Benefits In Brief

After months of delay, the Department of Labor (“DOL”) today released final regulations under Section 408(b)(2) of ERISA, requiring retirement plan service providers to disclose information about their services and fees to plan sponsors.  In doing so, the DOL delayed the effective date of those rules and made minor modifications to them.  The final regulations defer the compliance date from April 1 to July 1, 2012.  As a consequence, plan sponsors will also have more time to comply with the related participant-level fee disclosure rules.

Following an October 20 announcement by the IRS and an October 19 announcement by the Social Security Administration, we now know most of the dollar amounts that employers will need to administer their benefit plans for 2012. And unlike the past two years, many of these amounts will actually be adjusted upward to account for inflation.

Offering employees the opportunity to invest in the stock of their employer through a tax-favored vehicle like a Code Section 401(k) plan or employee stock ownership plan (“ESOP”) must have seemed like an innocuous idea at one time.  Indeed, Congress expressed its approval of such arrangements by creating special tax benefits for both the sponsors of such plans (in the form additional deductions) and participants in them (in the form of favorable tax treatment on unrealized appreciation in the value of employer stock).  Yet these “employer stock funds” are now the quickest path to the courthouse for employers that sponsor them and fiduciaries that administer them.

Employers sponsoring ERISA-covered, participant-directed, individual account plans (such as 401(k) or 403(b) plans) are constantly reminded of their fiduciary duties. In recent years, almost any discussion of these duties has included the issue of fees that are charged to participants’ accounts (or that otherwise affect a participant's account balance). Fiduciaries are being told that they must (i) know what fees are being charged to or paid from plan assets, (ii) understand what those fees are for, (iii) make sure that the fees paid are reasonable in relation to the services provided, (iv) disclose certain fees to plan participants, and (v) report certain fees to the government. But where are all of these requirements coming from? And why is there so much more focus on fees than there was 10 years ago?

Congress and the IRS are encouraging individuals to convert their retirement savings into Roth accounts (as a means to increase revenue). Pursuant to changes to the Tax Code made by the Small Business Jobs Act of 2010 (“SBJA 2010”), sponsors of Section 401(k) plans, Section 403(b) plans, and governmental Section 457(b) plans may now allow participants to convert their pre-tax accounts into Roth accounts. And on November 26, 2010, the IRS issued Notice 2010-84 (the “Notice”), clarifying the mechanics of such conversions and providing timing relief for the necessary plan amendments. This article briefly summarizes the basics of Roth contributions, and then examines highlights of the statutory changes and the recent IRS guidance regarding conversions.

Target-date funds have become increasingly popular with 401(k) plan investors in recent years. A target-date fund (“TDF”) is typically a mutual fund that contains a mix of underlying investments and automatically adjusts the asset allocation (stocks, bonds, cash equivalents) within the fund’s portfolio according to a selected “target date” such as retirement. As a participant approaches the "target date," the fund moves its allocation to more conservative investments (e.g., bonds and cash) and away from riskier investments (e.g., equities).

In late January the United States Court of Appeals for the Seventh Circuit (whose jurisdiction includes Illinois, Indiana, and Wisconsin) weighed in yet again on the extent to which ERISA’s fiduciary duty rules apply to the selection of 401(k) plan investments. As you may recall, the Seventh Circuit issued one of the most important rulings on this topic in recent years in Hecker v. Deere & Co. (2009), a case challenging as imprudent the fees attached to such investment options. Now, just two years later, the court appears to have reconsidered its analysis in Hecker, adding even more murkiness to these muddy waters.

As we reported in our August 2010 article, sponsors of tax-favored retirement plans should keep in mind the many required amendments for which a 2010 year-end deadline is fast approaching. Most tax-favored retirement plans must be amended by the end of the 2010 plan year to reflect the mandatory provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”).

On September 27, 2010, President Obama signed the Small Business Jobs and Credit Act of 2010 (the “Act”), which includes two provisions designed to promote retirement preparation (while raising revenue for the federal government). The first would permit Roth contributions to Section 457(b) plans maintained by state or local governments (a feature that is currently limited to 401(k) and 403(b) plans). The second would permit certain amounts in 401(k), 403(b) and governmental 457(b) plans to be converted to Roth accounts within the plan (i.e., an “in-plan” conversion option).

The IRS recently announced inflation-adjusted dollar limitations and cost-of-living adjustments applicable to qualified retirement plans in 2011. All of these limits remain unchanged from 2010. The Social Security Administration has made a similar announcement regarding Social Security premiums and benefits.

On September 27, 2010, President Obama signed the Small Business Jobs and Credit Act of 2010 (the “Small Business Jobs Act” or the “Act”). The Act provides $12 billion in tax cuts for small businesses and a $30 billion lending fund to improve the availability of credit for small firms. The bill also includes two provisions designed to promote retirement preparation (while raising revenue for the federal government). The first permits Roth contributions to 457(b) plans maintained by state or local governments (a feature that is currently limited to 401(k) and 403(b) plans). The second permits certain amounts in 401(k), 403(b), and governmental 457(b) plans to be converted to Roth accounts within the same plan (i.e., an “in-plan” conversion option). The in-plan Roth conversion option became effective upon enactment, while the Roth 457(b) option takes effect in 2011.

It may be summer now, but sponsors of tax-favored retirement plans should keep in mind the many required amendments for which a year-end deadline is fast approaching.  This article highlights some of the more important changes that sponsors must address before the sun sets on 2010.

As we reported in our September 2008 article, most tax-favored retirement plans must be amended by the end of the 2010 plan year to reflect the mandatory provisions of the Heroes Earnings Assistance and Relief Tax Act (the “HEART Act”).

As part of a recent IRS compliance initiative, 1,200 sponsors of 401(k) plans will soon be asked to complete a lengthy Questionnaire. This Questionnaire contains 69 questions, many divided into numerous subparts. Employers will have 90 days to respond. According to the IRS, “failure to complete the Questionnaire will result in further enforcement action” — up to and including an audit of the plan. Any employer receiving this Questionnaire should therefore move promptly to gather the voluminous and detailed data needed to respond, much of which may not be readily available.

In June of 2008, the Heroes Earnings Assistance and Relief Tax (“HEART”) Act became law. The Act made a number of significant changes to the treatment of military reservists under employee benefit plans. In an August 2008 article, we summarized those changes as they applied to qualified defined benefit and defined contribution plans, Section 403(b) plans, and Section 457(b) plans. In January of 2010, the IRS issued Notice 2010-15 (the “Notice”), which contains guidance on a number of the Act’s provisions. This article summarizes the most significant and surprising elements of that guidance, which apply to differential wage payments, “in-service” distributions on a reservist’s deemed severance from employment, and the Act’s mandatory death benefit provisions.

In September of this year, the IRS issued official guidance on how employers may convert unused leave under a bona fide sick leave, vacation leave, or paid-time-off (“PTO”) program into contributions to a qualified, defined contribution plan (such as a profit sharing or 401(k) plan). Revenue Rulings 2009-31 and 2009-32 provide a virtual “roadmap” for how the value of unused leave (that might otherwise be forfeited each year or paid out in cash on termination of employment) may be used as a basis for making additional employer contributions, or in some cases, employee elective deferrals, to such a plan.

Under recent IRS guidance, sponsors of many defined contribution plans must decide, by November 30, 2009, how to handle required minimum distributions (“RMDs”) for the 2009 calendar year. Participants who have already received 2009 distributions that consisted of (or included) a 2009 RMD have until this same date to roll that RMD into an IRA or eligible retirement plan in a tax-free rollover.

The Pension Protection Act of 2006 (“PPA”) became law on August 17, 2006. It was one of the most sweeping retirement reform bills in recent history, mandating a host of changes for tax-qualified retirement plans. Most of these changes are already in effect – in some cases, for years. Accordingly, most sponsors have long since wrestled with the necessary changes to plan administration and are operating their plans in compliance with PPA’s requirements.

Earlier this year, the IRS finalized regulations it had proposed in November of 2007 on the subject of automatic enrollment in salary deferral plans.  These final regulations respond to a number of comments on the proposed regulations. 

Since 1999, employers sponsoring Section 401(k) plans have been able to avoid ADP/ACP nondiscrimination testing (and the possibility of refunds to highly compensated employees in the event of a testing failure) by providing an annual notice to employees and making fully vested "safe-harbor" employer contributions. These "safe-harbor" contributions -- which must be made on behalf of all eligible non-highly compensated employees -- may be structured as either (i) matching contributions (which generally must total at least 4% of pay for those who defer at least 5% of pay) or (ii) non- matching contributions (referred to by the IRS as "nonelective" contributions) of at least 3% of pay.

If your company sponsors a retirement plan that is qualified under Section 401(a) or 403(a) of the Internal Revenue Code (such as a 401(k) plan, a profit sharing plan, or a defined benefit pension plan), your plan must periodically be amended for changes in the tax laws and/or the regulations governing such plans. Those changes include the final regulations under Code Section 415 (regarding the limit on annual additions to defined contribution plans and the limit on annual benefits payable under defined benefit plans).

The analysis of a federal district judge last year in a decision dismissing a class action complaint that challenged Deere & Co.’s 401(k) fee practices generated a great deal of excitement about 401(k) brokerage windows. The court seemed to imply that the existence of such an investment portal – through which participants may invest their plan accounts in almost any mutual fund or security – insulated the plan sponsor from claims that the plan’s core funds were too expensive or otherwise imprudent. That analysis is currently being tested as the parties appeal the judge’s decision. It has also drawn a cool reception from the Department of Labor.

In June, the Heroes Earnings Assistance and Relief Tax (“HEART”) Act became law. The Act makes a number of significant changes to the treatment of military reservists under employee benefit plans. This article summarizes those changes as they apply to qualified defined benefit and defined contribution plans, Section 403(b) plans, and Section 457(b)plans.

On April 5, 2007, the IRS and the Department of Treasury issued final regulations regarding the limitations, under Section 415 of the Internal Revenue Code (the “Code”), on contributions and benefits under qualified retirement plans. Although plan sponsors generally have until the due date (including extensions) of their 2008 tax return to amend their plans to comply with these regulations, there are very good reasons to amend plans before that deadline. In many cases, the sooner the better!

The IRS recently issued Notice 2008-30 (the “Notice”), which provides guidance on three distribution-related provisions of the Pension Protection Act of 2006 (“PPA”) that are first effective in 2008, as well as a distribution requirement introduced by final regulations under Section 402(g) of the Internal Revenue Code (the “Code”) that first applies to corrective distributions made during 2008.

As we reported in our last issue of Benefits in Brief (Volume 2008, No. One, p. 1), the Supreme Court’s latest foray into ERISA left open many questions about the liability of ERISA fiduciaries and the remedies available to plan participants. In LaRue v. DeWolff, Boberg & Assocs., the Court opened the door for individual participants in defined contribution retirement plans (e.g., 401(k) plans) to sue for losses suffered in their own accounts. Although the Court’s ruling allowed Mr. LaRue to proceed with his claim against his employer, it did not decide whether his employer was, in fact, an ERISA fiduciary which could be liable for Mr. LaRue’s alleged losses.

An important issue for 401(k)plan sponsors is whether amounts withheld from employee paychecks are deposited into the plan’s trust account in a timely manner. The Department of Labor (“DOL”)devotes significant enforcement resources to cases involving the delinquent remittance of employee contributions, and nearly 90% of applications under the DOL’s Voluntary Fiduciary Correction Program relate to this issue.

Like almost 70 million other Americans, James LaRue elected to save money for retirement through his employer’s 401(k) plan. When administrative errors reduced his account balance by nearly $150,000, Mr. LaRue sued his employer in federal court under ERISA to recover that amount. Initially, he lost. In a decision handed down on February 20, 2008, however, the United States Supreme Court resurrected his claim, in an apparent victory for Mr. LaRue and similarly situated 401(k) plan participants. (LaRue v. DeWolff, Boberg & Associates, Inc.) Unfortunately, the Supreme Court’s decision raises more questions than it resolves.

The Pension Protection Act of 2006 (“PPA”) amended ERISA to provide fiduciary relief for certain default investments when plan participants do not provide investment direction. The DOL has now issued final regulations, which will take effect on December 24, 2007, under which plan sponsors may enjoy a “safe harbor” from certain fiduciary liability.

Major corporate events (such as mergers, acquisitions, reductions-in-force, and plant closings) have long presented a special problem for retirement plan sponsors. Under the Tax Code, if employee turnover results in a “partial termination” of a qualified plan, the sponsor must fully vest all affected participants in the benefits they have accrued under the plan. Unfortunately, vague and anecdotal IRS guidance on precisely when such a partial termination occurs has left sponsors unsure of when they must take the costly step of fully vesting terminated participants.

Imagine that you are a 401(k) plan participant who, over the course of many years and at a significant sacrifice to your take-home pay, has accumulated a hefty account balance. As your retirement date approaches, you decide to move your plan balance from the moderately aggressive equity funds in which it had been invested to a conservative money market fund . . . The problem, however, is that – for reasons unknown – your transfer request was never implemented. The market plunged, and now your once-admirable account balance has been reduced by $150,000. After consulting your attorney, you conclude that those who are responsible for administering your plan have breached their fiduciary duties under ERISA, and you file suit to recover your losses. Easy case, right? Well, maybe not.

When the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) created the concept of a “Roth 401(k) contribution,” things got off to a slow start. For one thing, it was not at all clear how the Roth IRA concept, which has been around for some time, would be transplanted to an employer-sponsored plan.

In April, the IRS issued final regulations under Section 415 of the Internal Revenue Code (the “Code”). These regulations finalize rules proposed in May of 2005 and represent the first comprehensive overhaul of the Section 415 rules since 1981. For sponsors of defined contribution plans, one of the most newsworthy of the many changes is a revamping of the rules governing deferrals from compensation an employee receives after terminating employment.

Plaintiffs’ attorneys have filed a purported class-action lawsuit class action lawsuit against Wal-Mart and the fiduciaries of its 401(k) retirement plan. The suit, which was filed in a Pennsylvania federal court, builds on prior allegations that Wal-Mart unlawfully forced hourly employees to work without compensation.

In an opinion dated March 16, a judge for the Southern District of Illinois ruled against defendants’ motion to dismiss claims that they breached their fiduciary duties by permitting the Kraft Foods 401(k) plan to charge excessive and undisclosed fees. The court also refused to strike or order clarification of portions of the complaint that defendants claimed were lengthy and ambiguous, but did grant defendants’ motion to transfer the case to the Northern District of Illinois.

A recent spate of litigation involving 401(k) plan fees has drawn the attention of employers, the media, and Congress. At issue in these cases is hundreds of millions of dollars in potential liability, and also the very backbone of the retirement plan industry. Employers can expect more scrutiny of their plans from employees and, in some unfortunate circumstances, from plaintiffs' attorneys.

Effective for plan years beginning on and after January 1, 2007, defined contribution plans must provide such statements at least once each quarter (if they allow participants to direct the investment of their account balances) or at least once each year (if participants are not permitted to direct investments). Sponsors of defined benefit plans must furnish benefit statements at least once every three years.

As you probably already know, President Bush signed the Pension Protection Act of 2006 (the “PPA”) into law on August 17, 2006. Some PPA provisions became effective as of the date of enactment; others preserve existing laws that were set to expire in 2010; and still others are not effective until mid-2007 or 2008. This article summarizes some of the important provisions of the PPA that are effective as of plan years beginning on or after January 1, 2007 – or which apply to distributions, notices, or other events that will occur on or after that date.

As we first reported in a Benefits Alert! e-mail blast several weeks ago, a series of ten class action lawsuits filed in recent weeks challenges the fee structure employed by most 401(k) plans. These cases attack investment-related fees paid by plans to service providers, including revenue sharing arrangements between plans, mutual funds, and recordkeepers.

The Pension Protection Act of 2006 (PPA) made several changes intended to facilitate automatic enrollment plans, including new ERISA Section 404(c)(5), which provides fiduciary relief for certain default investments under participant-directed individual account plans. The DOL has now issued its proposed implementing regulations. The regulations will be effective 60 days after the final regulations – expected early in 2007 – are published.

Under an automatic enrollment feature, employees accumulate retirement savings through payroll deduction by default – unless they make an affirmative election to opt out of the program. For the past several years, in keeping with the federal government’s efforts to shore up the nation’s retirement savings, government agencies have actively encouraged such arrangements under employer-sponsored defined contribution plans.

In a series of seven class action lawsuits filed on September 11, 2006, plaintiffs’ attorneys launched an all-out assault on the fee structure employed by most 401(k) plans. These cases challenge investment-related fees paid by plans to service providers, including revenue sharing arrangements between plans, mutual funds, and recordkeepers.

ERISA guarantees plan participants and beneficiaries the right to request and receive certain information about their plans. If the plan administrator receives such a request and fails to respond within 30 days, ERISA authorizes the federal courts to impose statutory penalties on the administrator.

In the context of final regulations concerning abandoned defined contribution plans (so-called “orphan plans”), the Department of Labor (“DOL”) has also clarified its 2004 guidance on the permissible means of distributing accounts of participants and beneficiaries who cannot be located at the time of a plan’s termination. Although these orphan plan regulations are primarily of interest to banks, insurers, and mutual fund companies that hold assets of abandoned plans, plan sponsors and administrators will also benefit from the regulations’ “missing participant” provisions.

The Department of Labor (“DOL”) recently issued guidance regarding the distribution and allocation of mutual fund settlement payments made to employee benefit plans and their participants. This guidance is directly related to SEC enforcement actions alleging late trading and market timing activities. As a result of these actions, numerous mutual funds have established settlement funds.

The IRS has issued sample language by which a 401(k) plan sponsor may adopt a “Roth” feature for the plan. A Roth 401(k) feature allows employees to make after-tax contributions to the plan, but then receive a distribution of those contributions and earnings on a tax-free basis. This option may be of particular interest to younger employees, or to highly compensated employees who expect to remain in a relatively high tax bracket following their retirement.

Market timing and other short-term trading patterns impose costs on mutual funds by disrupting management, forcing funds to maintain excessive liquidity, and driving up tax expenditures. The SEC issued final rules on mutual fund redemption fees last year to curb these abuses.