Retirement Practice Legal Consulting & Compliance Quarterly Update

Transcription

1 Retirement Practice Legal Consulting & Compliance Quarterly Update Notes from the Editor By Jennifer Ross Berrian Welcome to the 2014 year-end issue of the Retirement Legal Consulting & Compliance Quarterly Update. We have contributions from two guest authors this month. Eric Keener, the Chief Actuary of Aon Hewitt s U.S. Retirement Practice Group, co-authored an article with me on the recently released cash balance regulations. These regulations finalize proposed regulations issued in 2010 and propose a transition process for bringing existing plans into compliance. In addition, Bridget Steinhart, a member of Hewitt EnnisKnupp s Defined Contribution Consulting Team, has contributed a fiduciary update on a recent court decision regarding whether possessing signatory authority on a company bank account may confer plan fiduciary status. Beginning this quarter, look for an additional focus on fiduciary issues. While many of our articles have historically addressed fiduciary topics, we have developed additional fiduciary material in this issue (and future issues). This issue includes articles on actions that plan sponsors should consider when reimbursing themselves from plan assets, how to handle dual settlor and fiduciary roles, and issues that defined contribution plan fiduciaries should evaluate when permitting plan participants to invest in employer stock. We also include articles about the Department of Labor (DOL) s recent action with respect to brokerage window investments, an update on Puerto Rico retirement plans, and a determination letter filing update with a link to a white paper detailing required and permitted year-end plan amendments. Don t forget that calendar year retirement plans may need to be amended by December 31, 2014, to comply with the U.S. Supreme Court s repeal of Section 3 of the Defense of Marriage Act (DOMA). In this Edition New Regulations for Cash Balance Plans Issued Qualified Plans: Determination Letter Filing Update PBGC Coverage of Puerto Rico Only Plans DOL Issues Request for Information on Brokerage Windows Employer Stock: Renewed Focus Required of Plan Fiduciaries Avoid Prohibited Transactions When Seeking Reimbursement from Plan Assets Employers as Plan Settlor and Fiduciary: Handling Dual Roles Can Signature Authority Trigger Fiduciary Status? Recent Publication If you need any assistance, please contact the author of the article or Tom Meagher, our practice leader. New Regulations for Cash Balance Plans Issued By Eric Keener and Jennifer Ross Berrian Cash balance (and other hybrid) plan sponsors should review their plans for compliance with long-awaited final and proposed regulations released by the Internal Revenue Service (IRS) on September 18, The new final regulations primarily provide guidance on market rate of return requirements along with a few (Continued on page 2) Retirement Practice Legal Consulting & Compliance Quarterly Update 1

2 (Continued from page 1) other issues. The new proposed regulations provide transition guidance for plans required to change interest crediting rates in order to comply with the final market rate of return requirements. The final regulations largely follow the 2010 proposed regulations, with certain clarifications and other changes, and are generally effective for plan years beginning after December 31, However, some provisions clarifying portions of the 2010 final regulations apply to plan years beginning after December 31, Acceptable Interest Crediting Rates Like the 2010 proposed regulations, the new final regulations provide an exclusive list of acceptable interest crediting rates. However the final regulations include certain important changes from the proposed regulations including, among other things, an increase in the maximum permissible floor for Treasury bondbased rates, an increase in the maximum permissible fixed interest rate, as well as permitting rates to be used that are based on the actual return on a subset of plan assets. Changes in Interest Crediting Rate The final regulations permit changes in the interest crediting rate in certain situations, apart from changes required to comply with the final regulations. The provisions in the 2010 final regulations permitting certain changes to the third segment rate are retained, as are provisions in the 2010 proposed regulations permitting changes that utilize a wear away approach. Changes in a rate s lookback month or stability period using a one-year greater-of grandfathering approach, similar to the grandfathering required for changes to the lookback month or stability period under Code section 417 (e), are expressly permitted. If a plan uses an interest crediting rate based on the return on a Registered Investment Company (RIC) and the RIC ceases to exist, a successor RIC may be used to determine interest credits, subject to certain conditions. Other Provisions of the Final Regulations The final regulations also include some clarifying and broadening definitions, more whipsaw relief, flexibility for purposes of testing the 133-1/3% accrual rule, expansion of the PPA age discrimination safe harbor, and elimination of a hybrid plan conversion approach from the 2010 proposed regulations that allowed a plan to satisfy the hybrid plan conversion requirements by establishing an opening hypothetical account balance without comparing to an A+B minimum. In addition, upon plan termination, a plan with an investmentbased interest crediting rate must fix the interest crediting rate by replacing the investment-based rate with the second corporate bond segment rate, rather than the third segment rate as originally provided under the 2010 proposed regulations. Key Provisions of Proposed Regulations The new proposed regulations provide rules regarding the transition from an interest crediting rate that does not satisfy the market rate of return requirements to a rate that does. Plans must be amended prior to, and amendments must be effective no later than, the first day of the first plan year beginning after December 31, The general approach of the regulations is to change each specific feature that causes an interest crediting rate to be noncompliant while retaining compliant features. These features include noncompliance with timing rules, fixed rates in excess of 6%, margins added to Treasury bond-based rates that exceed the maximum permissible amounts, impermissible Treasury bond-based rates, floor rates that exceed maximum permissible amounts, interest crediting rates determined as the greater of two otherwise permissible variable bond-based rates, and noncompliant investment-based rates. Hybrid plans should be closely reviewed for compliance with the final regulations. If any terms are out of compliance, the guidance given in the new proposed regulations should be utilized to bring the plan into compliance. The legal consultants listed at the end of this publication can assist with this process. Additional information on these regulations can be obtained here. Qualified Plans: Determination Letter Filing Update By Hitz Burton Employers sponsoring individually designed retirement plans that are designated Cycle D filers (e.g., the plan sponsor s Employer Identification Number (EIN) ends in a 4 or 9 ) have until January 31, 2015, to restate their plan documents and submit them to the IRS to obtain determination letters regarding their qualified status. The submitted plan documents must include all the information required in the Cumulative List of Changes in Plan Qualification Requirements set forth in IRS Notice Additionally, many plans, regardless of filing cycle, should be amended prior to year-end to reflect certain federal tax law changes and optional amendments. Each year, the Aon Hewitt Retirement Legal Consulting & Compliance Group publishes a white paper on the cumulative list of required qualified plan amendments for the next letter- (Continued on page 3) Retirement Practice Legal Consulting & Compliance Quarterly Update 2

3 (Continued from page 2) filing cycle. It also includes other required or permissive plan amendments based on tax law or regulatory changes and federal case law developments. Among other items included for this year is information about amendments that may be required to reflect the Supreme Court decision in U.S. v. Windsor regarding the recognition of same-sex marriages for federal tax purposes; final regulations regarding mid-year reductions or suspensions of safe harbor matching or non-elective contributions; and the expansion in opportunities for in-plan Roth rollovers. Contact any member of the Aon Hewitt Retirement Legal Consulting & Compliance Group for a copy of the white paper, assistance with your Cycle D determination letter filing, or any questions regarding the amendments that may need to be adopted before year-end. PBGC Coverage of Puerto Rico Only Plans By Clara Kim Employers sponsoring defined benefit pension plans for employees in Puerto Rico should be aware that their plans may no longer be covered by the Pension Benefit Guaranty Corporation (PBGC). Earlier this year, at the 2014 Enrolled Actuaries Meeting, PBGC representatives answered questions related to PBGC coverage of Puerto Rico plans. In general, PBGC representatives indicated that plans that benefit only Puerto Rico participants will no longer be covered under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA) if: The plan s trust is created or organized outside of the United States; and No election under ERISA section 1022(i)(2) (electing to be treated as a qualified plan under IRC section 401(a)) has been made. In addition, if the PBGC concludes that the plan is not covered under Title IV of ERISA, the PBGC may refund up to six years of PBGC premiums. Employers with pension plans that satisfy these requirements should determine whether or not to apply for a premium refund. This information represents the current view of the PBGC representatives and is not official PBGC guidance. However, the PBGC withdrew PBGC Opinion Letter (relating to Puerto Rico plans) on April 19, In Opinion Letter , the PBGC opined that Puerto Rico plans established for the benefit of Puerto Rico residents could be subject to Title IV of ERISA even without making an election under ERISA section 1022(i)(2) or having a trust account in the United States. The withdrawal of the prior PBGC guidance suggests that the PBGC has changed its position on whether Puerto Rico defined benefit plans are covered by the PBGC. In view of the informal nature of existing guidance, we will be monitoring further developments in this area. Another noteworthy development applicable to Puerto Rico plans is the recent issuance by the IRS of Revenue Ruling In addition to guidance related to Puerto Rico plans and group trusts, this Revenue Ruling provides clarification to plan sponsors wishing to transfer assets and liabilities from a qualified retirement plan to an ERISA section 1022(i)(1) plan. Please contact your Aon Hewitt legal consultant to discuss any issues involving Puerto Rico defined benefit plans. DOL Issues Request for Information on Brokerage Windows By Hitz Burton In a possible first step towards issuing new regulations, the Department of Labor (DOL) issued a request for information (RFI) on August 20, 2014, regarding the prevalence and use of brokerage windows as platforms for investments by participants in ERISA-covered defined contribution plans. While new guidance may not be issued for some time, plan sponsors offering brokerage windows for participant investments should continue monitoring the DOL s actions in this area. The DOL last provided guidance on brokerage windows in 2012, when it announced that investments offered under a brokerage window or similar platform can be subject to the same fee disclosure requirements as a plan s designated investment alternatives. That announcement was subject to a great deal of criticism, and the DOL was later forced to reissue the 2012 guidance without the controversial brokerage window disclosure requirements. (Continued on page 4) Retirement Practice Legal Consulting & Compliance Quarterly Update 3

4 (Continued from page 3) The RFI requests information on a variety of topics related to brokerage windows, including: Prevalence information on the types of brokerage windows, self-directed brokerage accounts or similar arrangements used by 401(k) plans, and the advantages or disadvantages associated with such plan features; Demographic information on how participants use brokerage windows (e.g., percent of vested account balance invested through the window feature versus percent invested in plan-designated investment alternatives); Restrictions, if any, that plan sponsors are placing on use of brokerage windows (e.g., minimum dollar amount, maximum percent of account balance, limitations on types of investable assets); and Comparison of investment costs for investments elected through window features versus costs associated with plan-designated investment alternatives. Among other possible areas of focus, the DOL is concerned about whether participants understand the possible long-term impact on their retirement savings from the typically higher investment costs for investments made through brokerage windows versus a plan s offered designated investment alternatives. Comments in response to the DOL s RFI must be submitted by November 19, Employer Stock: Renewed Focus Required of Plan Fiduciaries By Tom Meagher excessively risky. The more recent Tatum decision involved a stock rise case, underscoring the importance of fiduciaries evaluating both sides of the question whether it is prudent under ERISA for a plan to retain or dispose of employer stock that is otherwise permitted as a plan investment. While each client s situation will be different with respect to determining the prudence of holding or disposing of employer stock, it is nevertheless important that the responsible plan fiduciaries develop a prudent process for evaluating how best to proceed. Based on the guidance provided by these recent court decisions, a prudent fiduciary process could include retention of independent third-party advisors, including legal and financial experts, who can evaluate whether employer stock is a prudent plan investment. From a plan governance standpoint, the process should also entail holding routinely scheduled meetings to monitor and receive regular updates on the investment performance of the plan, along with market conditions. Most important, a written fiduciary record should be maintained regarding any information that is considered by the fiduciary, as well as any analysis of why an employer stock fund is (or continues to be) appropriate for participants plan investments. If a decision is made to eliminate an employer stock fund, consideration should be given to what an appropriate time frame may be for discontinuance of the fund and any related restrictions. To the extent any changes are to be made, the plan sponsor should ensure that conforming amendments to the plan document and investment guidelines are timely adopted; regulatory requirements regarding such changes (e.g., black-out periods, default investments, etc.) are satisfied; and appropriate disclosures are made to plan participants. While employer stock may be a prudent investment under appropriate circumstances, post-dudenhoeffer plan fiduciaries must continue to monitor the prudence of such an investment, and should bolster how they document their evaluation of employer stock so as to mitigate the risk of potential claims from participants involving stock drop or stock rise cases. Employers are continuing to evaluate the implications of the Supreme Court s recent decision in Fifth Third Bancorp v. Dudenhoeffer, which held that fiduciaries of an employee stock ownership plan (ESOP) are not entitled to a presumption that investing in employer stock is prudent. The recent Fourth Circuit Court of Appeals decision in Tatum v. RJR Pension Investment Committee has provided additional guidance for plan fiduciaries to consider regarding the investment by any ERISA-governed plan in employer stock. Dudenhoeffer involved a stock drop case where the ESOP in question held stock that plaintiffs claimed was overvalued and Avoid Prohibited Transactions When Seeking Reimbursement from Plan Assets By Dan Schwallie Some plan expenses that are initially paid by the plan sponsor, even if otherwise payable from plan assets, cannot be (Continued on page 5) Retirement Practice Legal Consulting & Compliance Quarterly Update 4

5 (Continued from page 4) reimbursed from the plan without violating ERISA. While many plan expenses paid by the plan sponsor may be reimbursed from plan assets, such reimbursements require careful attention, particularly if the reimbursement is not made before the 60 th day following payment by the plan sponsor. The DOL has taken recent enforcement action involving reimbursement of plan expenses; and plan auditors and legal counsel are raising such issues with plan sponsors. Settlor expenses (i.e., expenses incurred primarily on behalf of the plan sponsor or employer) can never be paid or reimbursed from plan assets (see accompanying article by David Alpert). However, plan assets generally can be used to pay the ordinary operating expenses of the plan (including benefit payments), provided that they are reasonable and appropriate. Reimbursement of the plan sponsor from plan assets for ordinary operating expenses of the plan is likely a prohibited transaction under ERISA if: expenses more generally) in light of DOL guidance, as well as ensure their plan document provides for such reimbursement. To the extent that the plan document is amended to provide for the payment of plan expenses, any such expense payment should be prospective in nature. The legal consultants listed on the last page of this publication can assist plan sponsors in determining a strategy for compliance with guidance on the payment or reimbursement of plan expenses. Employers as Plan Settlor and Fiduciary: Handling Dual Roles By David Alpert The expense would have been incurred even if services had not been provided to the plan, or if the expense represents an allocable portion of overhead costs. For example, according to DOL guidance, the compensation of employees who spend time on plan administration cannot be charged to the plan unless their jobs would not exist but for their services to the plan (i.e., they would otherwise be laid off or assigned to a different position); or Reimbursement to the plan sponsor is made 60 days or more after payment of the expense without a written loan agreement between the plan and the plan sponsor. Except to the extent a prohibited transaction exemption applies, loans or transfers of money or assets between a plan and the plan sponsor are prohibited transactions under ERISA. As many of our readers know, prohibited transactions are subject to substantial penalties and excise taxes. Fortunately, the DOL has provided a class exemption that permits reimbursement from plan assets to the plan sponsor for payment of plan expenses (that a trust could pay directly) if the reimbursement is made before the 60 th day after the payment by the plan sponsor. Otherwise, the reimbursement must be made pursuant to a written loan agreement that contains all the material terms of the loan. Certain other DOL requirements also apply to such reimbursements. The payment of plan expenses from plan assets in general should be considered carefully as such decision is a fiduciary decision under ERISA. Employers who seek reimbursement for paying plan expenses should review their policies and procedures regarding reimbursement (and for payment of plan Employers that sponsor an ERISA benefit plan should understand when they (and their employees and delegates) are acting in a fiduciary capacity or settlor capacity. This determination potentially has significant implications including: whether ERISA s rules regarding fiduciary responsibilities and personal liability apply; whether the decision-makers should be acting in the best interest of plan participants or the employer; and whether any particular expense may be paid from plan assets. It is not always obvious when an employer, employee, or delegate is acting as a plan fiduciary. In addition, the role of the employer, employee, or delegate may change (from fiduciary to non-fiduciary status, or vice versa) during a particular course of action. Implementation of a non-fiduciary decision made by the employer as settlor may result in subsequent decisions that involve fiduciary considerations. Therefore, it is important for employers (and their employees and delegates) to understand when they are exercising fiduciary-related responsibilities so that they can satisfy their ERISA obligations and minimize fiduciary risk. In certain situations involving a potential conflict between fiduciary and settlor roles, it may be appropriate for the employer to appoint an independent fiduciary. Settlor (corporate) functions generally include plan-related decisions regarding the establishment and design of a plan, eligibility, funding, collective bargaining, corporate transactions, and the amendment or termination of a plan. On the other hand, an employer serves in a fiduciary capacity (Continued on page 6) Retirement Practice Legal Consulting & Compliance Quarterly Update 5

6 (Continued from page 5) whenever it fulfills its responsibilities as plan administrator, including the implementation of plan-related settlor decisions and the selection and oversight of plan service providers. Determining whether administrative expenses are reimbursable from plan assets is also a fiduciary decision. Other situations are less clear. For example, the communication of settlor decisions related to an ERISA plan may involve a combination of fiduciary responsibilities regarding the timing and accuracy of the communication, as well as settlor actions involving content (if any) pertaining to other employment information. While the day-to-day administration of a plan generally involves non-fiduciary ministerial action, a person who exercises discretion or control regarding the management of the plan or its assets may be functioning as a fiduciary, regardless of disclaimers or agreements that may provide otherwise. Employers that sponsor an ERISA plan should develop a prudent process to demonstrate that any decision made or action taken in a fiduciary capacity satisfies ERISA s fiduciary rules. Employers also should develop written policies and procedures to guide their employees who are plan fiduciaries, and ensure that plan fiduciaries are trained and understand their responsibilities. Such a process should include the following steps. Identify necessary information Obtain such information from reliable sources Consider the information received carefully Seek legal, financial, and other relevant expert advice (either internal or external) as appropriate Make decisions consistent with the information received and in the best interest of participants Document the decision and underlying rationale (including issues reviewed and their resolution) The fiduciary role is at least as much about process as it is about outcome. Issues can arise well after decisions are made. Timely documentation of prudent decision-making is critical, even if simply to show how a decision was reached. Can Signature Authority Trigger Fiduciary Status? By Bridget L. Steinhart Fiduciaries to ERISA-covered plans are subject to liability for breaching their fiduciary duties. That said, it is essential for individuals performing services for a plan to understand when they are acting in a fiduciary capacity. In a case currently being litigated, the parties are debating whether bank account signatory authority is sufficient to trigger fiduciary status. The definition of fiduciary under ERISA includes those who exercise, with respect to an ERISA-covered plan, any authority or control respecting management or disposition of its assets. In January 2014, Secretary of Labor Thomas Perez brought suit against Geopharma, Inc., Mihir Taneja (director, secretary and CEO at Geopharma), and two others for fiduciary breach related to the company s health plan.* Geopharma s bank account required that checks reflect two signatures. Secretary Perez alleged that the defendants were jointly liable for not separating employee premium contributions and COBRA (Consolidated Omnibus Budget Reconciliation Act) payments from company assets as soon as reasonably possible, and for failing to use those funds to pay claims. Taneja argued that his bank account signatory authority was insufficient to trigger fiduciary status. The DOL alleged that Taneja became a fiduciary by having control over both Geopharma s corporate assets and plan assets simultaneously. The DOL further argued that as CEO, Taneja knew or should have known of Geopharma s cash flow problems and ensured proper oversight of plan administration. Among the charges in this case are that Taneja and the other defendants breached their fiduciary duties by participating knowingly in a breach, failing to monitor other fiduciaries, and failing to take action to remedy the situation. Taneja s motion to dismiss was denied on July 25, 2014, and the case continues to move forward. Future developments on this matter will be monitored. *Perez v. Geopharma, Inc. et al, M.D. Fla., Recent Publication Nuanced ADP/ACP Safe Harbor Plan Design by Dan Schwallie, 40 Journal of Pension Planning & Compliance 1 (Fall 2014). Click here to download. Retirement Practice Legal Consulting & Compliance Quarterly Update 6

7 Contact Information Tom Meagher, Practice Leader Somerset, NJ (732) David Alpert Somerset, NJ (732) Hitz Burton Newport Beach, CA (949) Ron Gerard Norwalk, CT (203) Elizabeth Groenewegen San Francisco, CA (415) Dick Hinman San Francisco, CA (415) Clara Kim Somerset, NJ (732) Jack Laufer Newport Beach, CA (949) Meghan Lynch Lincolnshire, IL (847) Beverly Rose Austin, TX (512) Jennifer Ross Berrian San Francisco, CA (415) Dan Schwallie Hudson, OH (330) John Van Duzer Lincolnshire, IL (847) About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit Aon plc This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt's preliminary analysis of publicly available information. The content of this document is made available on an as is basis, without warranty of any kind. Aon Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt reserves all rights to the content of this document. This Quarterly Update is intended to bring recent developments to the attention of our interested colleagues. The materials have been prepared for informational purposes only and do not constitute consulting, legal, or tax advice. Readers should consult with members of the Legal Consulting & Compliance group if they have any questions in connection with the subjects discussed in this Quarterly Update. Retirement Practice Legal Consulting & Compliance Quarterly Update 7