a)(4) for plan years that begin before 2020.

On Friday, the IRS released a private letter ruling (PLR) which will help clear the way for employers to provide a new type of student loan repayment benefit as part of their 401(k) plans. By issuing the PLR, the IRS gave its blessing to an employer-provided student loan repayment benefit offered through an employer’s 401(k) plan. Historically, many plan sponsors had questioned whether such an approach would be permissible under IRS rules. As a result, the PLR provides welcome confirmation that such an arrangement is permissible under certain circumstances.

Generally speaking, the PLR confirmed that, under certain circumstances, employers may be able to link the amount of employer contributions made on an employee’s behalf under a 401(k) plan to the amount of student loan repayments made by the employee outside the plan. More specifically, as explained in our On the Subject published on Friday, the IRS concluded that an employer could make a non-elective contribution to its 401(k) plan where the amount of the non-elective contribution would be based on an employee’s total student loan repayments and would be contributed to the plan in lieu of the matching contributions that would otherwise be made to the plan had the employee made pre-tax, Roth 401(k) or after-tax contributions.

Because student loan benefit programs are becoming an increasingly powerful way for employers to attract and retain key talent, particularly employers with a young and educated workforce, the PLR will very likely cause many employers to consider offering a student loan benefit as part of their retirement program. Importantly, employers who wish to do so should take care to review their 401(k) plans for special rules, features or design elements (outside those discussed in the PLR) that might create additional hurdles to linking the amount of employer contributions made on an employee’s behalf under a 401(k) plan to the amount of student loan repayments made by the employee outside the plan. For example, some of the special rules that apply to safe harbor plans could limit an employer’s ability to create a similar student loan benefit structure.

For more information about this groundbreaking ruling, including the key features of the student loan benefit program described in the PLR, the advantages of such programs and other important considerations, please see our On the Subject published on Friday.

The Internal Revenue Service (IRS) recently released “Issue Snapshots” on a number of topics related to tax-qualified retirement plans, including both pension and savings plans. Historically, the snapshots have explained new(er) laws and guidance, and have often included audit tips for IRS examiners. As a result, although the IRS has indicated that the snapshots are not official pronouncements of law or directives, the snapshots provide helpful insight into issues that the IRS thinks merit further discussion or clarification. Therefore, the snapshots can be instructive for plan sponsors and plan administrators.

Continue Reading IRS Issues “Snapshot” Guidance on Qualified Retirement Plan Issues

The Internal Revenue Service recently released final regulations confirming that employers can use plan forfeitures to fund qualified non-elective contributions (QNECs), qualified matching contributions (QMACs) and safe harbor contributions.

As explained in our earlier On the Subject discussing this topic, IRS regulations historically provided that QNECs, QMACs and certain safe harbor contributions had to be 100 percent vested at the time the amounts were contributed to an employer’s plan. The IRS interpreted this requirement to prohibit employers from using forfeitures to fund QNECs, QMACs and certain safe harbor contributions. In particular, according to the IRS, using forfeitures for this purpose was impermissible because contributions allocated to a plan’s forfeiture account were subject to a vesting schedule when the contributions were first made to the plan (as employer matching or profit sharing contributions). Therefore, the IRS took the position that forfeitures could never be used to fund QNECs, QMACs or certain safe harbor contributions even if the forfeitures were fully vested at the time they were ultimately re-allocated to participant accounts as QNECs, QMACs or safe harbor contributions.

In response to numerous comments regarding this requirement, the IRS issued proposed regulations in January, 2017 clarifying that QNECs, QMACs and safe harbor contributions were only required to be fully vested at the time the contributions were allocated to participant accounts, rather than when first contributed to the plan. As a result, employers could use forfeitures to fund QNECs, QMACs and safe harbor contributions.

The final regulations issued late last month confirm the approach outlined in the proposed regulations. Importantly, employers were actually permitted to rely on those proposed regulations immediately. As a result, the final regulations simply confirm that plan sponsors can continue to use forfeitures to fund QNECs, QMACs and safe harbor contributions. Before doing so, however, plan sponsors should review their plan documents carefully to ensure that the plans allow forfeitures to be used for such purposes.

Andrew Liazos said that it makes sense for companies to consider Q-SERPs in response to the end of the performance-based pay deduction, but he questioned whether the plans would offer much “bang for your buck.” “You first have to deal with the obvious time and effort you have to spend to show it’s not discriminatory, and then take a certain level of risk that the rules aren’t going to change,” he said.

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Originally published in Tax Notes Today, July 2018.

Emily Rickard presented “ESOP Fiduciary Responsibility for Value Determination” at the National Center for Employee Ownership National Conference addressing the fiduciary duties involved in the selection of an ESOP appraiser and the review of a valuation report.

View the full presentation.

A federal judge in the Northern District of Illinois recently dismissed a lawsuit against Northwestern University alleging that the University and its fiduciaries mismanaged its retirement and voluntary savings plans. This is the latest decision in a series of class action lawsuits against prominent universities in which plaintiffs allege fiduciary violations of the Employee Retirement Income Security Act of 1974, as amended (ERISA) for retirement plans governed by Internal Revenue Code Section 403(b). Northwestern is the second university to obtain a complete victory on a motion to dismiss in a 403(b) university case; the first university to do so was the University of Pennsylvania in Sweda v. University of Pennsylvania.

In Divane v. Northwestern University et al., No. 16 C 8157 (N.D. Ill. May 25, 2018), plaintiffs alleged that Northwestern University and its fiduciaries breached fiduciary duties, engaged in prohibited transactions under ERISA and failed to monitor other fiduciaries. Specifically, fiduciaries allegedly mandated the inclusion of particular stock accounts in the plans, imposing excessive record-keeping fees, improperly allowed payment for record-keeping expenses through revenue sharing, and included too many investment options. The Court rejected all of plaintiffs’ fiduciary duty claims.

The Court also rejected plaintiffs’ claims that defendants engaged in prohibited transactions. Namely, the Court held that there was no transfer of plan assets that would substantiate a prohibited transaction claim under ERISA Section 1106(a)(1)(D) and similarly rejected plaintiffs’ Section 1106(a)(1)(C) argument that fiduciaries engaged in transactions that resulted in “furnishing of goods, services, or facilities between the plan and a party in interest” as a “circular “argument.

The Court denied plaintiffs’ motion for leave to amend, amounting in a complete victory for Northwestern.

The Department of Labor’s fiduciary rule has recently been rendered unenforceable following a recent 5th Circuit Court of Appeals decision. In an article published by the Society for Human Resource Management, McDermott partner Brian Tiemann weighs in on what this means for plan sponsors. “As a result of the Fifth Circuit’s ruling, the suitability standard is effectively restored” for advising plan participants on investments, distributions and rollovers, Tiemann observed. He also points out that advisors may want to revise service agreements with plan fiduciaries to clarify the scope of advice that fiduciaries will provide participants.

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Originally published by the Society for Human Resource Management, May 2018.