The Ledger Second Quarter 2013 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 Tax Reform On July 9, Senator Orrin Hatch (R-UT), Ranking Republican on the U.S. Senate Finance Committee, introduced the Secure Annuities for Employee (SAFE) Retirement Act. Pages 1-5 Beacon Alerts Page 6 The bill would establish a new type of state and local government defined benefit plan in which the government would purchase annuity contracts on behalf of eligible public employees, eliminating public employer plan underfunding. Retirement Services Guidance Page 7 Defined Contribution and defined Benefit Plan Compliance Calendars Page 8-11 The bill also includes a long list of private plan reforms including: L O Creation of a new automatic enrollment safe harbor and elimination of the 10 percent automatic escalation limit under the existing safe harbor. Allowing electronic delivery of all plan-related notices under the Internal Revenue Code and ERISA, including through a website (provided that participants have the right to obtain paper copies). Modification of the multiple employer plan rules so that a qualification violation by one or more participating employers does not necessarily disqualify the entire plan. Repeal of the top-heavy rules. C K T O N R E T I R E M Authors Sam Henson, J.D. Senior ERISA Counsel Lockton Retirement Services 816.751.2245 shenson@lockton.com Jessica Skinner, J.D. Compliance Attorney Lockton Retirement Services 816.960.9295 jskinner@lockton.com E N T S E R V I C E S
Enhancement of the small employer tax credit for new plans, to as much as $5,000. Expansion of the IRS correction program (EPCRS) to apply to certain IRA errors and governmental 457(b) plans. Consolidation of certain participant disclosures. Establishment of benchmarks for target date funds that more accurately reflect their mix of asset classes. Creation of a new safe harbor for selecting an annuity provider for distributions under a defined contribution plan. Updating of the life expectancy tables (to reflect longer life expectancies) for purposes of the minimum required distribution rules. Allowing in-plan annuities to be rolled over to an IRA if the employer stops offering the in-plan annuity as an investment option. Finally, the bill would transfer authority for IRA-related prohibited transaction issues from the DOL to Treasury. In addition, the bill would give Treasury and DOL joint jurisdiction over regulations interpreting the prohibited transaction rules applicable to employer-sponsored plans. Fiduciary Definition On June 19, the House of Representatives Committee on Financial Services approved a bill (the Retail Investor Protection Act ) that would delay the DOL s quest to redefine an ERISA fiduciary. The bill prevents the DOL from defining the circumstances under which an individual is considered a fiduciary until after the SEC issues its own rule relating to standards of conduct for brokers-dealers under the Dodd-Frank Act. The bill is aimed at slowing down the rule-making process at both the SEC and DOL on the definition of a fiduciary, and to get both agencies to work together in forming a uniform fiduciary standard. It remains to be seen how much momentum this legislation has in Congress. The bill has also been referred to the House Education and Workforce Committee, which has jurisdiction over ERISA and the DOL. Members of that committee could be skittish about making the DOL dependent on the SEC with regard to this issue. Also, it is unlikely that the Senate has the appetite to pass legislation affecting rules that have yet to be written. 2
Second Quarter 2013 The Ledger ESOP Appraisers On May 17, Congressmen Brett S. Guthrie (R-KY), David Loebsack (D-IA) and Congresswoman Lynn Jenkins (R-KS) introduced in the House of Representatives a bill that would block any regulatory efforts by the DOL to treat appraisers of ESOP stock as fiduciaries for purposes of ERISA. A similar bill was earlier introduced in the Senate by Senator Kelly Ayotte (R-NH) in February. The DOL had previously issued a proposed amendment to its existing regulations that would greatly expand the definition of fiduciary. Included among the expanded class would be appraisers of plans including ESOPs. While the original proposed amendments have been withdrawn, the DOL has indicated its intent to re-propose amendments to the regulations. The intent of the current bill is to make it clear that ESOP plan appraisers should not be an ERISA fiduciary and rather that rules should be implemented to ensure only qualified individuals prepare valuations for benefit plans and those individuals follow recognized valuation standards. This bill interestingly points out that ESOPs have a positive record of sustaining jobs. According to the 2010 General Social Survey, ESOP companies laid off employees at a rate of 2.6 percent in 2010, whereas the rate for conventionally owned companies was 12.1 percent resulting in the fact that ESOP companies employees, in the aggregate, save the federal government $7 for every dollar it spent promoting employee ownership. Regulatory Update Annual Participant Fee Disclosure On July 22, the DOL issued Field Assistance Bulletin (FAB) 2013-02, providing temporary enforcement relief from fee disclosure requirements, allowing plan sponsors to reset the timing of the annual participant notice. Under last year s 404a-5 rules governing fee disclosure for participant-directed individual account plans, plan administrators must annually disclose detailed investment-related information to plan participants and beneficiaries about the plans designated investment alternatives in the form of a comparative chart. The 404a-5 rules require that the disclosure be provided at least once in any 12-month period for both calendar or fiscal-year plans. The DOL is now giving employers a single opportunity to reset their annual deadline for the 2013 or 2014 disclosures to align the comparative chart with other participant disclosures. If a plan that has not yet furnished the 2013 disclosure, they will have until 18 months after the 2012 disclosure was provided to issue the new disclosure. For plans that have already furnished or intend to furnish the 2013 disclosure, they may furnish the 2014 disclosure no later than 18 months after furnishing the 2013 comparative chart. Plans may use the relief only if the responsible plan fiduciary determines that doing so will benefit the plan s participants and beneficiaries. This enforcement policy does not alter a plan administrator s obligations under the regulation to timely update the investment information that is available at the plan s internet web address or to notify participants about changes to investment information, such as a new plan investment option. 3
Lifetime Income Disclosures On May 7, the DOL revealed new details of lifetime income disclosure rules being considered for defined contribution retirement plans. The DOL is exploring whether and how the individual benefit statement must present a participant s accrued benefits in a defined contribution plan as a lifetime income stream of payments as well as in the form of an individual account balance. Although the DOL has not indicated if this will be a mandate, the language of the proposal appears to indicate that the DOL is strongly leaning toward requiring the lifetime income disclosure. Specifically, the DOL is considering the following requirements in benefit statements: A lifetime income illustration converting the participant s current balance as if the participant (or beneficiary) had reached normal retirement age under the plan, even if he or she is much younger; Another lifetime income illustration using a projected balance to normal retirement age, based on assumed future contribution amounts and investment returns; Both income streams would be (1) presented as estimated monthly payments based on expected mortality, and (2) if the participant is married, include a projection based on the joint lives of the participant (or beneficiary) and spouse (based on a 50 percent survivor annuity); and An understandable explanation of the assumptions behind the illustrations and a statement that projections and lifetime income stream illustrations are estimates and not guarantees. Revenue Sharing On July 3, the DOL issued Advisory Opinion 2013-03A addressing whether certain revenue sharing payments constitute plan assets under ERISA. The advisory opinion described a common practice among 401(k) plan record-keepers, which involves offering plan clients the ability to capture some benefit from revenue sharing in the form of so-called ERISA budgets. Many financial institutions that provide record keeping and other administrative services to ERISA plans typically make available a variety of investment options to participant directed defined contribution plans. The financial institution receives payments from some of these investments s in the form of Rule 12b-1 fees, shareholder or administrative services fees, and similar payments. Generally, these payments are taken into account in establishing the recordkeeper s fee to its plan clients. Thus, the service provider may retain the revenue sharing payments, but will negotiate agreements with plans to maintain a bookkeeping record of amounts received with reference to the plan s investments and to provide credits to the plan based on a formula or methodology referenced in the services agreement. This arrangement allows the service provider to apply these credits to pay for plan expenses, such as the costs of services provided by accountants, actuaries, consultants or attorneys to the plan. Instead of, or in addition to, offsetting the cost of plan expenses, a service provider may also contract with the plan to deposit amounts equal to these revenue sharing credits directly into an account maintained on behalf of the plan. Under both types of arrangements, the agreement between the plan and the service provider does not require the service provider to segregate any portion of the revenue sharing payments for the benefit of the plan, nor do plan participants or plan fiduciaries receive any representation to that effect. 4
Second Quarter 2013 The Ledger The DOL has concluded that the revenue sharing payments are not plan assets where the plan itself does not actually receive the revenue sharing payments, but receives credits which are calculated by reference to the amounts received by the plan s service provider. However, any credits that are actually paid into the plan s account would become the plan s when placed in the plan s trust account. While the revenue sharing amounts themselves are not plan assets, the DOL concluded that the plan s contractual right to benefit from the revenue sharing payments would be a plan asset. Thus, in any cases that the recordkeeper failed to pay amounts as required under the contract, the plan s claim for credits or expense payments would be an asset of the plan. Courts Update Definition of Marriage On June 26, the U.S. Supreme Court officially struck down the federal Defense of Marriage Act (DOMA) in United States v. Windsor. DOMA, enacted in 1996, provided that the word marriage in any federal law or regulation (including those that address employee benefits) means only a union of a man and a woman. Here, the Court ruled that the law is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment. The decision raises a number of questions related to employer sponsorship of retirement benefits for employees and their spouses. It will be important for regulatory agencies such as the IRS to issue further guidance to clarify the implications of the Court s decision. Most notably, the decision will have an immediate impact on QDROs, death and survivor benefit payments and beneficiary designations. Guidance is expected soon. Fiduciary Warranty Provisions In Santomenno v. Transamerica Life Ins. Co., a plan participant from two different retirement plans filed a class action lawsuit against Transamerica Life Ins. Co. alleging numerous fiduciary violations of ERISA. In an interesting note from this case, the court criticized the fiduciary warranty provision included in the plan s contracts. The court said the fiduciary warranty provided to the plan sponsor by Transamerica was a breach of fiduciary duty because it benefited the employer but was paid for by participant plan assets. The court found that instead of an insurance company bargaining with the plan (who is seeking to obtain the best rate for itself in its insurance purchase), Transamerica was bargaining with an employer (who is not in fact bearing the financial burden of the insurance, though it would reap the benefits). Because the contract does not appear to have been negotiated at arm s length by the plan, Transamerica could not shield itself behind the contract from an alleged breach of duty when participants sued. 5
Beacon Alerts, Year-to-Date Fee Reset July 23, 2013 On July 22, 2013 the United States Department of Labor s Employee Benefits Security Administration (EBSA) issued Field Assistance Bulletin No. 2013-02, allowing retirement plan sponsors to reset the timing for the annual distribution of the investment comparative chart required under last year s participant fee disclosure rule (Sect. 404a-5). The Supreme Court s DOMA Decision: Its Impact on Retirement Plans June 27, 2013 On June 26, the Supreme Court of the United States struck down the 1996 Defense of Marriage Act (DOMA) as unconstitutional stating that it had no legitimate purpose. The Court found that DOMA s avowed purpose and practical effect was to impose a disadvantage, a separate status and a stigma upon all who enter into same-sex marriages made lawful by the authority of the States. Fiscal Cliff Legislation Affects Retirement Plans January 3, 2013 As part of a last-minute deal to avoid automatic tax increases and spending cuts that would have kicked in with the new calendar year commonly referred to as the fiscal cliff Congress has approved, and President Obama has signed, the American Taxpayer Relief Act of 2012 (H.R. 8). 6
Second Quarter 2013 The Ledger Retirement Services Guidance, Year-to-Date DOL Looks to Require Lifetime Income Disclosures May 30, 2013 Recently, the United States Department of Labor (DOL) issued an Advanced Notice of Proposed Rulemaking (ANPRM) that would require benefit statements to reflect what a participant s account balance would look like as a lifetime income stream. DOL Wants to Know Has Your Committee Been Trained? April 5, 2013 At some point, every retirement plan sponsor is likely to receive an audit notification from the United States DOL. At Lockton, we are often asked by plan sponsors to assess their risk of being selected for audit, or unfortunately for some, to assist them in navigating a current audit. Over the last few months, we have noticed an increase in retirement plan audits, and surprisingly the DOL is now requesting specific evidence of a committee s fiduciary training. Can You Amend a Safe Harbor 401(k) Plan? February 11, 2013 As the economy picks up and employers are better able to fund their contributions, Safe Harbor 401(k) plans are experiencing a resurgence in popularity. Unfortunately, the IRS has decided to focus its audit efforts on these plans, targeting employers that have failed to make the required Safe Harbor contributions. 7
Defined Contribution Plan Compliance Calendar Third Quarter July 2013 July 28 Distribute SMM. Affected Participants. No filing requirement. July 31 Distribute annual benefit statements for 2012 plan year (only for nonparticipantdirected plans). Participants and beneficiaries with accounts. No filing requirement. 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. July 31 Form 8955-SSA. IRS. Annual registration statement identifying separated participants with deferred vested benefits August 2013 August 1 Form 5500. Sent to participants and beneficiaries on written request. Filed with DOL. Electronic filing is required. August 1 Form 5558 (5500 Extension). August 15 Distribute 2nd Quarter 2013 Benefit Statements. August 31 Annual Disclosure of Plan Fees and Expenses. 1 IRS. 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. Annual report filed by employee benefit plans subject to ERISA and IRC 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 first day of 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. To request extension of time in which to file Form 5500 or Form 8955-SSA or both (maximum 2½ months). 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 08/30/12. If initially provided 08/30/12, 2013 deadline would be 08/30/13, otherwise within one year after last provided. 8
Second Quarter 2013 The Ledger August 2013 (Continued) August 31 Section 404(c) Disclosure. 2 August 31 File Form 5330 Return of Excise Taxes Related to Employee Benefit Plans. Sent to participants and beneficiaries. No filing requirement. IRS. Regulations under ERISA 404(c) require notice if plans want to limit fiduciary liability for participant and beneficiary investment decisions. DOL s new participant and fee regulations under 2550.404a-5 require all plans with participant direction to provide information that previously only 404(c) plans had to provide. As a result, a 404(c) plan must make expanded 2550.404a-5 disclosures. In addition, a 404(c) plan, as before, must provide a participant with an explanation that plan is intended to be a 404(c) plan and thus fiduciaries may be relieved of liability for losses resulting from participant s investment instructions. Deadline for filing Form 5330 Return of Excise Taxes Related to Employee Benefit Plans used to report and pay excise taxes on prohibited transactions and excess 401(k) plan contributions that occurred in prior year. 1 Only DC plans with Participant-Directed Investments 2 Only DC plans with participant-directed investments that want protection under 404(c) September 2013 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. 9
Defined Benefit Plan Compliance Calendar Third Quarter July 2013 July 15 3rd quarterly contribution due. Plan Custodian. Make quarterly contribution to the plan if applicable. July 29 Distribute SMM. Affected Participants. No filing requirement. Distribute Summary of Material Modification (SMM), if required. Distribution of an updated SPD satisfies this requirement. July 31 File Form 8955-SSA. IRS. Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits, if no Form 5558 submitted for extension. July 31 File Form 5500. Sent to participants and beneficiaries on written request. Filed with DOL. Electronic filing is required. July 31 File Form 5558 (If 5500 Extension Needed). July 31 File Form 5330 Return of Excise Taxes Related to Employee Benefit Plans. IRS. IRS. Annual report filed by employee benefit plans subject to ERISA and IRC 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 first day of 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. To request extension of time in which to file Form 5500 or Form 8955-SSA or both (maximum 2½ months). 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. August 2013 August 14 File PBGC Form 10. PBGC. PBGC Form 10 Filing Due if the July 15 quarterly plan contribution was missed by more than 30 days. 10
Second Quarter 2013 The Ledger September 2013 September 13 Certify AFTAP. Plan Administrator. No filing requirement. September 30 SARs. 1 Sent to participants and beneficiaries. No filing requirement. Plan actuary must generally certify the final AFTAP of the plan for the current plan year; otherwise, the AFTAP is deemed to be less than 60% for the remainder of the plan year or until the AFTAP is certified (if later). If the certified AFTAP is at least 60% but less than 80%, certain restrictions apply, including the partial restriction of certain forms of payment. If the certified or deemed AFTAP is less than 60%, benefit accruals are frozen and certain restrictions apply, including the restriction of certain forms of payment. If a restriction comes into effect, the sponsor must distribute ERISA 101(j) Notice to all participants and beneficiaries no later than 30 days after the effective date of the restriction. Narrative summary of financial information reported on Form 5500 and statement of right to receive annual report. Model notice language is provided by 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). 11
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 www.lockton.com 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 0G13569. 2013 Lockton, Inc. All rights reserved. Images 2013 Thinkstock. All rights reserved.