The 2016 proposed regulations significantly expanded 457(f) plan sponsors’ ability to permit elective deferrals, use noncompetition agreements and make larger severance payments than otherwise permitted under 409A without immediate taxation to participants. In a recent presentation, Ruth Wimer, Mary Samsa and Joseph Urwitz discuss the surprising opportunities with respect to tax-exempt and governmental entities’ “ineligible nonqualified deferred compensation” arrangements in 2016 regulations. They also address the rules and limitations of the short-term deferral exception, the interaction of the 2016 regulations with existing regulations, other types of arrangements potentially affected, as well as best practices for employers.

View the full presentation.

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.

The U.S. Department of Labor recently published proposed revisions to the template and related materials for the summary of benefits and coverage (SBC) and the Uniform Glossary. These documents are required to be provided to plan participants under the Affordable Care Act (ACA).

See our articles Additional Guidance Issued on Summary of Benefits and Coverage Disclosure Requirements and Summary of Benefits and Coverage Disclosure Requirements for more details on the SBC.

In many transactions, particularly those where the buyer is a portfolio company of a private equity fund, the buyer agrees to cause its 401(k) plan to accept a transfer of assets from the seller’s 401(k) plan. The asset transfer from the seller’s plan provides the buyer’s with an asset base with which to negotiate the best possible administrative fee structure, and seamlessly transfers the retirement plan benefits of employees being retained or hired by the buyer. If the seller’s plan contains employer stock as an investment however, the buyer should be aware of fiduciary concerns that may arise under the Employee Retirement Income Security Act of 1974 (ERISA), as amended.

“Stock-drop” litigation is a well-known phenomenon centering on plan fiduciary liability to plan participants when the value of employer stock investments in a retirement plan drops significantly. Less well-known is the fiduciary liability exposure facing new 401(k) plan sponsors and fiduciaries accepting a transfer of assets from the seller’s plan that includes former employer stock. Holding a significant block of a single security that is not company stock implicates ERISA prudence and diversification issues, and must be closely monitored.

Fiduciaries of 401(k) plans considering accepting asset transfers of former employer stock have often been advised to engage counsel to evaluate the prudence of holding the former employer stock in the buyer’s plan as an investment alternative (even if “frozen” to new investment) and establish a timeline for requiring that plan participants divest the former employer stock within one to two years of the asset transfer from the seller’s plan.

In light of the decision in Tatum v RJR Pension Inv. Comm., 2014 U.S. App. LEXIS 14924 (4th Cir. Aug. 4, 2014), buyer 401(k) plan sponsors and plan fiduciaries must now be even more careful to engage in a process that separates fiduciary from non-fiduciary acts and carefully follows established procedures for implementing any required divestitures of former employer stock. In Tatum, the plan was not properly amended to require the divestiture of former employer stock. This failure to properly amend the plan converted a plan design decision, which was a non-fiduciary or “settlor” decision, into a fiduciary act. In Tatum, the plan fiduciaries also failed to follow a prudent process for determining whether or not to eliminate former employer stock and for determining the timeline for implementing such divestitures.

The Tatum decision highlights that, in addition to fiduciary risk in holding former employer stock in the buyer’s 401(k) plan as an investment, there is also fiduciary risk in the process of eliminating former employer stock as an investment in the buyer’s plan.

When establishing a new 401(k) plan, the buyer should consult with legal counsel regarding the risks involved in accepting an asset transfer from a seller’s plan that includes former employer stock. Any new plan sponsors or plan fiduciaries that are contemplating accepting former employer stock as part of an asset transfer should consider whether or not they should engage an independent third party to monitor the former employer stock fund and/or conduct an investigation into the prudence of eliminating the former employer stock. In addition, new plan sponsors should ensure that any third-party administrators or prototype providers have adequately discussed with the plan sponsor the feasibility of having the elimination of the former employer stock part of the plan document as a plan design decision. Given the fiduciary risk for both continuing to allow the former employer stock as an investment alternative, and of implementing any decision to eliminate the former employer stock fund, buyers may now determine that the fiduciary risks of accepting a transfer outweigh the benefits of better administrative pricing and easier employee transition.

On Thursday, December 11, 2014, Chicago partner, Todd Solomon will speak at the Illinois Fiduciary Summit at Hyatt Lodge at McDonald’s Campus. Joined by additional keynote speakers from Wells Fargo and Crowe Horwath, Todd will discuss various topics important to retirement plan committee decision makers, including:

  • Top 10 Fiduciary Pitfalls 401(k) & 403(b) Plan Sponsors Need To Avoid
  • Fiduciary Obligations & Reducing Your Liability
  • How to Measure Plan Success
  • Evaluating Service Providers & Maximizing Vendor Negotiations
  • Outlook on the Bond Market and Recent On Goings at PIMCO

This event free of charge to McDermott clients and is certified for three hours of CPA/CPE credit and HRCI/SPHR/PHR general credit.

To register for the event, click here.

by Stephen Pavlick, Susan Schaefer and Kary Crassweller

The Internal Revenue Service (IRS) issued Notice 2012-70, extending the deadline for plan sponsors of defined benefit plans to adopt amendments to comply with Section 436 of the Internal Revenue Code (the Code), which generally imposes plan benefit payment and amendment restrictions if a defined benefit plan’s funding dips below specified levels. 


Code Section 436 sets forth a series of limitations on the accrual and payment of benefits under an underfunded defined benefit plan (see “New Notice Requirements Effective November 1, 2012 for Single Employer Pension Plans with Funding-Related Restrictions” for more information).  Under previous IRS guidance, (see “IRS Extends Year-End Deadline for Pension Plan Amendments Under Code Section 436” for more information), the deadline for adopting the Code Section 436 amendment to reflect such funding-based restrictions was generally the last day of the plan year beginning on or after January 1, 2012 (e.g., December 31, 2012, for calendar year plans).   

New Deadlines

On November 21, the IRS extended the deadline for adopting the required Section 436 amendment to the latest of the following: 

  • The last day of the plan year beginning on or after January 1, 2013 (e.g., December 31, 2013, for calendar year plans)
  • The last day of the plan year for which Code Section 436 is first effective for the plan
  • The due date (including extensions) of the employer’s tax return for the tax year that contains the first day of the plan year for which Code Section 436 is first effective for the plan 

However, plan sponsors submitting determination letter applications on or after February 1, 2013, for individually designed plans must adopt the Code Section 436 amendment prior to submitting the application.  Determination letter applications that are filed prior to February 1, 2013 (Cycle B plans), do not need to include provisions complying with Code Section 436.

Notice 2012-70 also extends the relief period under the anti-cutback requirements of Code Section 411(d)(6), which generally provide that a tax-qualified defined benefit plan may not be amended to reduce or eliminate a participant’s accrued benefit.      

Defined benefit plan sponsors should review the new guidance to determine the proper deadline for Code Section 436 amendments for their plans.  For more information on this guidance, please contact your regular McDermott attorney or one of the listed authors.