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DOL Creates Path for 401(k) Plans to Offer Private Equity Investment Options

In June, the US Department of Labor issued an information letter indicating that it will allow defined contribution retirement plans (such as 401(k) plans) to indirectly invest in private equity funds. While information letters are not binding, this new guidance creates a significant opportunity for plan sponsors to consider investment options that include private equity funds. However, it will be important for both plan sponsors and funds to carefully evaluate potential investments for compliance with fiduciary requirements.

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Finally SECURE: Opportunities in the 2019 SECURE Act for Plan Sponsors

The SECURE Act—the most significant piece of retirement plan legislation in more than a decade—is now law. Plan sponsors should immediately start considering how changes included in the SECURE Act could impact their retirement and health and welfare plans in 2020 and beyond.

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Once Again, IRS Extends Nondiscrimination Relief for Frozen Defined Benefit Plans

The Internal Revenue Service (IRS) has once again extended the temporary nondiscrimination relief for frozen defined benefit plans, now through 2020. Frozen pension plans are pension plans that have been closed to new participants but continue to provide ongoing benefit accruals for certain participants. This extended relief is intended to enable frozen pension plans to satisfy certain nondiscrimination testing requirements. In most cases, the relief allows the frozen defined benefit plan to be 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.

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Extension of Nondiscrimination Relief to Certain Closed Defined Benefit Plans

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.




IRS Issues “Snapshot” Guidance on Qualified Retirement Plan Issues

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.

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Supreme Court Rules in Favor of Church-Affiliated Hospitals in Church Plan Litigation

In a major victory for church-affiliated hospitals, the US Supreme Court overturned three appellate court rulings and decided unanimously that church-affiliated hospitals can maintain their pension plans as “church plans” exempt from the Employee Retirement Income Security Act of 1974, as amended (ERISA), regardless of whether a church actually established the plan. Impacted health systems, and especially their management, should evaluate how best to document and demonstrate their common religious bonds and convictions with the church.

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PBGC Announces 2014 Moratorium on ERISA Section 4062(e) Enforcement Actions

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.




The Dodd-Frank Act’s Impact on Pension Plan Investment Options

by Maureen O’Brien, Karen A. Simonsen and Adrienne Walker Porter

Pension plans use swaps to manage interest rate risks and other risks and to reduce volatility with respect to funding obligations.  The Dodd-Frank Act established a comprehensive regulatory framework for swaps.  The legislation was enacted to reduce risk, increase transparency and promote market integrity within the financial system, including the comprehensive regulation and required registration of swap dealers and major swap participants.

The Dodd-Frank Act has introduced new challenges in managing risks and liabilities of pension plans by subjecting ERISA plans to new requirements under the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).  If pension plans are unable to use swaps, plan costs and funding volatility could rise sharply.  This would undermine participants’ retirement security and would force employers to reserve, in the aggregate, billions of additional dollars to address increased funding volatility.  In order to meet the rulemaking objectives specified under the Dodd-Frank Act, regulators and Congress have introduced significant changes that may impact how pension plans manage their funded status.

  • In December of 2010, the CFTC released proposed regulations outlining business conduct standards for swap dealers and major swap participants.  The regulations highlighted the issue that swap dealers engaging in typical business activities with respect to “special entities” could be treated as ERISA fiduciaries.  (The Dodd-Frank Act provides that a special entity includes an employee benefit plan.)  ERISA provides that, generally, any transaction between a fiduciary and the ERISA plan with respect to which it owes fiduciary duties is prohibited.  Therefore, in effect, the proposed regulations may preclude swap dealers from entering into swap transactions with employee benefit plans subject to ERISA. Additionally, the Department of Labor’s proposed rule relating to the definition of the term “fiduciary” under ERISA may include advisors that perform plan asset valuations, which is an activity conducted by swap dealers under the CFTC proposed regulations.
  • On April 12, 2011, the CFTC issued proposed regulations establishing minimum initial and variation margin requirements for non-cleared swaps entered into by CFTC-regulated swap dealers and major swap participants. Under the proposed rules, pension plans would be included in the category of high-risk financial entities, subject to the most stringent requirements.  Such high-risk financial entities are required to post collateral and are limited to the type of assets that may be used to post margin.  This change could significantly increase the cost of managing pension plans.
  • On May 4, 2011, the U.S. House of Representatives Agriculture Committee approved H.R. 1573, legislation providing the CFTC and SEC with 18 additional months to finalize many of the rules relating to swaps.  The rules defining swaps-related products and participants and the rules relating to reporting recordkeeping, however, are to be finalized by July 15, 2011.  The CFTC also recently released a notice reopening the comment period for many of the proposed regulations related to the Dodd-Frank Act. 

Plan sponsors should continue to monitor the regulatory and legislative activity surrounding pension plans’ ability to use [...]

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