Regulatory Update Retirement Plans

Transcription

1 DiMeo Schneider & Associates, L.L.C. VOLUME 4, NO. 2 Regulatory Update Retirement Plans DOL Outlook for 2014 IN THIS ISSUE: DOL Outlook for 2014 Stock Drop Case Update District Court Decision Affirms Importance of Keeping Plan Documents IRS Issues Final Rules on Midyear Reduction or Suspension of 401(k) Safe Harbor Contributions Frequently Asked Question: Can a 401(k) plan exclude interns? What if the interns work over 1,000 hours? Every year the regulatory agencies have a number of issues upon which they plan to provide guidance. The U.S. Department of Labor s (DOL s) Employee Benefits Security Administration (EBSA) sets forth a regulatory agenda for each year. The regulatory agenda helps plan sponsors and industry organizations prepare for potential changes in the retirement environment. The following is a preview of what the DOL has planned for Early in 2014 the DOL intends to amend 408(b)(2) regulations to require that service providers accompany disclosures with an explanatory guide meant to help fiduciaries understand their plan disclosures. In March the DOL intends to amend the qualified default investment alternative (QDIA) regulations. The amendment is intended to provide additional direction regarding what investment information is required to be disclosed to participants and beneficiaries, in particular as regards target date fund QDIAs. Participant disclosures under 404a-5 will also likely be amended to include similar changes in requirements. In April the DOL anticipates beginning exploration of the use of self-directed brokerage accounts or windows (SDBA) in retirement plans. The DOL is reviewing what impact provision of SDBAs in a retirement plan has on fiduciary obligations. The DOL s investigation will begin with a Request for Information on the topic. Also in April the DOL intends to issue a final rule regarding regulations governing the termination of abandoned individual account plans. These regulations will provide certainty for the termination and distribution from retirement plans that sponsors have abandoned. Perhaps the most anticipated guidance is the DOL s new proposed definition of fiduciary. This guidance has already been issued once and withdrawn by the DOL. It is anticipated that this conflict of interest rule will be released in August of Also in August the EBSA is set to issue a proposed rule regarding provision of lifetime income illustrations that are to be required on participant retirement account statements. The DOL has targeted October for issuance of a notice of proposed rulemaking regarding an annuity selection safe harbor for fiduciaries. The safe harbor will provide fiduciaries some protection in selecting annuity products for 1

2 their retirement plans. The safe harbor is thought to be largely based upon the provider s ability to make all required payments under their annuity contracts. This looks to be a busy year for the DOL. The new conflicts of interest rule (formerly the redefinition of fiduciary ) could have a profound impact on who will be held to ERISA s lofty standard of care. More information will continue to flow to plan sponsor fiduciaries and participants alike, which will assist them in their respective decision making. More direction will be provided to fiduciaries to help them determine if they desire to offer SDBAs in their retirement plans and how to choose annuity products safely for their retirement plan participants. As with all years, the timing of this guidance is always subject to change, but regardless of the timing, it should be an interesting year for the retirement plan landscape. Stock Drop Case Update In Re: SUNTRUST BANK, INC.: The plaintiffs in this class action are participants in the SunTrust Banks, Inc. 401(k) Savings Plan (the Plan), who held SunTrust stock in their 401(k) accounts and saw those accounts lose significant value when SunTrust s share price plummeted. This case went to the Eleventh Circuit on appeal after the district court granted the defendant s motion to dismiss. After issuing its decision in Lanfear v. Home Depot, Inc., 679 F.3d 1267 (11th Cir. 2012), in which materially identical questions were at issue, the Eleventh Circuit reversed the district court s ruling. This reversal was based on the court s conclusion that Section 404(a)(2) of the Employee Retirement Income Security Act (ERISA) does not have the effect of exempting fiduciaries of eligible individual accounts plans (EIAPs) that hold employer securities from their duty of prudence under Section 404(a)(1). The case is now before the district court on the plaintiffs sole remaining viable claim, which is a prudence claim. Plaintiffs core allegation is that the company s stock became an overly risky and inherently imprudent investment option for the Plan because of the company s heavy involvement in the toxic subprime real estate market. In adopting the presumption of prudence standard from Moench v. Robertson, the Eleventh Circuit held that although a fiduciary is generally required to invest according to the terms of the plan, when circumstances arise such that continuing to do so would defeat or substantially impair the purpose of the plan, a prudent fiduciary should deviate from those terms to the extent necessary. In applying this standard, the district court made an attempt to discern the intent of the settlors. A review of the Plan s governing documents revealed that the documents contained strong language that essentially prohibited the fiduciaries from selling company stock (e.g., The Committee will have primary responsibility for administering the Plan and all powers necessary to enable it to properly perform its duties but will have no authority to limit, expand or remove the Employer Stock Fund ). In addition, the plan documents contained repeated warnings to Plan participants (e.g., This Investment carries more risk than the other investment options because it depends on the performance of only one company, It may experience very large increases in value or very large decreases in value, and Investing in the stock of a single company carries a high risk, as an economic downturn shows ) about investments in the company stock. Based on this information, the court inferred that the settlor intended that participants would have the opportunity to purchase SunTrust stock while understanding that to do so exclusively (or primarily) would expose their assets to great risk. Further, given the fact that the Plan offered many different investment opportunities, the court found no indication from the Plan documents that the settlor ever contemplated that the company stock would be sold. In granting the defendant s motion to dismiss, the court reasoned that, even if the court were to accept that there was a point at which the settlor would agree that the shares be sold, such a point was never reached. Fifth Third Bancorp v. Dudenhoeffer, 692 F.3d 410 (6th Cir. 2012), cert. granted, No (U.S. Dec. 13, 2013): In this class action, plaintiffs, participants in the Fifth Third 401(k) Plan (the Plan), alleged that defendants violated their fiduciary duties by continuing to offer the company s stock as a Plan investment. The stock ultimately declined 74 percent, allegedly due to Fifth Third s participation in subprime mortgage lending markets. 2

3 The district court granted defendants motion to dismiss, holding that the employee stock ownership plan (ESOP) fiduciaries decision to invest in employer stock was entitled to a presumption of prudence at the pleading stage. On appeal, the Sixth Circuit reversed the district court s ruling, holding that the presumption does not apply at the pleading stage. In Pfeil v. State Street Bank & Trust Co., 671 F.3d 585 (6th Cir. 2012), the Sixth Circuit set forth its stance on the presumption of prudence. The Sixth Circuit, while adopting the position that fiduciaries are entitled to a presumption of prudence, reserved the presumption for the evidentiary stage of litigation. This position differs from that taken by the majority of other Circuits that have addressed this issue. In addition, while the majority has adopted standards such as dire situation, impending collapse and brink of bankruptcy for rebuttal purposes, the Sixth Circuit only requires a plaintiff to prove that a prudent fiduciary acting under similar circumstances would have made a different investment decision a much less stringent standard. On Dec. 13, 2013, the U.S. Supreme Court granted certiorari. In granting certiorari, the Supreme Court limited its review to whether the Sixth Circuit erred by holding that plaintiffs were not required to plausibly allege in their complaint that the fiduciaries of an ESOP abused their discretion by remaining invested in employer stock in order to overcome the presumption that their decision to invest in employer stock was prudent, as required by ERISA and every other circuit court that has addressed the issue. It is anticipated that the Supreme Court s ruling will provide much-needed guidance on the availability of the presumption of prudence in employer stock cases and the rebuttal standards that should be applied in those cases. District Court Decision Affirms Importance of Keeping Plan Documents On Oct. 21, 2013, the district court for the Northern District of Indiana, in Hartman v. Dana Holding Corp, levied penalties approaching $5,000 for not providing documents, including an election form and spousal waiver, that would have gone into effect over 30 years prior. Elaine Hartman inquired about a survivor annuity following the death of her husband, a retired 24-year employee of the defendant company. After being informed that her husband had elected against such an annuity, she requested the relevant plan documents and summary plan description, in addition to her husband s election form and the spousal waiver form. After numerous conversations resulting in Dana staff finally communicating that they could not find the documentation, Hartman filed this suit seeking statutory penalties against Dana for its failure to provide the documents. The court awarded Hartman $10/day penalty for the time it took to produce the documents (over a year). Although the penalty in this case is small, it is a good reminder that employers should do their best to keep good records of old plan documents to avoid potential situations such as this. IRS Issues Final Rules on Midyear Reduction or Suspension of 401(k) Safe Harbor Contributions On Nov. 15, 2013, the IRS released final regulations related to midyear reductions or suspensions of 401(k) safe harbor contributions. As background, for a cash or deferred arrangement (CODA) (e.g., a 401(k) plan) to be qualified, elective contributions must satisfy either the actual deferral percentage (ADP) test or one of the design-based alternatives. Similarly, CODAs providing for matching or employee contributions must satisfy either the actual contribution percentage (ACP) test or one of the design-based alternatives. The design-based alternatives available for matching contributions parallel the design-based alternatives for elective contributions. In 2009, the IRS issued proposed regulations that allow the midyear suspension or reduction of safe harbor nonelective contributions in the event of a substantial business hardship. Prior to the proposed regulations, only safe harbor matching contributions could be suspended or reduced midyear without terminating the plan. 3

4 Under the final regulations, restrictions around midyear reductions of safe harbor non-elective contributions are loosened, as the substantial business hardship rule is no longer the standard. An employer now must only demonstrate that they are operating at an economic loss. Matching contribution changes, on the other hand, are subject to greater constraint as a new advance notice requirement applies if the employer is not operating at an economic loss. The final regulations modify the rules that apply to midyear amendments reducing or suspending safe harbor matching contributions. The requirements that apply to a midyear reduction or suspension of safe harbor non-elective contributions are not stricter than those that apply to a midyear reduction or suspension of safe harbor matching contributions. So now, if there is not an economic loss, safe harbor non-elective or matching contributions may only be reduced or suspended during a plan year if the plan s safe harbor notice a notice that generally must be given at least 30 and no more than 90 days before the beginning of the plan year includes a statement that the plan may be amended during the plan year to reduce or suspend the contributions. Finally, whether the notice rule or the economic hardship rule is used, a plan amendment associated with neither will be effective before the later of the date the amendment is adopted or 30 days after all eligible employees are given a supplemental notice. Requirements of the supplemental notice include: explaining the consequences of the amendment, explaining procedures for changing deferral elections and communicating the amendment s effective date. The final regulations are effective immediately with respect to safe harbor non-elective contributions. However, the effective date regarding safe harbor matching contributions is the first day of the first plan year in 2015, as the final regulations are more restrictive than the current rules. Frequently Asked Question Can a 401(k) plan exclude interns? What if the interns work over 1,000 hours? Qualified plans do not have to cover all of the employees of the employers that maintain them. Plans can, by design, be more restrictive. While employers have considerable freedom in setting participation criteria, that freedom is not unlimited. The Internal Revenue Code (IRC) and ERISA may affect the plan's ability to filter out potential participants. One useful way to view the process of identifying the persons who actually will participate in a plan is to visualize a funnel with a series of filters. The universe of employees who could participate is at the top of the funnel. Each filter is an eligibility criterion that prevents or delays participation by some employees who could be participants. An employee does not become an actual participant until the employee passes through every filter. 4

5 The eligibility filters may be temporary, merely delaying participation until a minimum age, minimum service or similar requirement has been met. Or they may be based on conditions that are not likely to change unless the person changes jobs, such as whether a person is paid on an hourly or salaried basis or works for a particular subsidiary. Let s focus on the middle two filters. Eligible Employees The employer can make choices about which categories of employees should receive plan benefits. Remember, however, that a qualified plan must cover a sufficiently broad cross-section of the employer's workforce to achieve the status of a qualified plan and to obtain the associated tax benefits. If an employer defines the class of eligible employees too narrowly (that is, structures the plan to exclude too many lower-paid employees), then the plan will fail the IRC's minimum coverage requirements and cease to be a qualified plan. The minimum coverage rules require that a plan cover a certain percentage of employees. IRC Section 410(b) states that a plan must satisfy one of the following alternative tests: The plan must benefit at least 70 percent of the employer's non-hces (the 70 percent test); The plan must benefit a percentage of the non-hces that is at least 70 percent of the percentage of the HCEs that benefit (the 70 percent ratio percentage test); or The plan must demonstrate, among other things, that the average benefit percentage of the non-hces is at least 70 percent of the average benefit percentage of the HCEs (the average benefit test). So, if the intern workforce is small enough (under 30 percent of the employee population) and everyone else is eligible for the 401(k) plan, then the employer would likely be okay excluding interns from eligibility. Here is another approach. Service Requirements Qualified plans may require individuals to work for a certain length of time before they become eligible, but generally, the longest waiting period a plan can impose is one year: More specifically, for plans that define years of service based on an hours-of-service definition, one year means 1,000 hours in a 12-month period. A plan may require employees to complete up to one year of service before they begin their participation in the plan (IRC 410(a)(1)(A)(ii); ERISA 202(a)(1)(A)(ii)). An exception to the one-year-of-service rule, however, permits a plan to require employees to complete two years of service before beginning participation in plan benefits other than elective deferrals, but only if the employees have a 100 percent vested right in all plan contributions made on their behalf, immediately upon participation (IRC 410(a)(1)(B)(i); ERISA 202(a)(1)(B)(i)). This may be the way to exclude the interns who work less than one year. This material is intended for the exclusive use of clients of DiMeo Schneider & Associates L.L.C. Content and format are privileged and confidential. Any dissemination or distribution of this material is strictly prohibited. Information is obtained from a variety of sources which are believed but not guaranteed to be accurate. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. DiMeo Schneider & Associates LLC does not offer legal or tax services. 5