INDIANA BENEFITS CONFERENCE QUALIFIED PLANS PANOPLY. September 17, 2013

Transcription

1 INDIANA BENEFITS CONFERENCE QUALIFIED PLANS PANOPLY September 17, 2013 The Windsor Decision Implications for Qualified Plans Gayle Skolnik, Partner, Faegre Baker Daniels ERISA 3(16) Fiduciaries Tom Totten, CEO & Actuary, Nyhart DOL Tips for Fiduciaries in Selecting Target Date Funds Doug Prince, CEO, ProCourse Fiduciary Advisors Common Issues in Qualified Plan Audits Tim Ayler, Partner, Greewalt CPAs

2 The Supreme Court s Windsor Decision on Same-Sex Marriage: Implications for Qualified Retirement Plans Gayle L. Skolnik September 17, 2013

3 Background on Defense of Marriage Act (DOMA) What it provided How it affected qualified retirement plans 3

4 The Supreme Court s Decision in U.S. v. Windsor Relevant Facts: Two women, Windsor and Speyer, were lawfully married in Canada, and their marriage was recognized as a legal marriage in the State of New York, where they resided. Because of Section 3 of DOMA, however, when Speyer died, Windsor had to pay over $300,000 in federal estate taxes that would not have applied to an opposite-sex spouse. Holding: Section 3 of DOMA, defining marriage and spouse to exclude same-sex spouses lawfully married under state law, is unconstitutional. Effect: For federal tax purposes, the terms spouse and marriage apply to same-sex couples legally married under applicable state law. Decision did not create a federal right to same-sex marriage. 4

5 Open Questions After Windsor What state s law determines whether a same-sex couple is lawfully married? State of domicile (where couple resides)? State of celebration (where license is issued and ceremony occurs)? Does marriage include civil union or registered domestic partnership? Retroactivity Effect on benefits previously paid/not paid Effect on benefit elections and beneficiary designations Effect on qualified status of retirement plans that did not apply spousal rights to same-sex married couples 5

6 Relationship Definition Rules Same-sex Marriage Civil Union Domestic Partnership Limited Recognition County and City Contractor As of 8/1/2013 6

7 States That Authorize Same-Sex Marriage Connecticut Delaware (effective July 1, 2013) District of Columbia Iowa Maine Maryland Massachusetts Minnesota (effective August 1, 2013) New Hampshire New York Rhode Island (effective July 1, 2013) Vermont Washington 7

8 IRS Guidance Issued on August 29, 2013; became effective September 16, 2013 Revenue Ruling FAQs (2 sets) Adopts State of Celebration Rule: for all federal tax purposes, IRS will recognize a same-sex marriage that was validly entered into in a state or foreign jurisdiction whose laws authorize same-sex marriage, even if the couple is domiciled in a state that doesn t recognize the validity of same-sex marriage. For all federal tax purposes, the terms spouse, husband, wife, and marriage apply to same-sex marriages validly entered into under the laws of the state or foreign jurisdiction in which the marriage was performed. But those terms do not apply to individuals (whether same-sex or opposite-sex) who have entered into a civil union, registered domestic partnership, or similar formal relationship recognized under state law but not denominated as a marriage under the laws of that state. 8

9 Impact on Qualified Retirement Plans Must treat legally married same-sex spouses as spouses for all qualified retirement plan purposes, including: Automatic beneficiary/spousal consent rights under defined contribution plans Qualified joint and survivor annuity (QPSA)/spousal consent rights and qualified preretirement annuity rights under defined benefits plans Spousal rollover rights Spousal rights under required minimum distribution (RMD) rules Spousal for purposes of hardship withdrawal rights Rights to and under Qualified Domestic Relations Orders (QDROs) Application of Code 415 limits to survivor benefits (disregard value of spousal survivor annuity under QJSA in applying 415(b) maximum benefit limits) 9

10 Additional Guidance is Still to Come IRS guidance on plan amendment requirements (including the timing of any required amendments IRS guidance on retroactivity (application to plan operations in periods before Windsor decision was issued) IRS guidance on any necessary correction relating to periods before future guidance is issued Guidance from Department of Labor and other agencies 10

11 What Should We Do Now? Review plans, forms, and beneficiary designation/death benefit procedures to determine changes required to comply with IRS guidance Identify and begin to implement changes required by IRS guidance Determine how to identify persons who must be treated as spouses under federal law (caution: avoid approaches that place additional burdens on same-sex married couples that don t apply to opposite-sex married couples) Communicate with employees Consider how to respond to retroactive benefit claims pending additional guidance Communicate with vendors Watch for agency guidance Watch for case law developments 11

12 Thank You Gayle L. Skolnik

13 ERISA 3(16) Fiduciary Thomas Totten, FSA Copyright All Rights Reserved.

14 What is ERISA 3(16)? Examples of Responsibilities What is Happening in the Market? Plan Sponsor Considerations

15 Under ERISA, defined to be the Plan Administrator Not the typical TPA Is a fiduciary to the plan In today s world, generally the plan sponsor Has discretionary control over the plan including choosing providers for operation of plan Investment professionals TPA Recordkeeper Audit firm

16 Named fiduciary Files 5500 Interpret plan rules Determine QDRO s Engage providers Provide notices to participants Determine vesting Determine loans and hardship eligibility Procure bonds for the plan Etc.

17 Note, many TPA s perform the ministerial function noted on the examples, but are not 3(16) fiduciaries Generally, the TPA is simply following the plan rules. When issues erupt, the plan sponsor makes the discretionary call for interpretation

18 Plan sponsors can hire a 3(16) fiduciary Does not relieve the plan sponsor from the fiduciary choice of the provider Provider may only accept limited duties Some providers have been accepting ERISA 3(16) fiduciary responsibilities for quite some time Generally large multiple employer plans for smaller firms The 3(16) fiduciary can be a group of people such as a committee NADART- for auto dealers Pentegra- for banks

19 There has been a limited trend to asking providers to be a 3(16) fiduciary in certain roles The question shows up in RFP s by consultants Some providers are accepting 3(16) fiduciary for limited roles Loans Distributions Hardships Distribution of all plan notices Generally, typical administrative functions

20 Plan sponsor needs to be aware of what is being outsourced Probably not everything What is being retained by the plan sponsor? Plan sponsor still maintains the fiduciary obligation of having chosen the 3(16) fiduciary Must also continue to monitor performance

21 Selection of provider made solely in interest of participants and in prudent manner Qualifications of service provider Quality of service Reasonableness of fees Should be outlined in 408(b)(2) disclosure Verify that plan document allows delegation of services May need to amend plan to name 3(16) fiduciary

22 This concludes our discussion ANY QUESTIONS?

23 ACTUARY &EMPLOYEE BENEFITS Thomas Totten, CEO and Actuary Qualifications or certifications: Fellow of the Society of Actuaries, Enrolled Actuary, Member of the American Academy of Actuaries. Alumni: University of Notre Dame, B.S., Mathematics, Ball State University, M.A., Actuarial Science. PhD Candidate, Oklahoma State, Business Tom Totten is an actuary and chief executive officer of Nyhart, one of the nation s largest independent actuarial firms. As the firm s senior executive, he oversees the operation and strategic growth of the growing company in addition to continuing to consult as a senior actuary to a variety of national companies. Tom has a broad background in defined benefit and defined contribution consulting and is regularly turned to by CEOs, CFOs, and boards of directors on retirement and other employee benefit strategies, consulted with a number of Fortune 500 companies, as well as groups like local utilities and church organizations. Thomas.totten@nyhart.com

24 ACTUARY &EMPLOYEE BENEFITS Established in 1943, Nyhart is an ESOP with 110 employees and offices in Indianapolis, Chicago, Atlanta, St. Louis, Kansas City, Houston and San Diego. Areas of Expertise Include: Defined Benefit & Pension Defined Contribution & 401(k) Employee Stock Ownership Plan Flexible Spending, HRA & HSA Healthcare Actuarial Consulting Learn more at

25 ACTUARY &EMPLOYEE BENEFITS 22 Actuaries Consulting In 48 States. Nyhart is one of the nation s largest independent actuarial and employee benefit firms, consulting to and administering the plans for clients with more than $16 billion in assets. Our team of benefit advisers deliver personalized analysis and recommendations, translating complex calculations and issues into common language that enables corporations, associations, churches and governments to effectively manage their retirement and health care benefits.

26 DOL s Tips for Fiduciaries in Selecting Target Date Funds (TDF) Douglas G. Prince, CPA, AIF, PRP Chief Executive Officer DPrince@ProCourseAdv.com N. Meridian Street, Suite 135 Carmel, IN

27 DOL Guidance on Target Date Funds 1. Establish TDF Selection Review Process 2. Establish an Ongoing TDF Review Process 3. Understand the TDF s Investments 4. Review the TDF s fees and Investment Expenses 5. Consider if a Custom or Non-Proprietary TDF Makes Sense for Your Plan 6. Develop Effective Employee Communications 7. Take Advantage of Available TDF Information Sources 8. Document the Process 27 Source: JP Morgan Funds Journey Magazine Summer

28 Many industry reports indicate that TDFs will become the largest holding within plans in the future Volatile markets created significant ranges of returns for Target Date years Target Date Fund assumptions vary from vendor to vendor

29 Savings Rate Targeted Income Replacement Length of Savings Period Pre & Post Retirement Withdrawals Long Term Capital Markets Assumptions

30 JP Morgan* T. Rowe Price Vanguard Glide Path End Age 65 95, with retirement withdrawals beginning at Equity Allocation at age 65 35% 56% 50% Equity Allocation at End Age 35% 20% 30% Assumed employee savings rate 5%, increasing to 8% by age 44, then to 10% by age 59 6%-15%, depending on salary + 4% match on 1 st 6% Assumed years of savings % Active or passive Active Active Passive Cost Range % % % 2010 Fund return in fund return in Data from Morningstar Other assumptions made by fund families include salary levels & growth, withdrawal rates during and after accumulation period, capital market assumptions, sequencing of estimated future returns, economic scenarios, targeted replacement ratios, inflation, mortality, etc. *JP Morgan Smart Retirement Instl. Share Class,

31 Analyze current plan design Analyze participant demographics Necessary information from record keeper Active & terminated participant demographics Investment concentration areas Participation analysis Glide Path Analysis

32 Terminations (250 Participants) Time Between Termination Date & Distribution Date 90% 84% 80% 70% 60% 50% 40% 30% 20% 10% 6% 5% 5% 0% < Years To vs. Through Target Date Fund Considerations The above chart is sample data and is intended for educational purposes only

33 Disclosures ProCourse Fiduciary Advisors, LLC ( ProCourse ) is an SEC-registered investment adviser located in Indianapolis, Indiana. ProCourse and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC-registered investment advisers by those states in which ProCourse maintains clients. ProCourse may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. This document is limited to the dissemination of general information regarding ProCourse s investment advisory services to United States residents residing in states where providing such information is not prohibited by applicable law. Accordingly, the publication and dissemination of this document should not be construed by any client and/or prospective client as ProCourse s attempt to effect transactions in securities or the rendering of personalized investment advice for compensation. Furthermore, this document does not constitute the rendering of any legal or tax advice to any client or prospective client. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by ProCourse ), or product referenced directly or indirectly in this document, will be profitable. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or investment strategy will suitable for a client s or prospective client s investment portfolio. The information in this document should not be construed, in any manner whatsoever, as a substitute for personalized individual advice from ProCourse. Any subsequent, direct communication by ProCourse with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption from registration in the state where the prospective client resides. Information pertaining to the registration status of ProCourse is available on the U.S. Securities and Exchange Commission s website at This document and any graphic image, data, and other non-text based materials contained herein are proprietary to ProCourse and/or third parties. Any unauthorized use of the ProCourse Fiduciary Advisors, LLC name (or any variation thereof), or the graphic images and data contained in this document is prohibited.

34 Tim Ayler Partner, Greenwalt CPAs

35 Director of Employee Benefits at Greenwalt CPAs Member of the AICPA Employee Benefit Plan Audit Quality Center

36 80,000 Plan Audits 9,231 CPA firms performing audits $5.5 trillion in plan assets subject to audit Per Ian Dingwall, CPA Chief Accountant, DOL EBSA

37 83 CPA firms (less than 1% of firms) 30,000 audits (38% of audits) $4.2 trillion in plan assets audited (76% of assets audited)

38 9,148 CPA firms (99%+) 50,000 audits (62% of audits) $1.3 trillion in plan assets audited (24% of assets audited)

39 1 or 2 Audits 3-5 Audits 6-24 Audits Audits Audits Per Ian Dingwall, CPA Chief Acccountant, DOL EBSA

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41 What could go wrong in your Company s plan Develop checks and balances Monitor frequently

42 Review of record keeper information Obtaining proper certification for limited scope audit Reconciling deferrals/match submitted to the amounts received, by person and in total Consider an Investment Committee for oversight

43 Know what the Plan Document says about deferrals Are bonuses part of compensation? If yes, consider amending plan or have employee sign to not defer. When is a person eligible to defer? How are rehires treated? Breaks in service. When can deferrals be changed? Monthly, per pay, etc? No deferrals for 6 months after hardship withdrawal. When a participant changes their deferral percentage, maintain documentation, and notify payroll department.

44 Failure to remit, or untimely remittance of participant elective deferrals constitutes a prohibited party-in-interest transaction When are they required to be submitted? A Plan Sponsor is required to deposit 401(k) deferral contributions on the earliest date the employer can reasonably segregate the contributions from its general assets, but in no event later than the 15 th business day of the month following the month in which the employer withheld the contributions from the employee s paycheck. Untimely remittance can result in penalties, filing through the Voluntary Fiduciary Correction Program, including lost earnings

45 Does the Plan allow? Is there an immediate and heavy financial need? Is the hardship withdrawal needed to satisfy the need? Employer makes determination and keeps proper documentation.

46 Significant decrease in plan participation (20%) Plan Sponsor should be initiating conversations and checking with ERISA attorney regarding the facts and circumstances. Company contributions become fully vested for all affected participants, regardless of vesting schedule in plan document.

47 Vesting is defined in the Plan Document Upon termination, the payout and forfeitures are calculated upon request Improper calculation of vesting creates incorrect vesting of the participant

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