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.
On October 23, 2015, the U.S. Departments of Labor (DOL), Health and Human Services (HHS) and Treasury issued frequently asked questions (FAQs) on the implementation of preventive care and wellness provisions of the Affordable Care Act (ACA) and mental health parity disclosure, adding to the existing list of 28 previous editions of FAQs on the implementation of ACA.
The U.S. Department of Labor (DOL) issued proposed regulations on April 14, 2015 that would expand the types of investment advice covered by fiduciary protections under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the Internal Revenue Code of 1986, as amended (the Code). The proposed regulations would require advisers to ERISA-governed retirement plans and individual retirement accounts (IRA) to act as ‘‘fiduciaries’’ within the meaning of ERISA and the Code, subject to certain carve-outs identified by the DOL for nonfiduciary adviser services. Advisers that become fiduciaries under the proposed regulations would be subject to ERISA fiduciary duties and prohibited from engaging in certain non-exempt transactions. The proposed regulations are accompanied by two new class prohibited transaction exemptions and amendments to several existing class exemptions, which recognize the expanded scope of ERISA’s fiduciary protections under the proposed regulations while allowing advisers to continue certain types of transactions and existing fee arrangements that would otherwise be prohibited for ERISA fiduciaries. While the proposed regulations likely would have the greatest impact on the IRA marketplace, advisers to plan sponsors, and therefore plan sponsors themselves, are likely to be impacted. Comments on the proposed regulations are due by July 21, 2015.
Court cases challenging the actions of Employee Retirement Income Security Act fiduciaries have continued unabated since the scandal of Enron in 2002. Since then, a large number of cases are in the “stock drop” area, which encompasses cases relating to employer securities investments when the stock price drops severely. The litigation has focused on whether a presumption of prudence exists that protects fiduciaries holding employer securities investments on behalf of a retirement plan. In June 2014, the U.S. Supreme Court ruled in the case of Fifth Third Bancorp v. Dudenhoeffer that ERISA doesn’t provide a presumption of prudence to protect fiduciaries of plans investing in employer securities. Now that the Dudenhoeffer decision resolves the presumption issue, it is reasonable to expect that ERISA cases may return to focus on the fiduciary duties of a directed license.
In connection with a merger or acquisition, an acquiring company may end up assuming sponsorship of a tax-qualified retirement plan that covers employees of the acquired company. This article provides a brief summary of some key issues that a company should focus on to ensure that the numerous administrative and fiduciary requirements involved in maintaining a qualified retirement plan will continue to be met on an ongoing basis if the plan will continue to be maintained following the acquisition.
On October 2, 2014, the Supreme Court of the United States granted the plaintiffs’ petition for a writ of certiorari in Tibble v. Edison International to answer “Whether a claim that [Employee Retirement Income Security Act] ERISA plan fiduciaries breached their fiduciary obligation by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institutional-class mutual funds were available, is barred by 29 U.S.C. § 1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.” The underlying claim asserts that the investment committee of the Edison 401(k) Savings Plan (the Plan), a defined contribution plan sponsored by Edison International, breached its fiduciary duty, although the issue presented to the Supreme Court focuses on the statute of limitations applicable to that claim.
The Plan’s investment committee selected a variety of funds for the investment of Plan assets. The funds selected by the investment committee were retail-class funds, which charged higher fees than the comparable institutional-class funds available in the retail market. Plan participants sued, alleging that lower-cost mutual funds were available and should have been selected for the Plan’s investment portfolio. The district court dismissed the case and the U.S. Court for the Ninth Circuit affirmed the dismissal on the basis that the funds were selected more than six years earlier and were therefore barred by ERISA statute of limitations.
ERISA provides a six-year period within which a participant or beneficiary may sue based on allegations of a breach of ERISA fiduciary duties. In general, the ERISA statute of limitation period begins to run on the date of the last act that constitutes a fiduciary breach owed to the beneficiaries. The U.S. District Court for the Central District of California dismissed several claims in the plaintiffs’ lawsuit, concluding that these claims were statutorily barred because the plaintiffs’ filed them after expiration of the six-year statute of limitations period. In addition, the district court ruled that it must defer to the investment committee’s selection of the higher-cost mutual fund by application of the deferential Firestone standard previously set by the Supreme Court.
In its petition for certiorari, the plaintiffs asked that the Supreme Court determine whether ERISA’s six-year limitations period begins on the date that the investment committee initially selected the higher-cost mutual fund options for the Plan’s investment portfolio or whether the on-going offering of such funds constituted a “continuing” fiduciary breach, thereby extending the period. The Supreme Court elected not to address whether the Firestone deference applies to fiduciary breach actions with respect to whether a fiduciary failed to follow plan terms in the selection of investment options.
This case follows the Supreme Court’s 2013 decision in Heimeshoff v. Hartford Life & Accident Insurance Co. Heimeshoff concluded that an ERISA plan’s contractual three-year limitations period for benefit claims was enforceable, despite the fact that the statute of limitations began to run before the participant’s benefit claim had been decided by the plan administrator. Conversely, in Tribble v. Edison, Int’l., the Supreme Court is asked when ERISA’s [...]
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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.
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.
The Internal Revenue Service recently established a one-year pilot program that provides plan administrators and plan sponsors of certain non-ERISA and foreign plans subject to the annual Form 5500 reporting requirements relief from penalties under the Internal Revenue Code. The penalty relief is temporary and expires on June 2, 2015.
Under the Employee Retirement Income Security Act, retirement plans generally come in two flavors – (i) retirement plans qualified under Section 401 of the Internal Revenue Code (the Code) and (ii) executive retirement plans, called “top hat” plans, which aren’t Code-qualified. What does that mean? While qualified retirement plans are subject to all of ERISA’s funding, participation and fiduciary provisions, top hat plans aren’t and may offer benefits exceeding those allowed under Code-qualified plans. Simply put, top hat plans are unique animals under ERISA.
Litigation involving top hat plans isn’t plentiful—likely due to the fact that such plans are available only to a small number of highly paid executives. However, within the limited top hat litigation realm, there exists a conflict among the federal courts of appeals over a seminal question—what review standard is to be applied to a benefit determination? While the U.S. Supreme Court has definitively answered this question for most ERISA plans in Firestone Tire & Rubber Co. v. Bruch, the unique nature of top hat plans has resulted in conflicting rules among the circuits. Whether these conflicting standards elicit similar results is an open and complex question for most ERISA practitioners.
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