The U.S. Securities and Exchange Commission recently amended the rules governing money market funds in an effort to increase the stability and liquidity of these funds in times of economic stress. Sponsors of retirement plans should consider how their use of money market funds should be changed in light of these revised rules.
On July 1, 2014, Puerto Rico adopted new legislation (Tax Act 77), which provides a window from July 1, 2014 – October 31, 2014, for participants in Puerto Rico retirement plans to prepay at reduced rates Puerto Rico income tax on the value of accrued benefits. On August 6, the Puerto Rico Treasury Department issued guidance on the prepayment option via Administrative Determination No. 14-16. The guidance clarified how participants in Puerto Rico-qualified retirement plans may prepay to the Puerto Rico Treasury Department by October 31, 2014, income tax at the rate of eight percent on all or a portion of the participants’ vested balance or accrued benefit. Retirement plan sponsors with Puerto Rico employees, both dual-qualified and Puerto Rico-only plans, should make sure their administrators are aware of and can comply with the tax prepayment rules in the event a participant submits a request.
The income tax prepayment may be made by an individual participant or by the plan trustee on behalf of a participant. If a participant is making the tax prepayment, he or she must complete and file three copies of Form SC 2911 with the Puerto Rico Treasury Department, along with a recent copy of a plan statement (no older than 30 days) reflecting the vested account balance or accrued benefit. Plan sponsors and administrators should expect that they may be asked by plan participants for updated account statements or accrued benefit estimates in order to satisfy this requirement.
Plan participants may make the tax prepayment from their own funds or from plan assets, if they are eligible to take a distribution. Plan administrators may need to provide assistance in completing Form SC 2911 because it requires information about the plan that participants normally would not have access to, such as when the plan filed for a determination letter with the Puerto Rico Treasury Department and when the plan received a favorable determination. After the Treasury Department stamps and returns two original copies of the prepayment form to the participant, the participant must provide the plan administrator with one of two originals within 30 days, as evidence of the tax prepayment.
Plan sponsors who maintain retirement plans qualified in Puerto Rico should consider how they may wish to communicate this option to participants, keeping in mind that time is short, as the window ends on October 31, 2014. Plan sponsors should also make sure that administrators are able to separately track the accounts of participants who have prepaid the tax so that, upon a subsequent distribution, only amounts for which the tax was prepaid are subject to Puerto Rico income tax and withholding. Note that a similar prepayment window occurred in 2006, so plan administrators may have systems already set up to track for similar accounts or benefits that had income tax prepaid.
On September 16, 2014, the United States Senate unanimously approved Senate Bill 2511, which would amend Section 4062(e) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), to clarify the definition of substantial cessation of operations. ERISA Section 4062(e) enables the Pension Benefit Guaranty Corporation to require that employers financially guarantee pension obligations based on a plan’s underfunded termination liability when an employer that maintains a pension plan shuts down operations at a facility, and as a result, more than 20 percent of the employer’s employees who are plan participants incur a separation from employment.
The bill revises ERISA Section 4062(e) to clarify that a “substantial cessation of operations” occurs when an employer permanently ceases operations at a facility and, as a result, there is a “workforce reduction” of more than 15 percent of all eligible employees at all facilities in the contributing employer’s controlled group. Under the amendment, a “workforce reduction” would mean the number of eligible employees at a facility who are separated from employment by reason of the permanent cessation of operations of the employer at the facility. Certain eligible employees would be excluded from the reduction analysis, including employees who, within a reasonable period of time, are replaced by the employer, at the same or another facility in the United States, by an employee who is a citizen or resident of the United States. In addition, employees would not be not taken into consideration for these purposes following the sale or other disposition of the assets or stock of the employer if the acquiring entity maintains the single-employer plan of the predecessor employer that includes assets and liabilities attributable to the accrued benefit of the employee and either (1) the employee is separated from employment at the facility, but within a reasonable period of time, is replaced by the acquiring entity by an employee who is a citizen or resident of the United States, or (2) the eligible employees continues to be employed at the facility of the acquiring entity.
The Congressional Budget Office estimates that Senate Bill 2511 would reduce the contributions that plan sponsors are required to make to their plans as a result of terminating operations at a facility, leading to increases in employer revenues and decreases in direct spending. The House of Representatives concluded its fall session on September 19, 2014 without acting on the bill. It remains to be seen whether the House will take up the Senate bill when it returns for a “lame-duck” session after the mid-term elections.
Every year the Internal Revenue Service (IRS) and Department of Labor (DOL) conduct thousands of audits of employee benefit retirement plans. While IRS audits focus on compliance with the Internal Revenue Code, and DOL audits focus on violations of the Employee Retirement Income Security Act of 1974, as amended (ERISA), a review of these audits over the last five years reveals that auditors at both agencies are increasingly focused on the internal controls employers maintain for their employer benefit plans.
Please click here to read the full article View From McDermott: Top IRS and DOL Audit Issues for Retirement Plans, published by Bloomberg BNA Pension & Benefits Daily on 8/13/14.
Employers that sponsor defined benefit qualified retirement plans benefiting only Puerto Rico employees should be aware that Pension Benefit Guaranty Corporation (PBGC) coverage may no longer apply. Last year, the PBGC withdrew old prior opinion letters (Opinion Letters 77-172 and 85-19) regarding PBGC coverage in Puerto Rico and Guam. Those opinion letters articulated the PBGC’s position at that time, that Title IV of the Employee Retirement Income Security Act (ERISA) (providing for PBGC coverage), may apply to defined benefit plans covering only Puerto Rico participants if the Puerto Rico plan is either qualified under Section 401(a) of the U.S. Internal Revenue Code or has been operated in practice in accordance with the requirements of Section 401(a) for at least the five preceding years. Earlier this year, in remarks made at an enrolled actuaries meeting, PBGC officials stated that, going forward, PBGC will determine that a plan is not covered under Title IV of ERISA if (1) the plan’s trust is created or organized outside of the United States (e.g., Puerto Rico) and (2) no election under ERISA section 1022(i)(2) has been made. As a result, it appears the new PBGC position is that Puerto Rico-only qualified plans generally are not covered under Title IV of ERISA (although dual-qualified plans with Puerto Rico participants are covered). Since few Puerto Rico plans have made an election under ERISA section 1022(i)(2) due to the strict U.S. laws applicable to such arrangements, this new PBGC position will affect a number of Puerto Rico-only defined benefit plans. PBGC officials also stated that if the PBGC determines that a plan is not covered under Title IV of ERISA, it may refund up to six years of premiums.
Employers with Puerto Rico-only defined benefit plans should consider whether PBGC coverage of their plan is still possible or desired. If not, a refund of PBGC premiums should be sought.
A radical change to UK pension law is expected to affect tens of thousands of organisations with UK-based employees in 2014. This follows the imposition of an unprecedented obligation on employers to “automatically enrol” eligible employees in, and to contribute financially to, a pension scheme that meets specific, carefully defined criteria.
Revenue Ruling 2014-18 holds that stock options and stock-settled stock appreciation rights (stock rights) granted by offshore funds and other entities domiciled in tax-indifferent jurisdictions can be structured to avoid immediate taxation under Section 457A of the U.S. tax code. Among other things, this ruling allows an offshore fund to compensate its managers with stock rights that will only be subject to U.S. tax upon exercise, so long as the stock right is exempt from Section 409A and the manager has the same redemption rights with respect to acquired shares as other shareholders of the hedge fund.
In a highly anticipated decision, the Supreme Court recently ruled that ESOP fiduciaries are not entitled to a presumption of prudence under ERISA in connection with their decisions to buy, hold or sell the employer’s securities. While the elimination of this presumption is a loss for ESOP fiduciaries, the decision imposes additional burdens on plaintiffs that will make it easier for plan sponsors and fiduciaries to defend so-called “stock-drop” cases. It also requires plan sponsors to reevaluate plan language requiring that certain funds be invested in employer securities and to reconsider hiring an independent fiduciary to manage the employer stock fund.
On July 8, 2014, the Pension Benefit Guaranty Corporation (PBGC) issued a press release announcing a moratorium on its enforcement of Employee Retirement Income Security Act of 1974(ERISA) Section 4062(e) through the end of 2014. In general, ERISA Section 4062(e) allows PBGC to require that employers financially guarantee pension obligations in the form of plan contributions or a bond or escrow amount based on a plan’s unfunded termination liability when an employer with a pension plan shuts down operations at a facility and, as a result of the shutdown, more than 20 percent of the employer’s employees who are plan participants incur a separation from employment.
PBGC had recently been quite aggressive in its enforcement actions under ERISA Section 4062(e). As a result, ordinary business decisions, like asset deals and other business decisions impacting less than a facility’s full operations, were gaining PBGC’s attention. PBGC believes that the moratorium will enable it to target future enforcement efforts to those cases where employee pensions are genuinely at risk and allow it to continue to consult with businesses, labor and other stakeholders in developing a practical approach to enforcement. The moratorium runs through December 31, 2014, and applies to currently pending as well as new cases. Importantly, PBGC advised that companies must continue to report potential ERISA Section 4062(e) events to the PBGC during the period of the moratorium. Further, the moratorium does not preclude PBGC enforcing ERISA Section 4062(e) with respect to any reportable event that occurs during the moratorium period. The moratorium is not a safe harbor and there is no indication that it will continue past December 31, 2014.
In March 2013, the Internal Revenue Service (IRS) issued the final version of Form W-8BEN-E Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting. This form allows certain non-U.S. retirement plans to claim exemption from the reporting and withholding requirement of the Foreign Account Tax Compliance Act (FATCA). However, the final version of the Form W-8BEN-E did not include instructions. On June 24, 2014, the IRS published the long-awaited instructions, which address many of the ambiguities inherent in completing the form. For additional information regarding the FATCA exemptions that may be claimed using Form W-8BEN-E, please click here.
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