The recent wave of 403(b) lawsuits against more than a dozen prominent US universities could herald similar suits for other 403(b) plan sponsors. Plan sponsors can minimize their risk by reviewing their plan governance procedures, investment policy statements, and plan investment lineup and fee structure.
Read the full article here to learn more.
Recent reports show that the number of retirement plan audits by government agencies is increasing. A survey released by Willis Towers Watson indicates that one in every three plan sponsors has experienced a retirement plan audit by a government agency in the past two years. Unofficial reports also indicate that the US Department of Labor (DOL) has added staff to conduct more retirement plan audits.
The increase in audit activity is not surprising after the DOL released its report last year on the quality of audit work performed by independent qualified public accountants. That report—“Assessing the Quality of Employee Benefit Plan Audits”—found that nearly four out of 10 (39 percent) employee benefit plan audits completed by independent qualified public accountants for the 2011 filing year contained “major deficiencies with respect to one or more relevant GAAS requirements” which “would lead to rejection of a Form 5500 filing.” Common audit deficiencies cited in the DOL report include insufficient review of plan documents and administration, failure to obtain evidence of required communications to participants, inadequate review of employee eligibility, participant accruals and non-discrimination testing, and failure to obtain evidence of adequate internal controls.
The reports of increased audit activity and the DOL findings on the quality of plan audits illustrate the importance for plan sponsors to continually monitor their employee benefit plans for compliance with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. Plan sponsors and fiduciaries may erroneously assume that once the independent audit is complete they can rest assured that the plan complies with legal requirements. However, an independent audit is not enough—plan sponsors have a fiduciary obligation to ensure their plans are properly maintained and administered beyond what is required to complete the annual audit.
For a summary of the most common issues under audit examination, please see our article on the “Top IRS and DOL Audit Issues for Retirement Plans.” The article describes numerous steps plan sponsors should take to review their plans to identify problems that come up on Internal Revenue Service and DOL audits, and to make sure they have proper internal controls to avoid those problems in the future. Regular review of these issues and proper focus on internal controls can help prevent costly fines and fees when a government agency audits a plan.
On July 11, 2016, the Department of Labor (DOL), Internal Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC) announced a proposal to implement sweeping changes to the forms and regulations that govern annual employee benefit plan reporting on Form 5500. The proposed changes, which were published in the Federal Register on July 21, 2016, would significantly increase the annual reporting obligations for nearly all retirement plans. The changes also would have a considerable impact on employer-sponsored group health plans. For more information about the effect of the proposed changes on health and welfare plan sponsors, see Proposed Changes to Form 5500 Would Significantly Increase Reporting Obligations for Health and Welfare Plan Sponsors.
The DOL is seeking written comments on the proposed changes, which must be provided by October 4, 2016. The revised reporting requirements, if adopted, generally would apply for plan years beginning on and after January 1, 2019. Certain compliance questions will, however, be effective for Form 5500 series returns filed for the 2016 plan year.
Read the full article here.
On June 22, 2016, the Internal Revenue Service (IRS) issued proposed changes to the regulations under the Internal Revenue Code (Code) §409A. The Code intends to clarify or modify a wide range of very restrictive rules pertaining to “nonqualified” deferred compensation plans as well as other types of compensation arrangements that may defer compensation. The proposed changes are designed to benefit taxpayers, with a few intending to close potential loopholes.
The following PowerPoint highlights key points from the proposed regulations and what employers and employees should know and can expect moving forward.
On June 29, 2016, the Internal Revenue Service (IRS) officially sounded the death knell for the five-year remedial amendment cycle with its release of Revenue Procedure 2016-37. Effective January 1, 2017, employers that sponsor an individually designed qualified retirement plan—a group that includes most large retirement plans—may no longer request periodic determination letters. Instead, the IRS will continue to conduct random audits to assess plan compliance with plan document operational requirements.
The IRS will continue to conduct random audits to assess plan compliance with plan document operational requirements. Beginning in 2017, the IRS expects plan sponsors to amend written plan documents in accordance with Revenue Procedure 2016‑37 and without reliance on a determination letter. In the context of an audit, a plan sponsor may rely on a plan’s last favorable determination letter, but only with respect to provisions that have not been amended since the last issued determination letter. Sponsors of individually designed plans must develop new means for assuring they comply with the qualification requirements in the wake of Revenue Procedure 2016-37.
Though the Supreme Court’s 2014 unanimous ruling in Fifth Third Bank v. Dudenhoeffer announced the Employee Retirement Income Security Act (ERISA) standards for stock valuation in the context of a large public employee stock ownership plan (ESOP), the vast majority of ESOPs are still grappling with valuation issues. ESOPs that hold stock of closely-held corporations—approximately 90% of all ESOPs— remain almost unaffected by Dudenhoeffer’s valuation discussions, and face continued scrutiny by the Department of Labor (DOL). Appraisal of closely-held stock is an inexact science that involves an inherent level of uncertainty in assessing a variety of potential fact patterns.
This article summarizes valuation issues in acquisitions of closely-held corporation stock by ESOPs in the context of Perez v. Bruister, a recently decided Fifth Circuit case. The case stressed the importance of ‘‘process’’ in valuation determinations being utilized for acquisitions of a corporation’s stock by an ESOP. In reviewing the case, this article provides a detail of the process that should be followed to ensure consideration of the appropriate factors by fiduciaries in reviewing valuations for ESOP transactions. The article concludes with a discussion of guidance provided by the court in Bruister that may be instructive as to best practices for ESOP fiduciaries charged with establishing the value to be used by an ESOP holding shares of stock of a private company.
The US Department of Labor increased the penalties for specified violations of the Employee Income Retirement Security Act of 1974. Most of the penalty increases involve reporting and disclosure failures related to benefit plans and will be effective for penalties assessed after August 1, 2016, if the violation occurred after November 1, 2015.
Under the Federal Civil Monetary Penalties Inflation Adjustment Act Improvements Act of 2015 (2015 Inflation Adjustment Act), the US Department of Labor (DOL) increased the penalties for specified violations of the Employee Income Retirement Security Act of 1974 (ERISA), published in an interim final rule (IFR). Most of the penalty increases involve reporting and disclosure failures related to benefit plans. After the 45-day comment period on the IFR lapses, the DOL will publish final regulations.
Penalty Adjustments for Inflation
The IFR adjusts ERISA reporting and disclosure penalties for inflation. The IFR’s adjustments apply only to penalties assessed after August 1, 2016, if the violation occurred after November 2, 2015. If the violation occurred on or before November 2, 2015, the current penalty amounts apply.
Annual Penalty Adjustments for Inflation
The 2015 Inflation Adjustment Act directs the DOL to adjust penalties annually for inflation. Beginning in 2017, DOL will adjust penalty amounts no later than January 15 of each year. By January 15, 2017, DOL will adjust penalty amounts to reflect any increase in inflation that occurred between October 2015 and October 2016. Future annual inflation adjustments are not subject to regulatory notice and rulemaking requirements. The DOL will post any changes to penalty amounts on its website.
Now that same-sex marriage is legal in all 50 states, most benefits plans will treat same-sex spouses the same as opposite-sex spouses. But several tricky issues remain. For example, what if an employer with religious beliefs wants to continue to exclude same-sex spouses from receiving benefits under its retirement plans? Or its medical and dental plans? Are employers that deny coverage vulnerable to sexual orientation and/or sex discrimination lawsuits under state and local law or to federal Title VII lawsuits? What has the EEOC said about this issue? In addition, should employers consider dropping benefits for unmarried partners? Is the answer different if the employer’s plans cover both same-sex and unmarried opposite-sex partners?
The following presentation highlights some of these considerations.
The US Department of Labor’s new fiduciary rule is aimed at financial advisors, including brokers, who provide retirement plan services. However, the new rule will impact compliance obligations and potentially, costs for plan sponsors, as highlighted in the following presentation.
In the last several months, plaintiffs have filed multiple class action lawsuits against plan sponsors, plan fiduciaries and stable value fund providers. These lawsuits, which have involved 401(k) plans sponsored by large corporations, have alleged that:
These lawsuits have also included allegations that plan fiduciaries breached their fiduciary duties of loyalty and prudence under ERISA by:
Plan sponsors and plan fiduciaries face a particularly difficult bind with respect to the offering of a stable value investment option as, ironically, they have been challenged for offering stable value funds and equally fornot offering them. For example, in addition to the stable value fund allegations described above, plaintiffs have sued some plans for failing to offer stable value funds, because money market funds—a fixed income investment alternative—have produced historically low returns. In fact, such lawsuits note that most large 401(k) plans offer stable value funds and criticize plan sponsors for their failure to conform.
As a result of this wave of lawsuits, plan sponsors and plan fiduciaries should evaluate the process they use to decide to invest in stable value funds, as well as the process they use to monitor investment management and recordkeeping fees more generally. Plan sponsors and plan fiduciaries must carefully select expert investment advisers and understand the expert’s advice before applying it. Plan fiduciaries that do not currently offer a stable value investment option should examine their fund lineups to ensure that the lineups provide an adequate fixed income investment at a reasonable cost to plan participants.
In addition, plan sponsors and plan fiduciaries should establish and maintain an investment policy, which they should use to rigorously monitor investment options and related fees. Plan fiduciaries should also document the process for making fiduciary decisions and be able to demonstrate that they considered quality, service and price in selecting and monitoring investment options. This documentation of the investment selection and monitoring process is crucial to defending against the recent onslaught of stable value fund and other related lawsuits.
Subscribe
