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Retirement Plans

Tax Court Disqualifies Plan for Not Adopting Required Amendments

by McDermott Will & Emery | May 11, 2011 | Retirement Plans

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.

Proposed Additional Disclosures for Qualified Default Investment Alternatives and Target Date Funds

by McDermott Will & Emery | May 5, 2011 | Fiduciary and Investment Issues, Retirement Plans

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.

Seventh Circuit Reverses Summary Judgment In Kraft ERISA “Excessive Fees” Case

by Jackie Sinn | Apr 14, 2011 | Benefit Controversies, Retirement Plans

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. [...]

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New Puerto Rico Tax Code Means Changes for Qualified Retirement Plans

by McDermott Will & Emery | Mar 28, 2011 | Retirement Plans

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.

IRS Issues Revenue Ruling Clarifying Termination Provisions for 403(b) Plans

by Jackie Sinn | Mar 2, 2011 | Retirement Plans

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.

Civil Unions Legalized in Illinois; Implications for Employee Benefit Plans

by McDermott Will & Emery | Feb 16, 2011 | Employment, Health and Welfare Plans, Retirement Plans

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.

IRS Gives Transition Relief Permitting Puerto Rico Qualified Plans to Participate in U.S. Group and Master Trusts, Extends Deadline to 12/31/11 for Spin-Offs from U.S. Qualified Plans

by McDermott Will & Emery | Jan 12, 2011 | Retirement Plans

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.

Plan Sponsors with Puerto Rico Employees Waiting for Guidance from the IRS on Treatment of Group Trusts, Possible Extension of Revenue Ruling 2008-40

by Jeffrey Holdvogt | Dec 10, 2010 | Retirement Plans

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.

Department of Labor Issues New Rules on 401(K) Fee Disclosure to Participants

by Jackie Sinn | Dec 10, 2010 | Retirement Plans

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.

Proposed PBGC Rule Has Potential to Expand Liability of Pension Plan Sponsors

by McDermott Will & Emery | Nov 10, 2010 | Benefit Controversies, Retirement Plans

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.