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 [...]
Continue Reading
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:
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.
Background
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:
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.
Subscribe
