LEGISLATIVE UPDATE, REGULATORY UPDATE, AND

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1 The Ledger Second Quarter 2014 Summary of Legislative, Judicial, and Regulatory Retirement News Issued by Lockton Retirement Services INSIDE THIS ISSUE LEG I SLATI V E U P D AT E LEGISLATIVE UPDATE, REGULATORY UPDATE, AND COURTS UPDATE Rubio Joins the Bandwagon Makes Retirement Security Proposal Pages 1-7 Sen. Marco Rubio, R-Fla., recently proposed opening up the federal employees Thrift Savings Plan (TSP) to private sector Americans that do not have access to an employer-sponsored plan. Opening Congress retirement plan to the American people will allow us to bring the prospect of a secure, comfortable, and independent retirement into reach of millions of people. The proposal also includes a number of Social Security reforms, including eliminating the 12.4 percent payroll tax for all individuals who have reached retirement age; gradually increasing the retirement age for future retirees to account for the rise in life expectancy; and adjusting the calculation of initial benefits to reduce the growth of benefits for upper income seniors. BEACON ALERTS Page 8 RETIREMENT SERVICES GUIDANCE Page 9 DEFINED CONTRIBUTION AND DEFINED BENEFIT PLAN COMPLIANCE CALENDARS Pages AUTHORS SAM HENSON, J.D. Senior ERISA Counsel Lockton Retirement Services shenson@lockton.com There have been numerous plans hatched this year aiming to grant access to employees who do not have an employer-provided retirement plan. Logistically, Rubio s plan is probably the most easily accomplished because it relies on the TSP, an already functioning plan with millions of participants. However, in an election year, there is no chance to gather necessary support, and this is more than likely a ploy in a potential Rubio presidential run in Interestingly, a similar bill was proposed last year that would have opened federal employee health coverage to all Americans, but it failed to gather enough support to make it to a vote. L O C K T O N R E T I R E M JESSICA SKINNER, J.D. Compliance Attorney Lockton Retirement Services jskinner@lockton.com E N T S E R V I C E S

2 House Proposes Bill to Encourage ESOPs The House Ways and Means Committee has introduced The Promotion and Expansion of Private Employee Ownership Act of 2014 which eliminates barriers that a business and its owners currently face in establishing a new S corporation employee stock ownership plan (ESOP) or expanding the employee-ownership stake in an S corporation. Congress created the S corporation ESOP structure to encourage and expand retirement savings, giving more workers in private companies the chance to own their companies through an ESOP-qualified retirement savings program. The bill will: Enable owners of S corporations to sell their stock to an ESOP. Encourage the flow of bank capital to ESOP-owned S corporations. Provide needed technical assistance for companies that may be interested in forming an S ESOP. Ensure small businesses that become ESOPs retain their Small Business Administration (SBA) certification. Affirm the importance of preserving the S ESOP structure in the Internal Revenue Code. S corporation ESOPs are very desirable to Congress. Studies have shown that S ESOP employees have retirement account balances three to five times higher than the average 401(k) or other defined contribution plans; the average ESOP participant has 20 percent more defined contribution assets than the average participant in a non-esop defined contribution (DC) plan; and on average, ESOP companies contributed 75 percent more to their ESOPs than other companies contributed to their primary DC plan. 2

3 Second Quarter 2014 The Ledger REGULATORY UPDATE IRS, PBGC Issue Filing Relief for Federal Disaster Victims On May 8, 2014, the Internal Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC) announced that they will waive certain penalties and extend certain deadlines in response to the severe storms and flooding in the southeastern United States. The IRS is postponing certain deadlines for taxpayers who reside or have a business in federal disaster areas in Florida, Alabama, Arkansas, and Mississippi. For instance, certain deadlines falling on or after April 28 and on or before October 15 have been postponed to October 15, This includes the deadline for filing extensions for Form 5500 series returns as well as the deadline for many tax-exempt organizations to file their annual Form 990. It also includes the June 16 and September 15 deadlines for making quarterly estimated tax payments. A variety of business tax deadlines are also affected, including the April 30 and July 31 deadlines for quarterly payroll and excise tax returns. The PBGC relief similarly applies to any designated person responsible for meeting a PBGC deadline (e.g., a plan administrator or contributing sponsor) who is located in Florida, Alabama, Arkansas, and Mississippi and cannot reasonably obtain information or other assistance needed to meet the deadline from a service provider, bank, or other person whose operations are directly affected by the severe weather. The PBGC announcement discusses requests for case-by-case relief, how to claim relief, assessment of premium payments, treatment of single-employer plan terminations, reportable event notices, requests for reconsideration and appeals, and multiemployer plan deadlines. IRS Offers Relief for Late Filers Plan administrators who fail to timely file Form 5500 annual reports for their retirement plans may be subject to penalties under both ERISA and the Tax Code. Under previous guidance from the IRS, correcting such a late filing under the Department of Labor s (DOL) Delinquent Filer Voluntary Compliance (DFVC) Program could relieve the filer from penalties assessed by both the DOL and the IRS. However, under new guidance from the IRS, relief from its penalties now depends on a separate filing. Specifically, the IRS will not impose penalties for the late filing of Forms 5500, 5500-SF, or 8955-SSA, or for late actuarial reports, with respect to any year for which such Form is required, if the plan administrator: Is eligible for and satisfies the requirements of the DFVC Program with respect to a delinquent Form 5500 for that year; and Files a complete Form 8955-SSA for that year (to the extent that the required information has not already been provided to the IRS) by the later of (i) 30 calendar days after the filer completes the DFVC Program filing, or (ii) December 1, Plan administrators who have failed to timely file a Form 5500, Schedule SSA, or Form 8955-SSA should understand the new requirements for relief from penalties assessed under the Tax Code and take advantage of this relief before the deadline expires. Administrators who have already obtained relief from the DOL penalties under the DFVC Program must file the appropriate Form 9855-SSA with the IRS before the December 1, 2014, deadline. Those who have not yet completed a filing under the DFVC Program must first do so, and then file Form 8955-SSA with the IRS before the applicable deadline (the later of 30 days after the DFVC filing is complete or December 1, 2014). 3

4 PBGC Issues Final Rule on Benefits After Plant Shutdown On May 5, 2014, the PBGC released a final rule (RIN 1212-AB18) providing that the guarantee of benefits upon the occurrence of an unpredictable contingent event (UCE), such as a plant shutdown, starts no earlier than the date of the shutdown or other unpredictable contingent event. The rule conforms the PBGC s benefit payment regulation to the Pension Protection Act of The new rule provides that the guarantee of an unpredictable contingent event benefit is phased in from the latest of the date the benefit provision is adopted, the date the benefit is effective, or the date the event that makes the benefit payable occurs. The rule also includes eight examples that show how the phase-in rules apply in various situations. This provision, which doesn t otherwise change the existing phase-in rules, applies to benefits that become payable as a result of a UCE that occurs after July 26,

5 Second Quarter 2014 The Ledger Courts Update ING Pays $15 Million Because of Revenue Sharing ING Life Insurance & Annuity Co. (ING) has agreed to pay $15 million to settle class action claims by a 401(k) plan administrator challenging the service provider s receipt of revenue-sharing payments from mutual funds. The settlement comes after three years of litigation in which plan administrators claimed that ING breached its fiduciary duties under ERISA and engaged in prohibited transactions by arranging for and receiving revenue-sharing payments from mutual fund companies. In addition to the $15 million payment, ING agreed to: Make prompt disclosures of any additions or removals from its menu of investment funds. Limitations on its discretion to make substitutions of funds. Revise its fee disclosures to include information about any revenue payments it receives, including language providing that such revenue sharing payments may have a direct impact on mutual fund expenses. This is yet another in a long line of cases involving claims based on undisclosed revenue relating to mutual funds. The fee disclosure obligations of covered service providers under ERISA should be a starting point in the plan sponsor s determination of fee reasonableness. Sponsors should continue to ask probing questions especially with regards to mutual fund investments including inquiry about any revenue sharing derived from their plans. Lowe s Survives Lawsuit on Overtime Credit Lowe s Home Centers Inc. (Lowe s) has successfully defeated class action claims alleging failure to credit participants in its 401(k) plan for overtime hours worked. A former Lowe s employee and participant in its plan argued that the plan s definition of eligible compensation included overtime hours worked. However, the Court agreed with Lowe s that the definition only included overtime hours for which compensation was actually paid to employees, rather than the number of hours worked. In addition, the Court found that the classification of overtime and those eligible was an employment decision and not a fiduciary decision subject to ERISA. The case flushes out an important plan design feature for employers who have a significant hourly paid workforce, include the words actually paid when referencing overtime hours under the plan s definition of eligible compensation. 5

6 Principal Stable Value Fund Sued for Excessive Fees and Poor Performance A retirement plan participant with assets invested in the Principal Stable Value Fund (SVF) has filed a proposed class action complaint contending that the fund s excessive fees and dismal performance prevented it from living up to its promise of providing a safe source of income for current and future retirees. The SVF held more than $4 billion in assets as of 2013, with Principal making annual profits between $90 million and $160 million off of the investment contracts it issued to the fund. The SVF invests about 90 percent of its assets in investment contracts issued by insurance companies, the participant alleged, with about 9 percent of the fund invested in investment contracts issued by Principal Life Insurance Co. The participant argued, through these investment contracts, the SVF in effect charges additional, largely undisclosed, fees to participants by allowing the contract issuers to retain unlimited spreads. The participant further alleged that Principal set their own compensation by establishing the crediting rate applicable to the investment contracts and retaining the difference between that crediting rate and the performance of the underlying investment, results in incredibly poor performance by an investment vehicle that advertises itself as preserving capital and providing liquidity for retirement plans. It is also alleged that the SVF consistently provided substantially lower crediting rates than those of similar funds, resulting in larger spread. Finally, the participant challenged Principal Life s issuance of guaranteed and synthetic investment contracts that held plan assets. According to the participant, Principal Life continuously reduced the credit rating in its investment contracts between 2008 and 2011, allowing it to retain larger spread, despite Principal Life s investment contract business being highly profitable during this period. This is the third stable value fund case filed in the last year, and shows the increasing sophistication of participant claims. Notably the litigation was against the investment company, but it is likely that future claims will name plan sponsors for breaching their fiduciary duty in selecting these funds. After Two Losses, Churches Get a Win Breaking from two recent rulings in similar cases, a Court granted a Catholic health organization s motion to dismiss a class action complaint alleging that its pension plans failed to qualify as church plans exempt from many requirements of ERISA. The case involved Ascension Health Alliance s pension plans and whether they qualified as church plans, because Ascension was controlled by and associated with the Roman Catholic Church. Disagreeing with two recent rulings out of New Jersey and California, the Court held that a plan need not be established by a church in order to qualify as an ERISA-exempt church plan. This is a highly unsettled area of the law among the Courts. This case is one of six recently filed challenges to religiously affiliated employers reliance on ERISA s church plan exemption and marks the first victory for the plan sponsors in these cases. Employer Wins Using Plan Valuation Date Resulting in Lower 401(k) Benefits In Wakamatsu v. Oliver, a participant in a 401(k) plan requested distribution of her benefits based in December of 2008 using a valuation date of December 31, 2007, which was the most recent valuation preceding the date 6

7 Second Quarter 2014 The Ledger of her distribution request. Under the plan terms, valuation of the assets must be conducted at least annually. Plan terms stated that assets are distributed based on the valuation date that immediately precedes the date the participant receives his/ her distribution from the plan. Because the plan s value dropped dramatically over the course of the 2008 plan year, the plan sponsor determined that processing the participant s claim using the December 31, 2007, valuation would be a breach of fiduciary duty owed to the remaining plan participants, because the participant would pass along her investment losses to other participants. Therefore the participant s distribution was processed using an upcoming valuation date of December 31, 2008, which resulted in the participant receiving approximately $60,000 less than she anticipated, so she sued. The court ruled the plan sponsor acted reasonably and prudently by deciding to use the 2008 valuation because that it more accurately represented the true value of her account. Paying benefits to the participant based on the 2007 valuation would prejudice the other participants in the plan, and that the plan sponsor reasonably concluded that making a distribution based on the 2007 valuation would have allowed the participant to escape her share of the losses occurring in 2008 and forced the other participants to bear those losses. The sponsor was lucky to have a favorable court, but the language in the plan permitting a interim valuation was key. If a sponsor relies on year end accounting, it would be very desirable to include this language in their plan. 7

8 BEACON ALERTS, YEAR-TO-DATE IRS Simplifies Process for Validating Rollover Acceptance On April 3, 2014, the Internal Revenue Service (IRS) released Revenue Ruling , which simplifies the process used by plan sponsors to accept rollovers from other qualified plans. Accepting plan rollovers can be beneficial to both the employer and employee. New Limit on 60-Day IRA Rollovers: One Rollover Allowed Per Year March 26, 2014 A recent tax court case has given the IRS the opportunity to apply a new limit on 60-day Individual Retirement Account (IRA) rollovers. President Unveils Retirement Reforms During the State of the Union January 29, 2014 Recognizing a significant deficiency in retirement readiness, the President has set his sights on a solution. In the State of the Union address, President Obama unveiled several initiatives in a plan to encourage Americans to save for retirement. 8

9 Second Quarter 2014 The Ledger RETI RE ME N T S ER V I C ES G U I D A NC E, YE A R-TO-DAT E IRS Provides Guidance for Amending Safe Harbor 401(k) Plans to Comply with U.S. v. Windsor May 16, 2014 On May 15, 2014, the IRS issued Notice , which provides guidance to safe harbor 401(k) plans on making midyear amendments to comply with the Supreme Court s decision in U.S. v. Windsor. President s Budget Impacts Retirement Savings March 5, 2014 On March 4, 2014, President Obama released his 2015 fiscal year budget proposal which includes several provisions that impact retirement savings. Republican Tax Reform Proposal Impacts Retirement Savings February 27, 2014 House Ways and Means Committee Chairman Dave Camp (R-Mich.) just released a 979-page proposal to overhaul the current tax system. Camp calls it a comprehensive plan that reflects input and ideas championed by Congress, the Administration, and most importantly, the American people. New Rules Provide Relief for Defined Benefit Plans February 10, 2014 On January 28, 2014, the Pension Benefit Guaranty Corporation (PBGC) issued proposed rule RIN 1212-AB13 that would amend regulations governing multiemployer plans in hopes of encouraging potentially beneficial plan merger transactions. Senate Retirement Proposals Are Here An Employer Mandate and Defined Contribution Reforms January 31, 2014 Following the President s proposed myra in his State of the Union address (See Beacon: President Unveils Retirement Reforms During State of the Union ), Senators have begun introducing their own plans to address the millions of Americans who are not saving for retirement. 9

10 DEFINED CONTRIBUTION PLAN COMPLIANCE CALENDAR Second Quarter 2014 July 2014 When Due Description Sent to/filed With Action July plan year 2nd quarterly contribution due. Plan custodian. Make quarterly contribution to the plan if applicable. July 29 Distribute SMM. Affected Participants. No filing requirement. July 31 Form 5500 (unless filing Form 5558 extension). Sent to participants and beneficiaries on written request. Filed with DOL. Electronic filing is required. Distribute SMM, if required; distribution of an updated SPD satisfies this requirement. Annual report filed by employee benefit plans subject to ERISA and IRS for purposes of providing plan information to DOL, IRS and PBGC. Filing requirements vary with type and size of plan. A short form is available for plans with fewer than 100 participants as of 1st day of the plan year, that are exempt from financial audit requirements, are fully invested in certain secure investments and hold no employer stock. Only certain schedules are required to be filed with Form 5500-SF. July 31 Form 5558 (5500 extension). IRS. To request extension of time in which to file Form 5500 or Form 8955-SSA or both (maximum 2½ months). July 31 Form 5330: Return of Excise Taxes Related to Employee Benefit Plans. IRS. Plan administrator files Form 5330 to report excise taxes related to retirement plans. The type of excise tax that is incurred determines the filing due date. July 31 Form 8955-SSA. IRS. Annual registration statement identifying separated participants with deferred vested benefits, if no Form 5558 submitted for extension. August 2014 When Due Description Sent to/filed With Action August 14 PBGC Form 10. PBGC. PBGC Form 10 filing due if the 2014 plan year 2nd quarterly plan contribution was missed by more than 30 days. September 2014 When Due Description Sent to/filed With Action September 30 SARs for DB plans not covered by the PBGC (professional service employers with fewer than 26 employees, church groups, federal, state, or local governments). Sent to participants and beneficiaries. No filing requirement. 10 Narrative summary of financial information reported on Form 5500 and statement of right to receive annual report. Model notice language is provided by DOL.

11 Second Quarter 2014 The Ledger DEFINED BENEFIT PLAN COMPLIANCE CALENDAR Second Quarter 2014 July 2014 When Due Description Sent to/filed With Action July 29 Distribute SMM. Affected Participants. No filing requirement. July 31 Distribute annual benefit statements for 2013 plan year (non-participant-directed plans). Participants and beneficiaries with accounts. No filing requirement. July 31 Form Sent to participants and beneficiaries on written request. Filed with DOL. Electronic filing is required. Distribute SMM, if required; distribution of an updated SPD satisfies this requirement. Statement informing participants of their accrued benefit at normal retirement age and, if not vested, when vesting will occur. Must describe any permitted disparity or floor-offset provision. For individual account plans, must also note value of each investment. Annual report filed by employee benefit plans subject to ERISA and IRS for purposes of providing plan information to DOL and IRS. Filing requirements vary with type and size of plan. A short form is available for plans with fewer than 100 participants as of the first day of the plan year, that are exempt from financial audit requirements, are fully invested in certain secure investments and hold no employer stock. Only certain schedules are required to be filed with Form 5500-SF. July 31 Form 5558 (5500 extension). IRS. To request extension of time in which to file Form 5500 or Form 8955-SSA or both (maximum 2½ months). July 31 File Form 5330: Return of Excise Taxes Related to Employee Benefit Plans. August 2014 IRS. Used to report and pay excise taxes on prohibited transactions and excess 401(k) plan contributions that occurred in prior year. When Due Description Sent to/filed With Action August 14 Distribute 2014 plan year 2nd quarter benefit statements. August 29 Annual disclosure of plan fees and expenses (DC plans with participant directed investments). September 2014 Participants and beneficiaries who may direct investments. No filing requirement. Sent to participants, including employees who are eligible to participate, but who have not actually enrolled, and to plan beneficiaries. No filing requirement. Statement informing participants of their accrued benefit at normal retirement age and, if not vested, when vesting will occur. Must describe any permitted disparity or floor-offset provision. For individual account plans, must also note value of each investment. Generally, required annual information must be provided on or before date participant or beneficiary can first direct investments and annually thereafter. Initial annual disclosure of plan and investment-related information (including associated fees and expenses) for calendar-year plans had to be furnished by 08/30/13. If initially provided 8/30/13, 2014 deadline would be 08/30/14, otherwise within one year after last provided. When Due Description Sent to/filed With Action September 30 SARs. Sent to participants and beneficiaries. No filing requirement. Narrative summary of financial information reported on Form 5500 and statement of right to receive annual report. Model notice language is provided by the DOL. 1 Only DB plans not covered by the PBGC (professional service employers with fewer than 26 employees, church groups, federal, state or local governments).

12 Our Mission To be the worldwide value and service leader in insurance brokerage, employee benefits, and risk management Our Goal To be the best place to do business and to work For Plan Sponsor Use Only The communication is offered solely for discussion purposes. Lockton does not provide legal or tax advice. The services referenced are not a comprehensive list of all necessary components for consideration. You are encouraged to seek qualified legal and tax counsel to assist in considering all the unique facts and circumstances. Additionally, this communication is not intended to constitute U.S. federal tax advice, and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending any transaction or matter addressed herein to another party. This document contains the proprietary work product of Lockton Financial Advisors, LLC, and Lockton Investment Advisors, LLC, and is provided on a confidential basis. Any reproduction, disclosure, or distribution to any third party without first securing written permission is expressly prohibited. Securities offered through Lockton Financial Advisors, LLC, a registered broker-dealer and member of FINRA, SIPC. Investment advisory services offered through Lockton Investment Advisors, LLC, an SECregistered investment advisor. For California, Lockton Financial Advisors, LLC, d.b.a. Lockton Insurance Services, LLC, license number 0G Lockton, Inc. All rights reserved. Images 2014 Thinkstock. All rights reserved.