The Worker, Retiree, and Employer Recovery Act of 2008 contained many relief and technical correction provisions for qualified plans, including a waiver of the 2009 RMD requirement for participants in defined contribution plans, 403(b) plans, governmental 457(b) plans, and IRAs and the relaxation of funding, benefit accrual, distribution, and other requirements for certain plans.
The IRS issued final regulations on automatic contribution arrangements and proposed regulations on midyear reductions of safe-harbor nonelective contributions and advising plan participants of the consequences of failing to defer receipt of a distribution. The IRS also issued notices providing relief for 403(b) plans’ written plan requirement, the funding threshold for calendaryear plans, and the application of normal retirement age regulations for governmental plans.
The Department of Labor postponed the effective date of regulations that would enable plan fiduciaries to give plan participants investment advice and finalized regulations that provide a safe harbor for fiduciaries regarding the treatment of missing participants and beneficiaries.
Though 2009 featured big changes in Washington and severe challenges for plan sponsors, the year brought largely incremental changes for qualified defined benefit and defined contribution plans as the IRS and the Department of Labor (DOL) continued to interpret recent statutory guidance and Congress provided some measures of relief.
Worker, Retiree, and Employer Recovery Act of 2008 (WRERA)
As part of its initial responses to the financial crisis, Congress passed WRERA in late December 2008.1 WRERA contained many important provisions affecting qualified plans, including relief provisions and long-awaited technical corrections to the 2006 Pension Protection Act (PPA)2 affecting defined contribution and defined benefit plans.
WRERA contained a number of temporary provisions responding to the recent declines in the markets. These measures were designed to mitigate the adverse effects that falling plan asset values could have on plan sponsors and participants.
Relaxed required minimum distributions (RMDs): WRERA waives the calendar-year 2009 RMD requirement under Sec. 401(a)(9) for qualified defined contribution plans, 403(b) plans, governmental 457(b) plans, and IRAs. The requirement is not waived for qualified defined benefit plans or for nongovernmental 457(b) plans. The relief was provided in response to concerns that minimum distributions would be based on higher balances that existed prior to the market downturn. However, by the time Congress could take action, it was too late to effectively waive the requirement for 2008. The decision was made to waive the requirement for 2009, allowing retirement accounts to recover value before forcing distribution of more of the accounts’ assets and possibly sparing recipients additional tax in a difficult year. However, RMDs for 2008 were not waived (even if scheduled to be made in 2009), and the prior minimum distribution rules will return in 2010.3
Shortly after WRERA passed, the IRS issued Notice 2009-9,4 which provided guidance on how to complete box 11 (for RMDs) on the 2008 Form 5498, IRA Contribution Information. The notice indicates that box 11 should not be checked, but it also provides relief for filers who may have issued forms with the box checked. However, many questions related to the RMD relief remained unanswered until Notice 2009-825 was issued on September 24, 2009. Notice 2009-82 provided fundamental clarification of the RMD waiver for 2009. It also granted transitional relief to allow RMDs made earlier in 2009 to be rolled over by November 30 and issued sample amendments that individual plan sponsors and sponsors of preapproved plans can rely on.
Among various matters, Notice 2009- 82 explains:
2009 RMDs: The waiver applies to a participant or
beneficiary who would have been required to receive an RMD
for 2009 (the 2009 RMD) and who would have satisfied that
requirement by receiving a distribution:
- Equal to the 2009 RMD; or
- Under a series of substantially equal distributions (including the 2009 RMD), made at least annually and expected to last for the life (or life expectancy) of the participant, the joint lives (or joint life expectancy) of the participant and the participant’s designated beneficiary, or for a period of at least 10 years (an “extended 2009 RMD”).
- Permissive direct rollovers: Plans are permitted (but not required) to offer a direct rollover of a 2009 RMD distribution. Notice 2009-82 clarifies that for this purpose the plan can elect to provide direct rollovers of 2009 RMDs and extended 2009 RMDs.
- Rollover to same plan: If the rollover requirements are met (and the plan document allows it), the 2009 RMD can be “rolled back” to the distributing plan.
- Substantially equal period payments under Sec. 72(t): The notice points out that the 2009 RMD waiver does not apply to payments that are being made as part of a “series of substantially equal periodic payments” to avoid the 10% early distribution tax under Sec. 72(t). If those payments are stopped in 2009 before age 59½ or before five years from the date of the first payment, all the payments made under the series are subject to the recapture tax.
The notice also provides clarification on other important matters, including spousal consent, withholding requirements, the deadline for certain beneficiaries to elect distribution timing, and the ordering rule by which the 2009 RMD is identified among more than one distribution made in 2009. (The first distributions in 2009 are any RMDs from prior years not yet distributed, followed by 2009 RMDs.)
Funding relief: WRERA provided funding relief by easing the requirements to qualify for PPA’s transition rules related to the full funding requirement. Under PPA, plans are subject to a funding target equal to 100% of the present value of their benefit liabilities, and, if the plan’s funding is not at this level at the beginning of the year, an additional contribution is required to make up this shortfall, so the shortfall would be made up over a seven year period. PPA included a transition rule that excused plan sponsors from this additional contribution requirement as long as the plan was at least 92% funded for its 2008 plan year, 94% for its 2009 plan year, and 96% for its 2010 plan year. However, if a plan missed one of those targets, the employer would be required to make a contribution based on a 100% funding target for the year, and the employer could not use the special transition rules in later years.
WRERA relaxed this requirement by (1) allowing a plan to calculate its funding shortfall contribution based on the difference between the transition target for the year and its actual funding level and (2) allowing the plan to use the transition target in subsequent years even if the plan missed the prior year’s funding target. Thus, for example, if a plan was funded at 91% for 2008, the funding shortfall for 2008 would be 1%, and the plan would be able to continue to use the transition rule in 2009. The plan would then need to fund to 94%, rather than 100%, in 2009.
Eased restrictions on benefit accruals: PPA added rules that restrict and/or prohibit certain benefit payments, accruals, and plan amendments for single-employer defined benefit plans that do not meet specified levels of funding, including a requirement that all benefit accruals in a plan that is less than 60% funded (determined as of the beginning of its plan year) cease. For plans that are less than 60% funded, WRERA provided relief from the requirement that benefit accruals be suspended for the plan years that began between October 1, 2008, and September 30, 2009. For that year, the funding level as of the beginning of the preceding year could be used to determine whether cessation of benefit accruals was required. The relief, as enacted, lasts for one year only, though at the time of this writing, draft legislation from the House of Representatives was circulating that would serve a similar function.6
Technical Corrections Affecting Defined Contribution Plans
Automatic enrollment: Sec. 414(w), as added by PPA, allows plans that automatically enroll participants to allow the participants to withdraw their automatic deferrals within 90 days of their first automatic contribution if certain additional requirements are satisfied (otherwise such assets must remain in the plan until a statutorily permissible distribution event).7 Under the law as originally enacted, the plan could allow withdrawals only if automatic contributions were invested in accordance with the DOL’s qualified default investment alternative rules in the absence of a participant investment election. WRERA removed that requirement. It also extended the Sec. 414(w) permissible withdrawal feature to SIMPLE IRAs and grandfathered SARSEPs. Finally, WRERA provides that permissive withdrawals under Sec. 414(w) are disregarded when applying the Sec. 402(g) limit on elective deferrals.
Testing refunds: PPA removed the requirement that “gap period” income (income earned between the end of a plan year at issue and the date of distribution) be included in distributions of excess contributions made in order to satisfy the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests. However, PPA did not include a similar change for distributions of excess deferrals under Sec. 402(g).8 WRERA amended Sec. 402(g) to remove the gap period income distribution requirement. Thus, for a calendar-year plan, under WRERA, income on excess deferrals that is earned through December 31 of the year of the excess will need to be distributed, but income earned thereafter in the year of distribution does not.
Technical Corrections Affecting Individuals and IRAs
Nonspousal rollovers of inherited amounts: PPA changed the rollover rules to allow nonspouse beneficiaries of a participant in qualified plans, Sec. 403(a) and (b) plans, and Sec. 457(b) plans to roll over distributions received from the plan as a beneficiary of a plan participant. However, plans were not required to adopt this rollover feature. WRERA makes this feature mandatory in retirement plans for plan years beginning after December 31, 2009.9
Roth 401(k) rollovers: For 2008 and 2009, a technical glitch in a provision added by PPA that was intended to allow plan participants to roll over distributions from qualified plans into Roth IRAs in a single step prevented married taxpayers filing separate returns and anyone with modified AGI of more than $100,000 from rolling any distribution from a retirement plan directly into a Roth IRA. This was of particular concern to Roth 401(k) participants, for whom a Roth IRA was the only arrangement into which they could roll Roth amounts and that had not previously been limited. WRERA carves out an exception to the $100,000 and married filing separately limitations for rollovers from designated Roth accounts. Thus, taxpayers can roll amounts from a Roth account directly into a Roth IRA during 2008 and 2009 regardless of their AGI or filing status. The AGI limitations will still apply to a rollover of non-Roth funds in a retirement plan to a Roth IRA until 2010, when the limitation is ended for all purposes, including for conversion from a traditional IRA to a Roth IRA.
Technical Corrections Affecting Defined Benefit Plans
Funding rules: PPA provided that contributions each year must at least equal the cost of benefits accruing during that year (the target normal cost) plus the amount necessary to amortize any beginning- of-year funding shortfall over a period of roughly seven years. Underfunded plans that meet at-risk criteria are subject to accelerated funding requirements. WRERA corrects some of the issues with PPA’s provisions and adds some additional refinements:
- Expenses that the plan pays directly will be included in the calculation of target normal cost.10 This modification is elective for plan years beginning in 2008 and mandatory thereafter.
- While PPA generally required the use of the fair market value of plan assets, determined as of the actual valuation date, for purposes of funding calculations, it authorized limited averaging over a period of no longer than two years. PPA specified that contributions and distributions should be taken into account in calculating the average in accordance with IRS regulations. WRERA allows expected earnings to be taken into account as well. On March 16, 2008, the IRS released Notice 2009-2211 to provide guidance on the adjustment for expected earnings. The notice also extended the scope of the automatic approval previously provided under proposed regulations12 by providing automatic approval for the adoption of an asset valuation method under Sec. 430(g) (3) for plan years beginning in 2009. Notice 2009-22 also makes clear that the automatic approval under the regulations for changes made in the asset valuation method for plan years beginning in 2008 also applies for changes made in that year to adopt the asset smoothing method as modified by WRERA. For the 2008 plan year, the notice permitted the actuarial value of the assets (i.e., asset smoothing) to be determined as provided under the proposed regulations (i.e., without adjustment for anticipated earnings). No adjustment for expected earnings was required for 2008, although it was permitted. 13 Practitioners are cautioned that a redetermination for 2008—notwithstanding that it results in a higher value of plan assets than under Sec. 430(g)(3)(B) prior to WRERA—may violate ERISA Section 206(g). (ERISA Section 206(g) contains parallel provisions to Sec. 436, which imposes funding-based limits on benefits and accruals.)
- WRERA clarified that if plan participants make mandatory employee contributions that fund part of their benefits (and are not allocated to a separate account), those contributions reduce the plan’s target normal cost dollar for dollar, thus reducing the amount the employer is required to contribute. This revision also applies regardless of whether the plan is at risk under Sec. 430(i)(4).14 It is elective for plan years beginning in 2008 and mandatory thereafter.
- WRERA clarified that the interest rate assumptions used to calculate a plan’s funding target must also be the same rate used to calculate target normal cost.
- WRERA expanded and clarified the IRS’s authority to issue guidance for determining a plan’s funded status (the funding target attainment percentage) for years prior to 2008. This clarification will be particularly important for purposes of determining whether a plan falls into at-risk status because that definition looks to the value of plan assets as of the preceding year, and PPA’s new funding mechanics first became effective for plan years beginning after calendar year 2007.
- Similarly, PPA required an employer to make quarterly minimum contributions to any plan that had a funding shortfall in the preceding plan year. Filling another gap in the IRS’s authority, WRERA explicitly authorized the issuance of guidance on how the existence of a funding shortfall will be determined for plan years preceding the PPA effective date.
Restrictions on distributions from underfunded plans: PPA imposed restrictions on lump-sum distributions, benefit increases, and continued benefit accrual for underfunded defined benefit plans (Sec. 436 restrictions). WRERA makes a few modifications to these rules:
- The restrictions on “prohibited payments” (generally lump-sum distributions) are made inapplicable to de minimis mandatory cashouts, where the value of the participant’s benefit is $5,000 or less.15
- WRERA gives the IRS authority to establish rules for determining whether a plan is subject to the Sec. 436 restrictions where the plan uses a valuation date that is other than the beginning of its plan year.16
- WRERA clarifies that the Sec. 436 restrictions apply not only to singleemployer plans but also to noncollectively bargained plans covering employees of unrelated entities (multiple- employer plans). Multiemployer plans (collectively bargained plans covering employees of unrelated employers) remain exempt.17
Calculation of limitations on lumpsum distributions: PPA provided that the mortality assumptions used in Sec. 415(b) calculations (for the upper limit of annual benefit accrual) would be based on the IRS’s standard table for determining reserves under group annuity contracts described in Sec. 807(d)(5)(A). WRERA replaces this table with the table for converting benefit accruals to lump sums under Sec. 417(e).18 This change is mandatory starting in plan years beginning in 2009, though plans were permitted to adopt it voluntarily before then.
Cash balance plans: PPA addressed a number of issues related to cash balance plans, including age discrimination, conversions of traditional defined benefit plans to cash balance plans, and the “whipsaw” effect, under which a plan could be required to distribute a lump sum greater than the participant’s hypothetical account balance.19 WRERA makes a few revisions to the rules related to cash balance and other hybrid plans:
- WRERA clarifies that the new vesting requirements applicable to cash balance plans (generally requiring 100% vesting after three years of service) do not apply to a participant who does not have an hour of service after the effective date of PPA rules (the later of June 29, 2005, or the date on which the plan is established).
- WRERA modifies Sec. 411(a)(13)(A) to clarify that the whipsaw rules do not apply for purposes of determining whether a participant’s benefit is valued at $5,000 or less and is therefore subject to the plan’s mandatory cashout feature upon termination of employment. Thus, whether a terminating participant is subject to a mandatory cashout will be determined based on the balance in his or her cash balance account.
- PPA required cash balance plans to provide participants with interest credits on their cash balance accruals based on a market rate of interest. WRERA allows cash balance plans maintained by government employers to use any desired interest crediting rate.
Final 401(k) Auto-Enrollment Regulations
An automatic contribution arrangement is an arrangement within a 401(k) plan (or a 403(b) or 457(b) plan) by which participants who do not have an affirmative deferral election in place are treated as having made an election to have a specified deferral contribution made on their behalf to the plan. Under an automatic contribution arrangement, contributions are made at this level unless and until the participant affirmatively elects a different contribution level or no contribution.
Containing some notable changes from the proposed regulations,20 final regulations have been issued for qualified automatic contribution arrangements (QACAs) under Secs. 401(k) and (m) and for eligible automatic contribution arrangements (EACAs) under Sec. 414(w).21 A QACA automatically satisfies discrimination testing requirements under Secs. 401(k) and (m); an EACA is an automatic contribution arrangement under which participants are permitted to withdraw amounts without otherwise violating statutory distribution limitations. An arrangement can be either a QACA or an EACA, both a QACA and an EACA, or neither a QACA nor an EACA; the choice depends on the sponsor’s needs.
QACA requirements: The following are among the important changes and clarifications made by the final regulations:
- Further clarification regarding the determination of a participant’s initial period for minimum contributions (critical because minimum contribution percentages are increased for plan years after this initial period);
- Clarification that though default deferral percentages must be applied uniformly, this does not prevent midyear increases in the default percentage as long as this is done uniformly based on a participant’s years under the arrangement;
- Clarification of timing for initial notice of the QACA arrangement and for the effective date of a default election; and
- Clarification that matching or nonelective contributions under a QACA (which must be made to each eligible employee under the plan) may not be withdrawn on account of hardship.
EACA requirements: The following are among the important changes and clarifications made by the final regulations:
- Clarification that an EACA cannot be established in the middle of a plan year of an existing 401(k) plan;
- Clarification that a plan can provide participants with a withdrawal period of less than 90 days (though no less than 30 days) after the date of the first default contribution, and the revision the tax adviser December 2009 835 of the latest date when withdrawal periods must begin;22 and
- Clarification that there can be more than one EACA in a plan. The uniform percentage requirement is applied by aggregating all EACAs within the plan. The definition of “plan” is determined after applying the disaggregation rules of Regs. Sec. 1.401(k)-1(b)(4)—that is, allowing permitted disaggregation of different groups of collectively bargained employees or different employers in a multiemployer plan. One disadvantage to any EACA that does not cover all eligible employees under the plan is that it loses an extended six-month correction period otherwise available under Sec. 4979.23
Proposed Rules on Midyear Reduction of Safe-Harbor Nonelective Contributions
The IRS issued proposed regulations allowing employers to reduce or eliminate safe-harbor nonelective contributions under Sec. 401(k) cash or deferred arrangements midyear in the event of business hardship.24 In general, cash or deferred arrangements must pass nondiscrimination testing under Sec. 401(k) (the ADP test), and plans that provide for matching contributions must pass nondiscrimination testing under Sec. 401(m)(2) (the ACP test). However, Sec. 401(k)(12) allows plans to adopt safeharbor designs that permit the plans to be deemed to pass nondiscrimination testing without actually performing such tests.
In addition, Sec. 401(k)(13) allows employers to adopt automatic contribution arrangements that are deemed to pass nondiscrimination testing. These designs generally require either predefined matching or nonelective contributions to be made to participants. Safe-harbor or automatic contribution arrangement status generally must be adopted before the beginning of a plan year and remain in effect throughout the full 12-month plan year. The proposed regulations parallel relief already provided for safe-harbor matching contributions that allows for a midyear reduction or suspension. However, a reduction of safe-harbor nonelective contributions must meet the additional requirement of the employer’s business hardship. Taxpayers can rely on the proposed regulations pending issuance of final regulations. The regulations provide some comfort to distressed plan sponsors who seek to eliminate safe-harbor nonelective contributions under their safe-harbor or automatic contribution arrangement as soon as possible.
Proposed Rules on Notice of Consequences of Failing to Defer Receipt of Distribution
In proposed regulations (proposed to be effective for plan years beginning after 2009), the IRS has outlined the disclosures required under Sec. 411(a)(11) to advise participants of the consequences of failing to defer receipt of distribution.25 The requirements will clarify and expand upon the information that will need to be provided to participants. Prior to the issuance of the proposed regulations, the only interpretive guidance plan sponsors had was provided by Notice 2007-7 and its safe harbor.
The proposed regulations require plan sponsors to provide a description of federal tax implications, benefit implications, and provisions materially affecting the distribution decision. In some respects, the regulations appear more specific than the existing safe harbor, particularly with respect to the information that must be provided by defined benefit plans. Plan sponsors can currently rely on the requirements of the proposed regulations, the provisions of Notice 2007-7, or their own good-faith interpretations of the statutory requirement until the first plan year beginning 90 days after publication of final regulations. (Because the IRS did not publish final regulations by early October 2009, calendar-year plans will not have to follow the regulations any earlier than 2011.)
Relief for Written Plan Requirement for 403(b) Plans
Notice 2009-3,26 released in December 2008, provided Sec. 403(b) plan sponsors additional time to put a written plan document into place. The final Sec. 403(b) regulations issued in 2007 required, among other things, that all Sec. 403(b) plans be operated under a written plan document, effective January 1, 2009.27 Notice 2009-3 does not postpone the written plan document requirement indefinitely; it generally gives plans an extra year (until December 31, 2009) to adopt a plan document. None of the other new requirements under the 2007 Sec. 403(b) regulations were affected by this relief. Subsequently, in Announcement 2009-34,28 the IRS expressed its intent to establish a determination letter program for individually designed Sec. 403(b) plans once the Sec. 403(b) prototype program is established and simultaneously posted on its website sample plan language for use in drafting Sec. 403(b) prototype plans.29
Last-Minute Funding Relief for Calendar-Year Plans
The IRS issued relief for pension plans in calculating their minimum required contributions.30 The Service released its guidance on March 31, 2009, the deadline by which many calendar-year plans were required to have an actuary’s certification of the plan’s funded percentage. The relief provided greater flexibility for plans that use the corporate bond yield curve to determine benefit liabilities in response to unique spikes in bond rates during late 2008 and generally poor asset performance. Specifically, the announcement provided that until final regulations are issued, the IRS will not challenge the use of a monthly yield curve for any applicable month (i.e., the month containing the valuation date and the four preceding months). (Previously, it was believed that the only permissible valuation options were the use of a three-tiered segment curve that included 24-month averaging and a lookback period or the full corporate bond yield curve with no lookback period.) For a calendar-year plan with a January 1, 2009, valuation date, this meant that the IRS would not challenge the use of a monthly yield curve for January 2009 or any of the four preceding months. The relief enhanced the ability of plans to meet the minimum funding threshold necessary to escape application of benefit restrictions under Sec. 436.
Postponement of Sec. 401(a) Normal Retirement Age Effective Date for Government Plans
In 2007, the IRS finalized regulations under Sec. 401(a)(36) altering the longstanding definition of normal retirement age (NRA) in an effort to facilitate staggered/ working retirement arrangements.31 However, because these changes to a fundamental plan feature revealed additional issues, the IRS eased the implementation of the regulations.
As part of this effort, the IRS issued Notice 2007-69,32 providing additional time for private-sector plans to change their definitions of NRA to come into compliance with the final regulations (until the first day of the plan year beginning after June 30, 2008). This temporary relief did not apply to governmental plans.
On October 10, 2008, the IRS issued Notice 2008-98,33 announcing a twoyear postponement—until the first day of the plan year beginning on or after January 1, 2011—of the effective date of the NRA regulations for governmental plans. It is believed that the guidance was provided so that government arrangements will have time to make modifications and have them approved by the appropriate governing body. As such, governmental pension plans will not be reviewed for compliance with the 2007 regulations until the next determination letter cycle C, which will require submission between February 1, 2013, and January 31, 2014. Interim amendments will nonetheless be required by the dates indicated in Rev. Proc. 2007- 4434 (i.e., generally by the last day of the plan year beginning on or after January 1, 2011, or, if later, the due date including extensions for filing the income tax return for the employer’s tax year that includes the first day of that plan year).
Modified Remedial Amendment Cycle for Government Plans
On November 5, 2008, the IRS announced a one-time modification to the staggered remedial amendment program of Rev. Proc. 2007-44 regarding the submission of determination letters for governmental plans, which are normally in the cycle C filing cycle (meaning that the plan sponsor has an employer identification number with a last digit of 3 or 8).35 The change was provided in recognition of unique difficulties that governmental plans had fitting within the remedial amendment cycle, which governments had not previously faced. Instead of submitting a determination letter application by the cycle C deadline of January 31, 2009, governmental plans had an option to submit during cycle E—between February 1, 2010, and January 31, 2011. Sponsors of governmental plans that had operational or document failures, however, still had an incentive to file in the most recent cycle because Employee Plans Compliance Resolution System (EPCRS) fees and sanctions are reduced for plans that have filed and are discovered to have plan document failures.
Controversial Final Regs. on Investment Advice on Hold
In January 2009, the DOL issued a regulation under ERISA Section 408(g) enabling plan fiduciaries to give participants in individual-account plans investment advice without violating the Code’s and ERISA’s prohibited transaction rules. Upon taking office, the Obama administration released a White House Memorandum requesting that all pending regulations be placed on hold for review by the new administration.36 Responding to this memorandum, the DOL announced a proposal to postpone the effective date of its final “investment advice” regulations by 60 days, from March 23 to May 22, 2009. It also reopened the comment period for 30 days, allowing comments on the substantive regulatory provisions until March 6, 2009.37 On May 22, the DOL further delayed the effective and applicability dates of these final rules from May 22, 2009, until November 18, 2009, to allow additional time for the department to evaluate questions of law and policy.38
Requirements for Fiduciary Safe Harbor for Terminated Plans
Plan fiduciaries continue to owe duties to terminated plans and their participants under ERISA Section 404(a) with respect to the distribution of benefits, the selection of a transferee entity, and the investment of funds in connection with the transfer.39 Prior to 2007, the DOL had published a safe harbor40 requiring the fiduciary of a terminated individual account plan with benefits payable to a missing nonspouse beneficiary to transfer those benefits to a non-IRA account. However, in February 2007, the DOL published an interim rule reversing this position and requiring the fiduciary of a terminated individual account plan with benefits payable to a missing nonspouse beneficiary to transfer those benefits to an IRA in order to meet the fiduciary safe harbor. In October 2008, the DOL adopted its 2007 interim rule as final.
Fiduciaries who comply with the missing participant and beneficiary safe harbor are deemed to satisfy their duties under ERISA Section 404(a) with respect to the distribution of benefits, the selection of a transferee entity, and the investment of the funds in connection with the transfer. At the time it adopted the interim rule, the DOL noted that it was planning to further expand the safe harbor once the Pension Benefit Guaranty Corporation (PBGC) issued final regulations under ERISA Section 4050 (which was amended by PPA to permit terminating plans that are not subject to the PBGC insurance program— such as defined contribution plans—to transfer the benefits of missing participants to the PBGC). As of this writing, the PBGC has not issued these regulations.
Guidance for the “Safest Annuity Available” Rule
On October 6, 2008, the DOL issued new rules intended to make annuities a more appealing benefit distribution option for Sec. 401(k) and other defined contribution plans.41 An oft-cited obstacle to defined contribution plans offering annuity options is the DOL’s “safest annuity available” rule, which has been applied to both defined benefit and defined contribution plans. In 1995, the DOL issued guidance clarifying that the selection of an annuity provider in connection with benefit distributions is a fiduciary act governed by the standards of ERISA Section 404(a) EmployeeBenefits&Pensions (1) (including the duty to act prudently and solely in the interest of the plan’s participants and beneficiaries).42 As part of the guidance, the DOL explained that plan fiduciaries must take appropriate steps to obtain the safest available annuity unless, under the circumstances, it would be in the interest of participants and beneficiaries to do otherwise. The DOL extended this to defined contribution plans in Advisory Opinion 2002-14A.43 Pursuant to a directive of the PPA, the DOL’s October 2008 guidance amended the safest available annuity rule to specify that it applies to defined benefit plans only. This guidance provides a safe harbor for defined contribution plans to comply and notes that the safe harbor is not the exclusive means of satisfying the safest available annuity rule.
New Guidance for Annual Funding Notice
In February 2009, the DOL released Field Assistance Bulletin (FAB) 2009-0144 and model notices to provide enforcement guidance to its national and regional offices with respect to the expanded annual funding notice requirement under ERISA Section 101(f). Until PPA, annual funding notices were required only of multi-employer (collectively bargained) plans. Effective for plan years beginning on or after January 1, 2008, annual funding notices are now required of each defined benefit plan subject to Title IV of ERISA (i.e., subject to the PBGC provisions).
The FAB provided much needed guidance and contained model notices for a single-employer plan and a multi-employer plan. Pending further guidance, the DOL will treat the new funding notice requirements as satisfied if the plan administrator complies with the FAB. Use of the model notices, although not required, will satisfy the ERISA §101(f) content requirements. The plan administrator must furnish the notice no later than 120 days after the close of each plan year. (Therefore, calendar- year plans first had to provide the new notice no later than April 30, 2009.)
Sec. 401(k) Fee Cases
The recent decision in Hecker v. Deere & Co.45 may stem the tide of “excessive fee” and “imprudent selection of investment” suits being brought against ERISA plan fiduciaries and is being noted by ERISA plan sponsors and service providers with cautious optimism and a sigh of relief. In Hecker, three employees who participated in the employer’s two 401(k) plans and were dissatisfied with the fees that the investment funds were charging sought to sue, alleging violation of ERISA because (1) revenue sharing arrangements between the fund provider and the trustee had not been disclosed and (2) the selection of the plan’s investment funds was imprudent because of the high fees. The trial court dismissed the case for failure to state a claim and ordered the plaintiffs to pay the defendants’ costs in responding to the suit.
The Seventh Circuit upheld the lower court’s dismissal of the case and upheld the assessment of over $219,000 in fees against the participants. The court seems to have drawn a bright line for ERISA plan participants seeking to sue because of dissatisfaction with the investment performance of their accounts. The court found that given the breadth of choices offered to the individual participants and their control over what funds to invest in with regard to fees, the statutory safe harbor of ERISA Section 404(c) was satisfied and could be used as an affirmative defense for the plan’s fiduciary.46 According to the court, as long as the fiduciary does not intentionally mislead or cover up any material information to participants of 401(k) plans, and the participant chooses funds based on what is offered and can exercise such control to switch funds, the fiduciary would be protected by the safe harbor. However, in its order denying a rehearing for the case, the Seventh Circuit emphasized that a plan fiduciary could not fulfill its duties and relieve itself of liability by simply including a very large number of investment options in the plan and shifting the entire responsibility of choosing among them to the participants.47
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.
Deborah Walker is a tax partner at Deloitte Tax LLP in Washington, DC. Michael Haberman is a tax manager at Deloitte Tax LLP in Parsippany, NJ. Hyuck Oh is a senior at Deloitte Tax LLP in Washington, DC. For more information about this article, contact Ms. Walker at email@example.com or Mr. Haberman at firstname.lastname@example.org.
The authors thank Tom Pevarnik, Robert Davis, and Stephen LaGarde for their valuable contributions to this article.
1 Worker, Retiree, and Employer Recovery Act of 2008, P.L. 110-458.
2 Pension Protection Act of 2006, P.L. 109-280.
3 Sec. 401(a)(9) permits initial RMDs to be paid as late as April 1 of the year following the year in which the participant triggers for payment (generally upon reaching age 70½). Thus, for individuals who reached age 70½ during 2008, the initial RMD for 2008 did not have to be paid until early 2009, but the WRERA waiver does not change the plan’s responsibility to make this payment (an RMD for calendar year 2008). At the time of writing, it was unclear whether this provision would be extended to RMDs for 2010. Early in 2009, Representative Jim Sensenbrenner (R-WI) introduced H.R. 2637, which if enacted would extend the WRERA waiver through 2010. The bill was referred to the House Ways and Means Committee on May 21, 2009.
4 Notice 2009-9, 2009-5 I.R.B. 419.
5 Notice 2009-82, 2009-41 I.R.B. 491.
6 Draft legislation released by Representative Earl Pomeroy (D-ND) on August 27, 2009, would provide that for the 2009 and 2010 plan years, benefit accrual restrictions would be based on the plan’s 2008 (presumably higher) funding level.
7 For additional discussion of automatic enrollment requirements, see the section “IRS Guidance—Final 401(k) Auto-Enrollment Regulations” on p. 834.
8 2004 regulations required the payment of gap period payments in the excess contribution situation (see Regs. Sec. 1.401(k)-2(b)(2)(iv)). PPA negated these regulations through changes to the underlying statute (see Sec. 401(k)(8)(A)(i)). Despite the statutory reversal, the IRS proceeded to require the payment of gap period earnings in the excess deferral context (T.D. 9169).
9 Worker, Retiree, and Employer Recovery Act of 2008, §§108(f)(1)(A)–(B), (f)(2)(B).
10 Reasonable administrative expenses may be paid from plan assets if the plan permits it. The determination of whether an expense is a plan administrative expense and whether the amount is reasonable is subject to the fiduciary rules under Title I of ERISA.
11 Notice 2009-22, 2009-14 I.R.B. 741.
13 The actuarial value of plan assets for a plan year that begins during 2008 is permitted to be determined using an asset averaging method that complies with the rules described in Regs. Sec. 1.430(g)-1(f)(4) of the proposed regulations (notwithstanding that this determination results in a lower value of plan assets than under Sec. 430(g)(3)(B) as amended by WRERA). Accordingly, no adjustment for expected earnings is required to be applied for purposes of determining the actuarial value of assets under Sec. 430(g)(3)(B) for a plan year that begins during 2008.
14 Sec. 430(i)(2).
15 Sec. 436(d)(5) (flush language).
16 Sec. 436(k). The benefit restriction provisions are based upon a plan’s “adjusted funding target attainment percentage” as of the first day of the plan year. This presented issues for small plans (those with 100 or fewer participants), which are allowed to designate any day of the plan year as their valuation date, because a plan’s adjusted funding target attainment percentage cannot be determined until the valuation date.
17 Sec. 436(l).
18 Sec. 415(b)(2)(E)(v).
19 In a cash balance plan, a participant’s benefit is communicated as a hypothetical account balance. Under prior law, however, a number of courts, interpreting IRS guidance, had concluded that the distribution could not be less than the present value of the participant’s projected annuity at the plan’s normal retirement age. To make this calculation, the account balance had to be projected using the plan’s interest crediting formula, converted into an actuarially equivalent annuity, and then discounted back to the date of distribution using the statutorily mandated factors for converting accrued benefits into lump sums. Whenever the projection rate was higher than the discount rate, this process resulted in a lump-sum benefit larger than the hypothetical account balance, which then had to be paid to the participant.
21 T.D. 9447.
22 Under the proposed regulations, the deadline was no later than the last day of the payroll period that begins after the date the election was made (72 Fed. Reg. 63148). The final regulations are more flexible, and the permissible withdrawal election must now be effective no later than the pay date for the second payroll period that begins after the election is made or, if earlier, the first pay date that occurs at least 30 days after the election is made.
23 Preamble to T.D. 9447.
26 Notice 2009-3, 2009-2 I.R.B. 250.
27 T.D. 9459.
28 Announcement 2009-34, 2009-18 I.R.B. 916.
30 IRS, Employee Plan News (March 2009).
31 See T.D. 9325.
32 Notice 2007-69, 2007-35 I.R.B. 468.
33 Notice 2008-98, 2008-44 I.R.B. 1080.
34 Rev. Proc. 2007-44, 2007-28 I.R.B. 54.
35 The IRS initially published this guidance in Employee Plan News (November 5, 2008) (www.irs.gov/pub/irs-tege/se1108.pdf) and later formalized it in Rev. Proc. 2009-36, 2009-35 I.R.B. 304.
36 See 74 Fed. Reg. 4435.
37 74 Fed. Reg. 6007.
38 74 Fed. Reg. 23951.
39 73 Fed. Reg. 58459.
40 71 Fed. Reg. 20820.
41 73 Fed. Reg. 58447.
42 Dep’t of Labor, Interpretive Bulletin 95-1 (29 CFR §2509.95-1), made clear that the selection of an annuity provider in connection with benefit distributions is a fiduciary act governed by the fiduciary standards of ERISA Section 404(a)(1), including the duty to act prudently and solely in the interest of the plan’s participants and beneficiaries.
43 Dep’t of Labor, Advisory Opinion 2002-14A (12/18/02), available at www.dol.gov/ebsa/regs/aos/ao2002-14a.html.
44 Dep’t of Labor, Field Assistance Bulletin (FAB) 2009-01 (2/10/09), available at www.dol.gov/ebsa/regs/fab2009-1.html.
45 Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009).
46 29 U.S.C. Section 1104(c) states, in pertinent part, “In the case of a . . . plan which provides for individual accounts and permits a participant or beneficiary to exercise control over assets in his account, if a participant or beneficiary exercises control over the assets in his account . . . no person who is otherwise a fiduciary shall be liable under this part for any loss, or by reason of any breach, which results from such participant’s, or beneficiary’s exercise of control.”
47 Order denying rehearing, Hecker v. Deere & Co., 569 F.3d 708 (7th Cir. 2009).