Benefits Biz Blog

Sen. Baucus Marks Out Turf on Health Care Reform

Written by: Nick Curabba

Wasting little time to begin the debate over health care reform, Sen. Max Baucus (D-MT), chair of the Senate Finance Committee wrote to President-Elect Barack Obama just two days after the November 4 election to announce a forthcoming plan to "move forward on health care reform in the early days" of the next Congress. Sen. Baucus revealed little in the way of details about his plan in his letter to the  President-Elect, but did outline five key principles that are, in his words, "essential to successful reform."

Those key principles are:

(1) achievement of universal coverage utilizing a mix of public and private solutions;

(2) use of pooling arrangements that will supplement (replace?) the employer-based system and the individual market, neither of which does Sen. Baucus believe can provide "affordable, portable, quality coverage";

(3) realization of cost controls by manipulating the tax code and searching for efficiencies elsewhere in the health care market;

(4) emphasis on illness prevention as a way to avoid "needless suffering and the high costs of treating" a preventable sickness; and

(5) ensuring that individuals, employers, and government all play a part in "creating and funding" a new system of delivering health care.

The full details of the plan are expected to be released this week, and action on legislation will likely begin as soon as the 111th Congress convenes in January 2009.

403(b) Talk on YouTube

Written by: Nick Curabba

Kudos to the National Association of Government Defined Contribution Administrators (NAGDCA) for bringing Bob Architect to the YouTube generation. Following the link here will bring you to a series of informal, yet very informative, discussions with the IRS guru for 403(b) plans. As the time fast approaches for school districts, tax-exempts, and other 403(b) plan sponsors to become compliant with new regulations, Mr. Architect provides some general guidance on topics such as:

• the written plan document requirement
• effective dates for compliance
• elective deferral ordering; and
• plan termination, among others.

Granted, it's not the standard YouTube fare. But riveting stuff for true 403(b) wonks.

Change Election Produces Little So Far on the Hill

Written By: Nick Curabba

Despite the undeniable impact the "change" element had in the Presidential election, as BNA reported this morning, the leadership of the key Congressional committees with jurisdiction over employee benefit matters in both the House and Senate will likely remain the same next year.  At least in terms of benefits-related issues, then, it would appear that we can pretty much know what to expect.

We know, for instance, that Charlie Rangel (D-NY) will return to chair the tax-writing House Ways and Means Committee. Despite reports that Rep. Rangel was "embattled" over revelations of incomplete income tax filings, he was easily reelected to his 20th term by an overwhelming margin of 88% - 9%.  George Miller (D-CA) will return to the House Education and Labor Committee for his 18th term, defeating his opponent with 73% of the vote. 

In the Senate, Sen. Ted Kennedy, who was not up for reelection this year, will apparently retain control of the Health, Education, Labor, and Pensions Committee.  There had been some early talk that Sen. Chris Dodd (D-CT), who is the second-ranking Democrat on the HELP Committee, might make a move for the gavel, but reports are now that Sen. Dodd will retain his chairmanship of the Senate Banking Committee instead.  On the Finance Committee, Sen. Max Baucus (D-MT), who won his own reelection with a convincing  73% of the vote, will continue to control the gavel for the Senate Finance Committee.

The leadership and composition of these committees is the best way to get an early forecast on the benefits legislation that may crop up next year.  For instance, with Rep. Miller continuing to head the Education and Labor Committee in the House, we are sure to see a reintroduction of fee disclosure legislation.  We are also expecting more sweeping benefits legislation addressing the impact the financial crisis is having on retirement plans.

It is still much too early to tell how the election will impact the regulatory agenda of the Department of Labor and the Internal Revenue Service.  At this time, we basically know two things for sure: 1) the politically appointed heads at DOL and Treasury/IRS will likely not continue in their current roles, and 2) on-going regulatory initiatives will likely continue for the time being. 

For instance, although we will probably see a new head of the Employee Benefits Security Administration, there is little likelihood that the three-prong fee disclosure initiative the Department is currently engaged in will cease or be terminated.  Indeed, to the extent the service-provider disclosure (sec. 408(b)(2)) regulations and the participant disclosure (sec. 404) regulations are not finalized by the end of this year, it may be possible to see even more aggressive rules under the new agency leadership.

Continue to watch this space for updates on legislative and regulatory developments as they unfold in the "new Washington."

RMDs Make the Big Time

Written by: Nick Curabba

While the world's finance chiefs convened over the week to staunch the global market collapse, U.S. Presidential candidates John McCain and Barrack Obama were proposing one "fix" in particular that grabbed our attention: modifying the section 401(a)(9) rules on required minimum distributions.  We're not sure if it's a sign of policy enlightenment or something more ominous, but we are quite certain that it is the first time in American history that both major party candidates have discussed the RMDs in any context during a Presidential campaign.

During his October 10 stump speech in LaCrosse, WI, Senator McCain suggested one way to protect American investors from the global financial market melt-down would be to suspend the rules that "mandate that investors must begin to sell off their IRAs and 401Ks when they reach age 70 and one half." 

Not to be out done, the Obama campaign later the same day issued a statement supporting the concept, according to an article in Plan Sponsor magazine.  As described in the article, Senator Obama's proposal would rely on immediate action by the Treasury Department to suspend the RMD rules, while it seems Senator McCain may have been talking about a legislative fix to section 401(a)(9) of the Code.

It seems an oddly narrow response to the current situation, and perhaps unnecessary since in-kind distributions are permitted to satisfy the RMD rules (as was pointed out by the left-leaning political blog Talking Points Memo). What we can fairly promise is that this will not be the last proposed rule change affecting retirement plans as a result of the Crash of '08. 

LaRue and the Participant Disclosure Regulations

Written by: Bob Toth

We have commented in the past on how the REAL impact of the DOL’s “three pronged” disclosure effort lies not in each discrete set of rules, but in how they interact with each other.  Our friend and fellow blogger Jerry Kalish, at National Benefit Services has wryfully dubbed this effect as “The Three Amigos.” This will be tough enough, but their impact gets even more complicated when you take a look at the interplay of the Supreme Court’s decision in LaRue v. DeWolff, Boberg & Associates with the Three Amigos.

Let’s look at the proposed participant disclosure regulations as an example.  The regs are striking because they were made a part of ERISA’s fiduciary rules, not part of its reporting and disclosure rules. This means that a fiduciary would be engaging in a fiduciary breach by failing to provide participants with the information required by the regulation within the time proscribed by that reg.

The LaRue impact?  That case clarified that a plan participant can sue a fiduciary for money damages even if the only harm suffered as a result of the alleged fiduciary breach was felt by one individual account.  Let’s say that a plan failed to provide to plan participants the required quarterly disclosure outlining the amount of plan administrative fees charged against individual accounts in a quarter.  Would not, under LaRue, plan participants be entitled to bring a fiduciary lawsuit against the “responsible plan fiduciary” for failure to properly disclose?  The impact could be significant.  

Let’s even take this a step further and look at section 408(b)(2). Assume that the plan level charge that is required to be disclosed quarterly doesn’t make sense when compared to the data disclosed under the 408(b) (2) regs. It seems that LaRue grants participants the right to pursue fiduciary claims related to these instances as well, as engaging in a non-exempt prohibited transaction is also a fiduciary breach.

We may be seeing the opening of the proverbial Pandora’s box.

Retirement Plans and the Troubled Asset Relief Program

Written by Both Toth and Nick Curabba

Set against the dramatic House vote and ensuing market plunge yesterday, it might be easy to overlook the possible direct implications the Emergency Economic Stabilization Act might have had (and still may have) on qualified plans. 

The centerpiece of the Administration's proposal to rescue the financial services industry was to be the creation of a Troubled Assets Relief Program, or TARP.  Under TARP, the Secretary of Treasury was to be given broad discretion to purchase troubled assets from banks and other entities that hold what has come to be known as "toxic paper."  As defined in the legislation, the Treasury Secretary was authorized to buy from financial institutions any "residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability."  Other types of instruments could later be defined as "troubled" by the Treasury Secretary after consultation with the Fed Chairman.

Ok, first question: Why should plan sponsors and service providers care about legislation targeting financial institutions?  The term "financial institution" is defined in the bill to include banks, insurance companies, savings associations, and broker/dealers that hold troubled assets.  The list of financial institutions is non-exhaustive, however, and the House drafters were careful to say other similar types of entities could fall into the definition.  At first blush, though, even with a broad definition of "financial institution" it seems like a stretch to put qualified retirement plans in the same category as a bank or insurance company.  But another section of the bill would have directed the Treasury Secretary to do just that.

When considering which troubled assets should be purchased, the Treasury Secretary would have been required to consider, among other things, purchasing troubled assets held by or on behalf of qualified pension plans, section 457 plans, and section 403(b) plans.  So, if this bill had been adopted, any plan out there holding a troubled asset would have had to consider participating in TARP.  Not surprisingly, the bill contains no guidance or relief to plan fiduciaries on that decision, perhaps inviting by silence stronger regulatory oversight from the Treasury or Department of Labor on how pension plans will participate in the program.

Second question: Why should we care about a bill that is defeated?  Clearly the final rules are not yet fleshed out, and we do not know what the new proposals will look like or even if there will be a final package. But the original effort gave us some clues as to what some in the Administration and Congress are thinking.  There is no indication that the authority to buy troubled assets from retirement plans was a particularly controversial component of TARP. If Congressional negotiators pick up the fallen bill and work around the edges to attract an additional dozen or so votes needed for passage, the authority to purchase plan assets may survive. 

In anticipation of that possibility, we've started to think about just how it would work. It will be interesting to see what sort of product issues arise involving insurance company separate accounts and general accounts, as well as collective trusts. How will mutual funds be affected? What prohibited transaction rules will be involved, if any?  What kinds of disclosures to participants will be required, and how will it impact the new proposed Department of Labor regulations?  Will a fiduciary be able to rely on the Treasury Secretary's valuation of the troubled asset without being exposed to fiduciary liability for selling a plan asset for too little?  And something odd … it seems that those self-directed brokerage accounts in 401(k) plans will be covered as well.

As always seems to be the case with complex legislation, an initial review leads us to believe that there is more complexity here than meets the eye.

One of the most nagging issues related to distributing annuities from defined contribution plans is how and when to apply the spousal consent and qualified joint and survivor annuity ("QJSA") rules to distributions.  We can list the "basic" rules (although as with most tax-related benefit rules, "basic" is really a misnomer):

RULE 1: Electing annuity payments directly from a DC plan triggers the standard spousal consent and QJSA rules.  That generally means any type of annuity distribution that differs from a standard, statutorily defined QJSA first requires a notarized waiver from the participant's spouse.

RULE 2: Rule 1 applies to annuity payments, UNLESS the starting date of the annuity is deferred.  This is treated as an "in-kind" lump sum distribution, to which the same rules apply as would to a lump sum distribution (which is another way of saying that no spousal consent will be required).  

RULE 3: Even "withdrawals" from that "distributed annuity" contract will only be subject to the lump sum distribution rules, and not be considered annuity payments in the application of the spousal consent and QJSA rules. This generally means that systematic withdrawals or periodic partial lump sum distributions from the distributed annuity would generally not be subject to the spousal consent/QJSA rules.

RULE 4: The point at which payments from that deferred contract become "annuitized" is when spousal consent rules/QJSA rules apply.  This means different things for different contracts.  Lets try a couple of examples:

·                  Example 1.  The distributed annuity contract allows the former participant to elect to start guaranteed monthly payments at any time before his or her 65^th birthday.  The spousal consent and QJSA rules will apply at the point of the election to start taking lifetime payments.

·                  Example 2.  The distributed annuity contract has an account balance and guarantees that an amount equal to 5% of the original account balance will be paid out over the former participant's lifetime, even after the account balance runs out.  As long as there is an account balance, the payments are merely lump sum withdrawals. Once the account balance runs dry, and the payments are being made from the insurance company's assets, annuitization has occurred.  This means that the spousal consent and the QJSA rules will apply at that point.

The practical effect? If the guaranteed lifetime payout (here, the 5%) does not equal what a QJSA would be (and payable as a survivor annuity to the spouse), spousal consent may be required. If the spousal consent is not obtained, then the guaranteed amount may need to be adjusted to meet the QJSA standards.

In any event, it appears that naming a beneficiary other than the spouse-without the proper consent-on the distributed annuity which has not yet been "annuitized" may also be a problem which could cause "disqualification" of the distributed annuity.

403(b) Rollovers vs. 403(b) Exchanges

Written by: Bob Toth

The DOL's New Math: Form 5500 + 408(b)(2) = Fireworks

Written by Bob Toth

"Were there any nonexempt transactions with any party in interest?"

Plan administrators have been answering that question (or versions of it) on Form 5500 for years, as part of either Schedule H (for large plans) or Schedule I (for small plans).  In the past, answering the question has largely been a simple matter of looking for the "usual suspects" of delinquent deposits, excessive participant loans or other obvious financial transactions of the plan.  That world, however, is about to change.

We have said from time to time (for example, see our posts on 408(b)(2)) that one of the most challenging aspects of the DOL's "three pronged effort" at forcing greater transparency isn't complying with any of the three sets of rules in isolation.  Since they individually are sensitive in many ways to the administrative concerns of employer and service providers,  the biggest challenge is what happens when you put all three sets of rules together. 

The proposed service provider regs are a classic example.  The failure of a service provider to properly update in a timely manner its disclosure to the "responsible plan fiduciary" makes the receipt of direct or indirect compensation (including, by the way, things like 12(b)-1 fees) by that "untimely" provider a prohibited transaction.  If a fiduciary doesn't report this failure to the DOL, that fiduciary may be jointly liable for the prohibited transaction penalties related to the receipt of those funds by that service provider.

This may or may not be a significant penalty, depending upon the size of the compensation.  Where the fiduciary may really get hurt, however, is in the answer to Line 4(d) on either Schedule H or I on the Form 5500, which asks for an affirmation that there has been no non-exempt prohibited transaction.  If the plan administrator doesn't list the payment of that comp to the "untimely" provider, or if the administrator incorrectly answers "no" to that question, the DOL can then consider that 5500 incomplete and assess penalties. Now THIS can get hugely expensive, with potential penalties which may far exceed those assessed for the prohibited transaction itself.  And don't think this is a problem just for the larger plans which need to file audited financial statements. This also applies to the small plans, under Schedule I.

Let the fireworks begin.