Benefits Biz Blog
Baker & Daniels' BEC Team: March 2008 Archives
ERISA and Mom
ERISA wonks such as ourselves tend to get lost in the press of details which seem to flow non-stop from our regulators and legislators in D.C. It is sometimes helpful to step back and see the personal impact of the things we do.
A few years back, a good friend of mine who ran the retirement plan operations of a large insurance company asked me to speak about ERISA to a meeting of his administrative processing staff. At the time, they were still struggling with some of the more difficult administrative processes related to the QJSA and QPSA rules. Here's what I told them:
My father died at Ford's Rouge Plant in 1970, after 20 years with the company. Back then, the normal form of benefit under a defined benefit plan was a single life annuity, covering the life of only the employee. There was no such thing yet as a qualified joint and survivor annuity or a qualified pre-retirement survivor's annuity. This meant that my father's pension died with him. My mother, the typical stay-at-home mother of the period was depending on that pension benefit for the future, but was left with nothing. With my father's wages topping at $13,000 annually and five kids at home, there was also little chance to accumulate savings.
The Retirement Equity Act of 1984 (a copy of which I still keep in my office) was designed to change all of that. By implementing the requirement of a spousal survivor annuity, a whole class of non-working spouses received protection which was desperately needed. So in that speech to my friend's administrative staff, I asked them to take a broader view, for just a moment, of the important task they were being asked to implement. It was valuable social policy with real, human effect which they were responsible for pulling off, and they should take a measure of pride in the work they were doing.
Things have evolved much over the years, and some of those same rules which provided such valuable protection often now act as an impediment to important new benefits like guaranteed lifetime income from defined contribution plans. But the point is that Congress sometimes gets it right, and there is very valuable social benefit often hidden in the day to day "grunge" of administering what often seems to be silly rules.
Mom, by the way, is still alive and doing well.
Supreme Court Turns Back AARP
Written by: Nick Curabba
It looks like SCOTUS knows how to turn down an ERISA case, after all.
In a term that has seen the High Court hand down a landmark decision in LaRue, and grant certiorari in two other cases with significant potential ERISA implications, the Justices yesterday let the Third Circuit Court of Appeals ruling stand in AARP v. EEOC. The decision to deny cert. effectively ended a nearly decade long legal battle over the application of federal age discrimination laws to retiree health insurance benefit plans.
At issue before the Court was a Third Circuit decision upholding the validity of EEOC regulations that permit employers to coordinate their retiree benefit plans with Medicare eligibility. Those regulations, which were challenged by the AARP, were promulgated by the EEOC following outcry from plan sponsors over a prior decision by the Third Circuit in 2000 striking down as age discriminatory the practice of providing higher retiree health benefits to pre-Medicare eligible retirees.
Following that decision in Erie County Retirees Association v. County of Erie, plan sponsors and their trade associations, together with organized labor groups, engaged in vigorous advocacy to convince the EEOC to reverse its position and permit plan coordination with Medicare. They were able to successfully argue the retiree benefit plans – a voluntary offering by employers – would simply no longer be provided if the Erie County decision were left in place.
The decision not only caps an extremely successful lobbying and legal campaign by the top benefits-related trade associations in D.C. against the extraordinarily powerful AARP, but may also result in more retiree health plans being offered by employers and unions in the future.
The case also serves as a reminder – if one is needed – that despite ERISA's strong federal preemption of state laws, other federal laws, like the Age Discrimination and Employment Act, and federal securities laws do impact benefit plans and must be taken into consideration. As we have pointed out in the past, securities laws are certainly making their presence felt more and more in the benefit plan world, particularly with 403(b) plans. The practice of law in this area, we think, will increasingly depend on a grasp of a diverse set of laws enforced by various federal agencies that often are themselves not coordinated.
Studies Support DC DB-ification
Written by: Nick Curabba
The very good and frequently updated Retirement Plan Blog by Jerry Kalish at National Benefits Service last week reminded us again that the world as we know it is about to change. Or maybe it already has. Mr. Kalish suggests that in the coming years, the new buzz word that will be on the lips of everyone in the retirement security marketplace will be "decumulation," or the act of converting a lifetime of savings into retirement income for life.
Two recent studies from financial services firms back his claim up, too. One, entitled "Creating Next Generation Glidepaths for Defined Contribution Plans," by Seth Ruthen at PIMCO, argues that "fundamental changes in the U.S. retirement system are forcing individuals to assume more risk and responsibility for providing their own retirement income." The other, by the Russell Investment Group, is entitled "401(k)s: The Launch of Version 2.0," and it asserts that the purpose of the 401(k) plan has changed over time to become the "primary savings vehicle for millions of Americans," yet many individuals are not equipped to manage their own savings and retirement income strategies.
Both studies similarly suggest that at least one partial response to this rapid transformation of the marketplace will be a heavier reliance on features pulled from the defined benefit plan world. As this revolution in the retirement plan landscape continues, both studies provide some interesting theoretical ideas and practical advice on how to bridge the gap between the "old" system and the "new."
'Distributing' 403(b) Annuities
New 403(b) Regulations Raise More Questions Than Answers
Written by: Bob Toth
The IRS's decision to permit the termination of 403(b) plans, and the distribution of its assets, raises a new issue which vendors, plans and plan participants have never had to deal with in the past: can you distribute an annuity upon 403(b) plan termination, how do you do it, and how is such a distribution treated?
The distribution of annuities has long been a feature of 401(a) plans, in the form of something called a "qualified plan distributed annuity contract," (see, for example, Sec. 31.3405(c)-1 Q-13). Few people outside of the insurance industry are familiar with these creatures, but they have served as the basis for distributing assets from terminating defined benefit plans for over 70 years. They are also able to be used for distributions from defined contribution plans and those amounts are not includable in income until actually distributed from the contract. Though they are not IRAs, assets can be rolled into and out of them as if they were part of a plan.
Under the new 403(b) regulations (a topic about which we have blogged several times: here, here, and here), however, the IRS tells us that we can distribute a "fully paid individual insurance annuity contract" from a terminated 403(b) plan (see, e.g. 1.403(b)-10(a)(1)). How is this done? Presumably its done by an internal transfer (where group arrangements are in place, or where mutual funds are involved), then followed by a distribution. With individual contracts, it seems to be merely a recordkeeping entry that would need to be done. Is it correct to assume that the terms of information sharing agreements would reflect that such contracts are no longer subject to their terms?
According to the new regulations, this distributed annuity does not lose its status as a 403(b) contract. Does this mean that we'll have a class of annuity contracts for which no employer is involved, and to which the current rules do not apply? Can the vendor now rely upon employee representations related to hardships and loans? What of the lack of a written plan document? Can these contracts be transferred into another 403(b) plan at the participant's election? Upon the distribution of the contract, does the amount need to be reported on Box 8 of the 1099-R?
The regs clearly do not address these and other questions related to the distribution of annuity contracts upon the termination of the 403(b) plan, but we will need to find answers.
IRS Agents Reprimanded
Written by Nick Curabba
Practitioners have been grumbling for some time about the often quirky way in which the Internal Revenue Service administers its determination letter program, but it’s not often that the Service gets called to the carpet by a federal district court judge for “extortionary, deplorable, and wrong” behavior. A clearly exasperated Judge Rodney S. Webb of
Most of the underlying facts in the case are unremarkable. Jewell’s former law firm served as a plan sponsor of four prototype plan documents, which it provided to its clients. Following the series of legislative amendments to the tax code known colloquially as the GUST amendments, Jewell began the process of amending the prototype plans and adoption agreements. Updated plans were filed for approval by the Service within the remedial amendment period, but the Service later found errors and asked Jewell to make corrections. Jewell made corrections and re-filed the plan document.
Perhaps betraying his concern about the timeliness of the prototype plan amendments, Jewell took the step of filing for an individual determination letter for each of his firm's clients, which the Service granted. Rather than leaving well enough alone, after receiving the favorable individual determination letters, the law firm updated the prototype plan accordingly and resubmitted an adoption agreement for approval. The resubmission apparently piqued the curiosity of the two IRS agents, who began reviewing each of the individually filed plans.
Although Jewell resisted the agents’ assertion that the resubmission of the prototype plan “proves” that the earlier filed plans were late amenders, he consented to negotiating an umbrella closing agreement. The negotiation was complicated by the simultaneous dissolution of Jewell’s law firm, and the subsequent revocation of Jewell’s authority to negotiate with the Service. Instead, Jewell’s former partners finalized a closing agreement which required Jewell to pay the nearly $9,000 penalty.
Here is where the agents overstepped. In order to coerce him to sign on to the agreement and pay his share of the penalty, Jewell alleged that the IRS agents threatened to walk away from the closing agreement, exposing Jewell to law suits from his former partners and making Jewell’s clients targets of individual investigations. These threats – which the agents delivered to Jewell in writing – amounted to a Hobson’s choice, the court said: either he would have to accept the closing agreement and pay a penalty or subject his clients to the “harsh consequences of disqualification, penalty, or both.” As an attorney, Jewell “had an ethical obligation to …accept the closing agreement and pay a penalty, whether rightfully deserved or not. The lack of any true options took away any negotiation position Jewell and [his law firm] may have had. This conduct is extortionary, deplorable, and wrong,” the court said.
Jewell's victory against the IRS must have been a bright spot in an otherwise stormy year in which he was the target of a criminal investigation that led to his indictment by a federal grand jury for unrelated charges of conspiracy to defraud the U.S., three counts of money laundering, and one count of income tax evasion. Jewell and his former law firm partner Bobby Keith Moser were also at the time being sued by a former client for legal malpractice.
House Passes PPA Technical Corrections
Written by Nick Curabba
The U.S. House of Representatives on March 12 passed the Pension Protection Technical Corrections Act (H.R. 3361). The Senate passed a similar bill, the Pension Protection Technical Corrections Act (S. 1974) late last year. Because there are differences in the bills, a conference committee will be convened to come to a consensus bill.
Both bills would make a series of corrections to the Pension Protection Act of 2006, the comprehensive funding reform legislation enacted in 2006. The complex nature of the PPA, and the unconventional legislative process used to get in through Congress, made a technical corrections bill almost an inevitability. While there was some initial wrangling last year to enact a corrections bill that would address some of the more substantive concerns some had with the PPA, this current version of the corrective legislation appears to be limited in scope to corrections of a truly technical nature.
The legislative language of the House bill is available here, as is a summary prepared by the Ways and Means Committee staff.
Although experience tells us that it is never a good idea to count out rapid and unexpected action on pension-related legislation, in an election-year shortened Congressional session we are less than sanguine about enactment this year.
Securities Laws and 403(b) Plans:
Prospectus Delivery, Free Transferability, Rule 22c-2, and Other Things That Go Bump In The Night
Written by: Bob Toth
One of the most striking differences between 403(b) plans and 401(k) plans is the way in which the Securities Act of 1933 and the Security Exchange Act of 1934 apply to them. Though the new 403(b) regulations attempt to make 403(b) plans look and act almost like 401(k) plans, the application of securities laws will make that objective difficult – if not impossible – to achieve without wholesale revision of the securities laws.
For instance, except for anti-fraud provisions, 401(k) plans are generally exempt from securities laws. There are some exceptions – most notably for plans with company stock – but the broad exemption from securities laws generally means that 401(k) plans are free from registration as a security, and that securities purchased by these plans need not be registered. On the other side, 403(b) plans enjoy no such luxury.
The continued application of the securities laws to 403(b) plans presents numerous challenges to sponsors and vendors alike in the new world charted out by the IRS's final regulations. The intersection of the securities laws requirements and the new regulations will affect plan relationships with brokers and advisors, and will affect the drafting of plan documents and the setting up of plan procedures. Some examples:
· Likely the most expensive of the differences is the requirement of prospectuses to individual plan participants – something that is done for purposes of ERISA § 404(c) purposes, but otherwise only upon request in the 401(k) world. Even the e-delivery of these documents are subject to certain conditions.
· Free transferability is a nit-picky rule for 403(b)s. The 403(b) distribution limitations can cause a conflict with the SEC's rules on liquidity and free transferability. The SEC granted relief a few years ago, as long as certain signed disclosures are put into affect-rules which will need to be incorporated into the administration of those new 403(b) plans.
· Rule 22c-2 (the rule which attempts to restrict the excessive trading of mutual fund shares) applies directly at the participant level. Though 401(k) vendors are painfully aware of this rule because of the difficulties in dealing with it at the "omnibus" level, the practical effect for 403(b) plans is that Rule 22c-2 applies directly at the individual level without an intermediary.
· The SEC views the plan participant as the purchaser and owner of the investment of the 403(b) annuity contract or custodial account. In 401(k) plans, the trustee is the "owner," with the participants having only a beneficial interest in the plan. The impact of this view can be substantial, as 403(b) plan sponsors (with their new administrative responsibilities under the new regulations) will need to pay close attention to a number of SEC pronouncements and be aware of the impact on their plans. Incidentally, its not just 403(b) plans that will have to pay increased attention to the SEC. This recent Report of Investigation highlights the SEC interest in the retirement plan world, including the management of state-administered defined benefit pension plans. Thanks to the great bloggers at Pension Risk Matters for this tip.
Read 'Em and Weep List
Final Schedule C Includes Extensive New Codes
Written by: Nick Curabba
In addition to more fulsome disclosure of revenue sharing and other types of indirect fees that plan service providers charge, the final revisions to Schedule C of the Form 5500 will require plan administrators and TPAs to spend a lot of time with their systems administrators over the next year. Take a look (if you haven't already) at the extensive list of new fee codes to be used for different types of compensation. Assuming the "eligible indirect compensation" alternative reporting option is not available, plan administrators must capture and tag all compensation paid by the plan with a specific code. The list is too long to reproduce here, but here is a sampling that brought tears to our eyes:
· Float revenue (Code #62)
· Non-monetary compensation (Code #56)
· Fees for "insurance services" (Code #23)
· Investment management fees (Codes # 52 and #53)
· "Soft dollar" commissions (Code #68); and
· Copying and duplicating (#36)
In addition to these, we are actively soliciting explanations or theories for the Department's need to have two separate codes (#53 and #69) for "Insurance brokerage commissions and fees." Query: if those fees and commissions are also reportable on the Schedule A, would this qualify as triple counting?
Just in Time?
Posted by: Nick Curabba
As Phil Gutwein mentioned on this blog earlier, the Supreme Court is to set to hear oral arguments on MetLife v. Glenn, which involves the appropriate standard of review of benefit eligibility decisions. Blogger Roy Harmon on his Health Plan Law blog noted the Court's decision can't come soon enough. He quotes from a recent Ninth Circuit slip opinion:
"The [Supreme] Court granted certiorari on the following specific question, which might affect the district court’s analysis on remand: “'If an administrator that both determines and pays claims under an ERISA plan is deemed to be operating under a conflict of interest, how should that conflict be taken into account on judicial review of a discretionary benefit determination?' The district court may wish to stay its review of Dine’s claims until the Court has issued its decision in Glenn, which is scheduled for argument on April 23, 2008."
Dine v. Metropolitan Life Ins. Co., Slip Copy, 2008 WL 565322 (C.A.9 (Cal.)) (March 03, 2008)
In what is shaping up to be a busy ERISA docket for the Court, we anticipate the Glenn decision will not be issued until close to the end of this year's term in June -- perhaps just about the time MetLife could be looking at the next round of litigation in Dine.
Bloggers React to LaRue
Written by: Nick Curabba
There has been a deluge of LaRue coverage in the blogosphere since the Supreme Court handed down its unanimous decision last month. Much of the commentary (including ours) predicts the decision will increase ERISA lawsuits in the future, especially in the small and mid-sized plan space because plaintiffs' attorneys now have a remedy without having to engage in complex class action litigation.
Just a sampling include Workplace Prof Blog; ERISA Law Blog; Pension Protection Act Blog; Pension Risk Matters; Employment Blawg; Womble Carlyle's South Carolina Appellate Law Blog; The National Center for Employee Ownership, and The D&O Diary. Attorney and reliably insightful blogger Stephen Rosenberg bucks the trend with his agnostic view of the potential for LaRue to result in an avalanche of new litigation.
From our perspective, the decision in LaRue was the only conclusion the Court could have come to without triggering an apoplectic Congressional response. With Chairman George Miller (D-CA) and others pushing hard this year to enact his breathtaking fee disclosure bill, the "wrong" outcome in the LaRue case would have added fuel to the legislative fire. There is little doubt that if the Court had held that Mr. LaRue was without a remedy under ERISA, Congress would have made sure that there would be in the future, which undoubtedly would have included extra-contractual and consequential damages.
