Compensation and Benefits Update: Retirement Plans and Executive Compensation

By Deborah Walker, CPA, and Thomas R. Pevarnik, J.D., LL.M.


  • The IRS updated its Listing of Required Modifications for cash or deferred arrangements and released results of its survey of 401(k) plan sponsors.
  • Law changes include an interest rate stabilization provision for single-employer pension plans and increases in premium rates for the Pension Benefit Guaranty Corp.
  • Final or proposed Treasury regulations addressed qualifying longevity annuity contracts, partial annuity distributions, defining governmental plans, and clarifying requirements for the Sec. 83 election for restricted property received as compensation.
  • Labor Department final regulations added new requirements under the Employee Retirement Income Security Act (ERISA), including new disclosure requirements for plan sponsors and service providers. Other ERISA guidance addressed the ERISA safe harbor and prohibited transaction exemptions.

This is the first of a two-part article describing statutory, regulatory, and judicial changes in compensation and benefits over the past year. This part focuses on qualified retirement plans and executive compensation. Most of the changes involved pension plans, although enforcement attention on 401(k) plans increased, and the Labor Department issued and revised disclosure rules. The next part, in the December issue, will focus on health plan changes and employment taxes.

Sec. 401(k) Plans

Listing of Required Modifications

Last revised in 2006, the Listing of Required Modifications (LRM) 1 for cash or deferred arrangements was recently updated by the IRS to include provisions that satisfy the relevant qualification requirements through the Small Business Jobs Act of 2010. 2 The LRM is primarily intended to assist the IRS in reviewing plan documents and helping to evaluate whether plan language meets certain requirements, but it is also helpful for those drafting or reviewing plans or plan amendments to be sure all required changes are made.

The updates include new provisions on eligible automatic contribution arrangements, as well as modifications to provisions on the Sec. 402(g) limit, gap-period income on corrective distributions (i.e., excess deferrals, excess contributions, and excess aggregate contributions), qualified reservist distributions, and safe-harbor matching contributions. The IRS also recently updated the LRM for defined contribution plans. There are also packages for traditional IRAs, Roth IRAs, 403(b) plans, defined benefit plans, and cross-testing provisions. 3

Sponsor Survey Results

In 2009, the IRS surveyed 1,200 randomly selected 401(k) plan sponsors to better understand the 401(k) plan marketplace and to determine potential areas of noncompliance. The sponsors were required to complete a detailed questionnaire. The IRS has released a preliminary report of its findings from the examination of the plans. 4 It does not cite areas of noncompliance but reveals interesting information about the current structure of 401(k) plans, including:

  • 86% use a preapproved plan document;
  • 96% allow catch-up contributions;
  • 68% provide matching contributions (and 58% require one year of service to be eligible for matching contributions);
  • 54% require one year of service (and 64% require attainment of age 21) to be eligible to make 401(k) elective deferral contributions;
  • 60% use the current-year method for the actual deferral percentage test;
  • 62% allow in-service withdrawals;
  • 65% permit plan loans;
  • 1% have investments in employer securities; and
  • 73% have a third-party administrator responsible for making timely plan amendments.

Profit Sharing Plans Offering Deferred Annuity Options

Rev. Rul. 2012-3 5 provides guidance on the qualified joint and survivor annuity (QJSA) and qualified preretirement survivor annuity (QPSA) rules for a profit sharing plan that offers a deferred annuity contract as an investment option. The ruling describes three alternative plan designs and determines when the plan becomes subject to the QJSA and QPSA requirements and whether the plan has to provide the written QPSA explanation required by Sec. 417(a)(3) or obtain spousal consent for waiving the QPSA.

In general, the plan becomes subject to the rules when the participant can no longer transfer his or her assets from the deferred annuity contract to any other available investment option or demand a single-sum distribution. A plan subject to the rules does not have to provide the notice if it fully subsidizes the cost of the QPSA and the option to waive the QPSA or appoint a non-spouse beneficiary is not available.

Longevity Annuities

The IRS is proposing to modify the minimum required distribution rules to facilitate the purchase of longevity annuities. Under the proposed rules, 6 qualifying longevity annuity contracts (QLACs) could be excluded from the account balance used to calculate the minimum required distributions for those arrangements. A QLAC is an annuity contract (other than a variable contract, equity-indexed contract, or other similar contract) purchased from an insurance company that allows for distributions to begin on a specified date no later than age 85; whose premiums do not exceed 25% of the account balance, or, if less, $100,000; that has no commutation benefit (such as a period certain or refund of premiums); and has limited death benefits. Specifically, the only benefit permitted to be paid after the employee’s death would be a life annuity payable to the surviving spouse equal to 100% of the annuity amount payable to the employee. In the case of any other beneficiary, the life annuity would have to satisfy the minimum incidental death benefit limitations under Sec. 401(a)(9)(G), which would limit the beneficiary’s life annuity payments to an “applicable percentage” of the amount payable to the employee. The contract would also have to state that it intends to be a QLAC.

Pension Plans

Moving Ahead for Progress Act Amendments

On July 6, 2012, President Barack Obama signed into law the Moving Ahead for Progress in the 21st Century Act (MAP-21). 7 For single-employer pension plan sponsors, MAP-21 includes an interest rate stabilization provision 8 that should significantly reduce plan sponsors’ minimum funding obligations in the short term—beginning in 2012. In 2013, however, a series of substantial increases to Pension Benefit Guaranty Corp. (PBGC) premiums for single- and multiemployer plans will begin to take effect as well.

Basically, the act amended Sec. 430(h)(2) and Employee Retirement Income Security Act (ERISA) Section 303(h)(2) to limit the segment rates used to calculate liabilities for pension funding and other purposes. The limit is based on a 25-year average segment rate to be determined and published by the Treasury Department. Each segment rate for a given month cannot be less than the “applicable minimum percentage” or more than the “applicable maximum percentage” of the relevant 25-year average. The applicable minimum and maximum percentages form a corridor that gradually widens over a five-year implementation period, as shown in the exhibit.

This corridor applies when calculating a plan’s target normal cost, shortfall amortization base, and funding target under the minimum funding rules. It also applies when calculating a plan’s adjusted funding target attainment percentage (AFTAP) under the Sec. 436 benefit restriction rules. It does not apply for purposes of:

  • Calculating the maximum deduction limit for single-employer plans under Sec. 404(o);
  • Calculating lump-sum distributions under Sec. 417(e);
  • Determining if a plan has excess pension assets that can be transferred to a retiree health account pursuant to Sec. 420;
  • Calculating a plan’s unfunded vested benefits under the PBGC variable-rate premium rules; and
  • Determining if a plan sponsor is subject to the ERISA Section 4010 information-reporting requirements.

Plans covered by ERISA may also be required to include information in their annual funding notices about the corridor’s effect on their funding obligations. The additional information is required for any plan year beginning after Dec. 31, 2011, and before Jan. 1, 2015, if the plan’s funding target using the corridor is less than 95% of what the funding target would have been without the corridor; the plan’s funding shortfall without the corridor would be greater than $500,000; and the plan had 50 or more participants on any day during the preceding plan year.

These changes generally apply to years beginning after 2011. The act permits plan sponsors to use the prior-law interest rate assumptions for the 2012 plan year and to first apply the new rules in 2013. A plan sponsor that makes this election can do so for all purposes or solely for determining the plan’s AFTAP for 2012.

Beginning in 2013, the flat-rate PBGC premium for single-employer plans increases from $35 to $42 per participant. In 2014, the flat-rate premium will rise to $49 per participant and be adjusted for inflation in 2015 and beyond. The single-employer program’s variable-rate premium—currently $9 per $1,000 of unfunded vested benefits—will be adjusted for inflation beginning in 2013. Additionally, the inflation-adjusted $9 per $1,000 of unfunded vested benefit variable-rate premium will be increased by $4 in 2014 and by $5 in 2015. However, a $400-per-participant variable-rate premium cap will apply beginning in 2013. The cap amount also will be adjusted for inflation beginning in 2014. Flat-rate premiums for multiemployer plans will be increased by $3 per participant beginning in 2013.

Sec. 436 Compliance Deadline Extended

Notice 2011-96 9 gave sponsors of defined benefit plans more time to adopt amendments to comply with the Sec. 436 funding-based limits on accruals and accelerated benefit payments. Before the notice was issued in November 2011, the deadline was the last day of the plan year beginning in 2011. The notice extended the deadline to the latest of: (1) the last day of the first plan year that begins in 2012; (2) the last day of the plan year for which Sec. 436 is first effective for the plan; or (3) the due date, including extensions, of the employer’s tax return for the tax year that contains the first day of the plan year for which Sec. 436 is first effective for the plan. For most plans, the deadline will be the last day of the plan year beginning in 2012. However, filing a determination letter application for an individually designed plan accelerates the deadline, as determination letter applications filed on or after Feb. 1, 2012, require the restated plan to incorporate an interim amendment to comply with Sec. 436.

The notice also provided a sample amendment that, if timely adopted with changes only as permitted, would satisfy the Sec. 436 requirements and not cause a violation of the Sec. 411(d)(6) anti-cutback requirements. In addition, an individually drafted Sec. 436 amendment that eliminates or reduces a Sec. 411(d)(6)–protected benefit will not violate the anti-cutback requirements if the amendment is adopted by the deadline in the notice and the elimination or reduction is made only to the extent necessary to enable the plan to comply with Sec. 436.

Qualified Replacement Plan

In Letter Ruling 201143034, 10 the IRS examined the requirements of Sec. 4980 as they apply to the sale of a subsidiary that sponsors a “qualified replacement plan,” where the parent proposes to sell the subsidiary and retain the plan within the seller’s controlled group.

In 2009, a subsidiary terminated a defined benefit plan and transferred excess assets from it to a defined contribution plan it sponsored, satisfying the requirements of a qualified replacement plan under Sec. 4980. That same year, the parent company requested a ruling from the IRS in which it proposed to sell the corporate subsidiary but retain the qualified replacement plan (by changing the plan sponsor to another member of the controlled group). At the time of the IRS ruling in 2011, the plan covered 80 employees of the subsidiary and 260 employees of other members of the controlled group.

The IRS ruled that the transaction would not cause the plan to fail to be a qualified replacement plan. Specifically, the IRS ruled that the transaction would not cause the plan to fail the 95% test under Sec. 4980 because, of the active participants in the previously terminated defined benefit plan who would remain employed within the seller’s controlled group after the subsidiary’s sale, at least 95% would be active employees under the plan. According to the IRS, the measuring point would be after the subsidiary was sold.

Anti-Alienation Rules

In a case that illustrates the importance of accurately segregating the benefits due to an alternate payee under a qualified domestic relations order (QDRO), the Second Circuit ruled that a money purchase plan was obligated to pay a plan participant a portion of his account assets that had been mistakenly segregated and paid to the participant’s ex-wife under a QDRO. Under the facts of the case, Milgram v. Orthopedic Associates Defined Contribution Pension Plan , 11 a third-party administrator of the money purchase plan incorrectly processed the QDRO in 1996, transferring $763,847 more of the assets in the participant’s account to his ex-spouse than she was entitled to receive under the QDRO. When the error was discovered, the plan administrator (the participant’s former employer) requested that the ex-spouse return the money, but she refused to do so. The plan administrator then sued to recoup from the ex-wife or the third-party administrator the amount erroneously transferred.

After two years with no decision in the case, the participant sued the plan, his ex-wife, and the plan administrator to recover the funds. The two cases were consolidated by the district court. The plan argued that requiring it to pay the participant before it had recovered the equivalent funds from the ex-spouse would violate ERISA’s anti-alienation provisions, but the district court disagreed and awarded the participant the principal that had been erroneously transferred, plus earnings and interest. On appeal, the Second Circuit upheld the district court’s decision, explaining that the anti-alienation rule does not prevent plan assets from being used to satisfy a judgment entered against the plan itself.

Partial Annuity Distributions

Proposed regulations 12 would make it easier for defined benefit plans to provide a part-annuity/part-single-sum distribution by permitting a simpler calculation method. Rather than requiring a special calculation of the annuity portion using the Sec. 417(e)(3) cash-out assumptions, plans would be allowed to apply the usual annuity equivalence factors to the annuity portion and the cash-out assumptions to the single-sum portion. Under the proposal, the simpler method could be used only for three types of plans:

  1. Plans that explicitly provide that the bifurcated benefits are treated as two separate optional forms of benefit for purposes of Sec. 417(e)(3). This is the case if a plan provides two separate portions of the accrued benefit that are determined without regard to any election of an optional form and the participant is permitted to choose a different form of distribution with respect to each portion.

  2. Plans that allow the participant to elect different distribution forms for different portions of the accrued benefit in pro rata portions of the amount that would otherwise be determined.

  3. Plans that provide a single-sum distribution option with respect to only a portion of the benefit and provide a separate benefit election for the remainder.

For all three plan types, a plan amendment to adopt the bifurcated treatment would need to comply with Sec. 411(d)(6).

Lump-Sum Payment or New Annuity Allowed

In Letter Ruling 201228045, 13 the IRS ruled that a defined benefit plan could be amended to offer a limited window period in which retiree-annuitants could elect a lump-sum payment of their remaining plan benefits without violating the Sec. 401(a)(9) minimum required distribution rules. The offer would be extended to a wide range of participants, consisting of retirees currently receiving benefits, retirees eligible for but not yet receiving benefits, terminated deferred vested participants, beneficiaries currently receiving or currently entitled to receive survivor benefits, and alternate payees.

Under the proposal, the identified individuals would have between 60 and 90 days during which they could elect to receive the actuarial present value of their remaining benefits in a lump-sum payment. Those already receiving benefits could receive, in lieu of their current annuity, the actuarial present value of their remaining accrued benefits, either in a qualified joint and survivor annuity, a qualified optional survivor annuity, or an immediate lump sum. The new distribution form would have a new annuity starting date, and the election would be subject to the spousal consent requirements. If an annuitant had remarried after the original annuity starting date, the spousal consent would include, where required, both the current and the former spouse.

In analyzing the issue, the IRS observed that the proposed amendment would change the annuity payment period as a result of the lump-sum option, and individuals who elect to change their current distribution option would have a new annuity starting date. However, because the ability to select a lump-sum option would be available only during a limited window, the increased benefit payments were a permitted benefit increase under Regs. Sec. 1.401(a)(9)-6, Q&A-14(a)(4). The IRS noted that the Sec. 415 limitations would have to be satisfied at each of the annuity starting dates.

Rollover From Defined Contribution to Defined Benefit Plan

For employers that sponsor both a defined benefit and a defined contribution plan, Rev. Rul. 2012-4 14 clarifies how rollover contributions can be made from the defined contribution plan to the defined benefit plan and then be distributed in an annuity form consistent with the Code’s qualification requirements. In general, rollover amounts are treated as employee contributions and are nonforfeitable. The annuity derived from the rollover is determined by converting the rollover amount into an actuarially equivalent immediate annuity using the applicable interest rate and applicable mortality table under Sec. 417(e). In the event of a delay between the rollover and the annuity starting date, interest on the rollover amount is credited at 120% of the federal midterm rate consistent with Secs. 411(c)(2)(B) and (C), which govern the determination of accrued benefits derived from employee contributions. The annual benefit for purposes of Sec. 415(b) excludes benefits attributable to rollover contributions that are determined using the rules of Secs. 411(c)(2)(B) and (C), unless the plan were to use a more favorable actuarial basis to determine the annuity’s amount, in which case the excess portion would be included in the annual benefit under Sec. 415(b) and would be taken into account in applying the nondiscriminatory amount requirement under Sec. 401(a)(4). The rollover amount could have a different annuity starting date than the remainder of the plan benefits.

Common Compliance Problems

It is important to understand what the IRS views as areas of noncompliance, both qualification issues and those that can result in excise taxes. With respect to pensions, this includes:

  • Annual funding notices—late or undated.
  • Elections to use or reduce prefunding and carryover balances—late or undated.
  • Elections to use prefunding and carryover balances to meet quarterly contributions—late or with unspecified dollar amounts.
  • Adjusted funding target attainment percentage certification—late.
  • Actuarial increase for late retirement benefits—not made.
  • Asset valuation—done differently for minimum funding versus funding-based limits.
  • Relative value disclosure notices—not compliant with requirements to show relative value compared with the qualified joint and survivor annuity.
  • Contributions—late payment resulting in liquidity shortfalls.
  • Quarterly contributions—late.
  • Premiums for life insurance policies—inappropriate inclusion as plan expenses in target normal cost.
  • Funding—in excess of the deduction limit.
  • Determining accrued benefits in the valuation—use of a definition of compensation not consistent with plan terms.
  • Compensation for benefit purposes—not defined under the plan.
  • Service calculation for benefit purposes—incorrect calculation.
  • Distribution options subject to the Sec. 417(e) cash-out restrictions—incorrect interest rates used for calculating. 15

Governmental Plans

Prop. Regs. Define “Governmental Plan”

Facing increasing requests from plan sponsors of governmental plans for favorable determination letters 16 and a lack of guidance under Sec. 414(d) regarding the definition of “governmental plan,” the IRS is considering proposing regulations 17 on how to determine whether a retirement plan is a governmental plan. 18 Unlike other retirement plans, governmental plans are exempt from certain qualification requirements and are deemed to satisfy certain others. In addition, titles I and IV of ERISA—which are within the jurisdiction of the Department of Labor and the PBGC, respectively—do not apply to governmental plans. Along with the IRS, the two agencies oversee an almost identical definition of “governmental plan” and have historically attempted to coordinate their rulings to achieve a level of conformity in determining whether a plan meets the definition. 19

Sec. 414(d) defines a governmental plan as one established and maintained for its employees by the government of the United States, the government of any state or political subdivision thereof, or by any of their agencies or instrumentalities. The term also includes plans of Indian tribal governments and related entities if all plan participants are employees whose services are substantially all in the performance of essential governmental functions (but not commercial activities, regardless of whether they are also essential governmental functions). The rules apply not only to qualified plans but also to Secs. 403(b) and 457 plans and for purposes of Secs. 4980B, 9831, and 9832, which exempt governmental plans from COBRA (Consolidated Omnibus Budget Reconciliation Act) and group health plan requirements.

Whether an entity is an agency or instrumentality of the United States is based on the facts and circumstances, including whether:

  1. The entity performs or assists in a governmental function; 
  2. Any private interests are involved;
  3. Control of the entity is vested in the government of the United States;
  4. The entity is exempt from federal, state, and local tax by an act of Congress; 
  5. The entity is created by the U.S. government pursuant to a specific enabling statute;
  6. The entity receives financial assistance from the U.S. government;
  7. The entity is determined to be an agency or instrumentality of the United States by a federal court;
  8. Other governmental entities recognize the entity as an arm of the U.S. government; and/or
  9. The entity’s employees are treated in the same manner as federal employees for purposes other than providing employee benefits.

Determining whether an entity is an agency or instrumentality of a state or political subdivision of a state is also based on the facts and circumstances, including whether: (1) the entity’s governing board is controlled by a state (or political subdivision); (2) the members of the governing body are publicly nominated and elected; (3) a state (or political subdivision) has fiscal responsibility for the debts and other liabilities of the entity, including responsibility for funding benefits under the entity’s employee benefit plans; (4) the entity’s employees are treated in the same manner as employees of the state (or political subdivision) for purposes other than providing employee benefits; and (5) for an entity that is not a political subdivision, the entity is delegated the authority to exercise sovereign powers (e.g., the power of taxation, the power of eminent domain, and police powers) pursuant to a statute of a state (or political subdivision).

The draft proposed regulations also address what it means to “establish and maintain” a plan, changes in status (i.e., ceasing to be a private or governmental entity), governmental liability for spun-off benefits, and plan coverage for employees of labor unions. The rules would not apply before the plan year beginning after the date the final regulations are published in the Federal Register and will take into account the fact that state legislation may have to be enacted to amend a state or local retirement plan.

Changes to Normal Retirement Age

The IRS also announced two changes to the rules relating to the applicability of the normal retirement age (NRA) rules to governmental plans. 20 The changes would provide that (1) governmental plans that do not allow in-service distributions before age 62 would not be required to have a definition of NRA to satisfy the requirement to provide definitely determinable benefits after retirement or attainment of NRA merely because the pension plan does not have a definition of normal retirement age or does not have a definition of NRA that satisfies the requirements of the 2007 NRA regulations, and (2) the age-50 safe harbor in Regs. Sec. 1.401(a)-1(b)(2)(v) would apply to a group of employees, substantially all of whom are qualified public safety employees, regardless of whether they are covered by a separate plan.

Note that a definition of NRA may be important for a number of purposes—such as in determining eligibility for favorable tax treatment under Sec. 402(l) (which provides an income exclusion for certain distributions for health and long-term-care insurance premiums for retired public safety officers) or under the special catch-up provisions of the Sec. 457 regulations. 21

Finally, the notice states that the IRS intends to extend the effective date of the regulations regarding NRA for governmental plans to annuity starting dates that occur in plan years beginning on or after the later of Jan. 1, 2015, or the close of the first regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date that is three months after the final regulations are published in the Federal Register.

IRS Determination Letter Program Changes

With the goal of improving efficiency and eliminating features of limited utility, the IRS announced that its determination letter program 22 will no longer accept Form 5300’s Schedule Q, Elective Determination Requests, which is used to request a determination based on coverage and nondiscrimination demonstrations. 23 The IRS will, however, determine whether the benefit or contribution formula satisfies the requirements of a design-based safe harbor under Sec. 401(a)(4) and whether the plan’s terms satisfy the Sec. 401(k) and Sec. 401(m) requirements.

In addition, determination applications filed on Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans , on or after May 1, 2012, will be accepted only from adopters of volume submitter (VS) plans that have modified the terms of the specimen plan (and only if the modifications are not so extensive as to cause the plan to be treated as individually designed). Form 5307 applications will not be accepted from adopters of VS plans that have not made any changes to the specimen plan (except to select among options under the plan) or from adopters of master and prototype (M&P) plans. Those adopters may rely on the advisory or opinion letter issued for the VS or M&P plan, the announcement explains.

Effective May 1, 2012, an application for determination for a VS or M&P plan must be filed on Form 5300, Application for Determination for Employee Benefit Plan, if: (1) a determination is being requested on an affiliated service group, leased employee status, or a partial termination; (2) the plan is a multiemployer plan; (3) the determination is required by the IRS (e.g., in connection with a request for funding waiver); (4) where the employer has added language to an M&P plan to satisfy the Sec. 415 annual limit and Sec. 416 top-heavy requirements because of the required aggregation of plans; or (5) where a preapproved pension plan has a defined NRA earlier than age 62.


Safe-Harbor Qualifications

The Labor Department recently advised in Advisory Opinion 2012-02A 24 that a 403(b) plan’s eligibility for the ERISA safe harbor—by which the plan would not be considered a pension plan subject to title I of ERISA—is not adversely affected if the employer also maintains a qualified plan that is subject to ERISA. However, if employer matching contributions are made to the qualified plan based on employee salary deferrals that are made to the 403(b) plan, the 403(b) plan would fall outside the safe harbor and be subject to title I of ERISA, the Labor Department advised.

Prohibited Transaction Exemptionafe-Harbor Qualifications

In Advisory Opinion 2012-05A, 25 the Labor Department addressed how the sale or acquisition of a single parcel of employer real property by an ERISA plan could satisfy the “geographically dispersed” requirement necessary to satisfy the prohibited transaction exemption. It advised that the contribution of the property would be treated as a contribution of qualifying employer real property (QERP), provided that, immediately after the acquisition, the parcel satisfied the definition of QERP—including the geographically diverse requirement—when combined with other parcels held by the employer’s master trust. As such, the transaction would be exempt from the prohibited transaction rules if the other conditions of the ERISA Section 408(e) exemption were met.

Similarly, with the sale of a single parcel, the Labor Department advised that the parcel would meet the geographic dispersal requirement if, immediately after the sale, the remaining parcels in the plan together satisfied that requirement. If, immediately after the transaction, the parcels of employer real property did not satisfy the definition of QERP, the Labor Department advised, the transaction would constitute a prohibited transaction under ERISA Section 406(a)(2), which prohibits a fiduciary from allowing a plan to hold employer real property that is not QERP. To avoid such a result, the plan would need to obtain an individual exemption before the transaction.

New Disclosures by Plan Service Providers

Modified Labor Department regulations delayed the effective date of the new disclosure requirements 26 under ERISA Section 408(b)(2) until July 1, 2012. These rules obligate service providers to ERISA retirement plans to disclose the compensation they will receive as a result of dealing with the plan. Changes include the additional disclosure of items that the plan, in turn, is required to disclose to participants and an enhanced ability to “pass through” investment-related information from the issuer of a designated investment alternative. The separate, follow-on disclosures from the plan to the participants were likewise postponed until Aug. 30.

ERISA prohibits contracts or arrangements between a plan and a service provider, 27 but an exemption applies under ERISA Section 408(b)(2) for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if the contract or arrangement is reasonable and no more than reasonable compensation is paid. Under Labor Department final regulations 28 effective July 1, 2012, for the exemption to apply to a particular service contract or arrangement, the covered service provider must have provided the plan fiduciary with a disclosure of the fees it will receive.

A covered service provider is one that reasonably expects to receive $1,000 or more in compensation (direct or indirect) for performing services as a fiduciary or investment adviser, record keeper, or broker—or for performing any other services (e.g., accounting, auditing, actuarial, legal, consulting, etc.) if indirect compensation is reasonably expected to be received by the service provider, its affiliate, or a subcontractor. 29 Indirect compensation is that which is received from sources other than the plan or plan sponsor.

Upon discovering that a service provider failed to provide the required information, the fiduciary must submit a written request to the service provider to furnish it. If the service provider fails to comply within 90 days after that request, the fiduciary must notify the Labor Department. ERISA retirement plan fiduciaries who fail to receive the required fee disclosures from plan service providers must notify the Labor Department no more than 30 days after the expiration of the 90-day period (or, if earlier, no more than 30 days after the service provider refuses to comply with the request).

New regulations also require a plan sponsor to disclose fees charged to plans or plan participants. 30 For participants in defined contribution plans (such as 401(k) plans), the regulations require disclosure of fees charged against their accounts. Disclosures are required for plan-level fees and investment-related fees. The new plan-related disclosures are required for investment alternatives that are offered through a brokerage window, but the investment-related disclosures are not required for these investment alternatives unless they are specifically identified as available under the plan. Where a significant number of participants and beneficiaries elect to invest in a non-designated investment alternative offered through a brokerage window, the Labor Department views ERISA Section 404(a)—specifically, the duties of prudence and loyalty—as requiring the plan fiduciary to examine the investment alternative to determine whether it should be treated as a designated investment alternative and, therefore, be subject to the disclosure requirements. 31

Form 8955-SSA and Form 5558

Question 8 of Form 8955-SSA, Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits , asks whether the plan administrator provided an individual statement to each participant who was required to receive it pursuant to Sec. 6057(e). As with the old Schedule SSA (Form 5500) it replaces, the Form 8955-SSA requires the disclosure of participants who separated from service during the plan year with a deferred vested benefit (and any participants whose previously reported information requires revision). The penalty for failure to file the Form 8955-SSA (or to include all the required participants) is $1 per participant per day, up to a maximum of $5,000 per plan year, pursuant to Sec. 6652(d). That same Code section imposes a separate and distinct penalty on the failure to report required revisions, which is $1 per failure per day, up to a maximum $1,000 penalty imposed on any person. By contrast, Sec. 6690 imposes a penalty of $50 per participant for each willful failure to provide a proper individual statement.

The IRS recently revised Form 5558, Application for Extension of Time to File Certain Employee Plan Returns , to permit use of that form to request an extension of the deadline to file Form 8955-SSA. The revised form, however, requires a plan sponsor signature to obtain an extension of the Form 5558, but no signature was required to extend the deadline for filing the Form 5500. Plan sponsors will typically want to extend both forms if an extension is necessary. Recently, the IRS released proposed regulations that will permit plan sponsors to request an extension of the Form 8955-SSA without the need for a signature. 32 Although the IRS has not revised the form, it has indicated plan sponsors may rely on these regulations in proposed form.

Sec. 83

Substantial Risk of Forfeiture

The IRS issued proposed regulations 33 to clarify that, for purposes of the Sec. 83 income recognition rules for property transferred in connection with the performance of services:

  1. A substantial risk of forfeiture may be established only through a service condition or a condition related to the purpose of the transfer;

  2. Determining whether there is a substantial risk of forfeiture requires considering both the likelihood that the forfeiture event will occur and the likelihood that the forfeiture will be enforced; and

  3. Transfer restrictions do not create a substantial risk of forfeiture, except as specifically provided under Sec. 83(c)(3) or related regulations.

The proposed regulations’ preamble cites Robinson, 34 which held that a substantial risk of forfeiture could be established under the facts and circumstances without a service condition or a condition related to the purpose of the transfer. The decision held that a “sellback provision” in a stock option agreement—by which an individual was required to sell his shares back to the employer at his original cost if he sought to dispose of them within a year after he exercised the stock option—created a substantial risk of forfeiture. This was because the likelihood the employer would enforce the provision was high (although the likelihood the individual would trigger the event was very low). While not a service condition or a condition related to the purpose of the transfer, the sellback provision served a significant business purpose, the court reasoned, since it would cause the individual to disgorge any profit he made on a short-term sale, similar to Section 16(b) of the Securities Exchange Act of 1934. As such, the condition met the criteria for a substantial risk of forfeiture, the court ruled.

The preamble also gives the example of an employer that transfers to an employee stock that is nontransferable and subject to forfeiture if the employer’s gross receipts fall by 90% over the next three years. Even though the purpose of the condition is to incentivize the employee (and, thereby, to impose a condition related to the purpose of the transfer), if the employer is a long-standing seller of the product and there is no indication that future demand will fall or the employer will lose its ability to sell the product, the condition would not constitute a substantial risk of forfeiture, the preamble explains. This is because the likelihood that the forfeiture event will occur and that the forfeiture will be enforced must both be considered.

Regarding the third clarification above, the preamble notes that Sec. 83(c)(3) provides that as long as a sale may give rise to a suit under Section 16(b) of the Securities Exchange Act of 1934, the person’s rights in the stock are subject to a substantial risk of forfeiture and not transferable. Other transfer restrictions that carry the potential for forfeiture or disgorgement of some or all of the property, or other penalties, do not establish a substantial risk of forfeiture, the preamble explains. The proposed regulations provide new examples. A lockup provision in an underwriting agreement entered into in connection with an initial public offering, by which an employee agrees not to sell, dispose of, or hedge the company’s common stock during the prescribed period, would not establish a substantial risk of forfeiture under a new example. This change incorporates the holding in Rev. Rul. 2005-48. 35

The regulations are proposed to be effective for transfers made on or after Jan. 1, 2013, but taxpayers can rely on them for property transferred after their publication in the Federal Register on May 30, 2012.

Election Sample Language

Rev. Proc. 2012-29 36 includes sample language for a Sec. 83(b) election and provides examples of the tax consequences of making such an election. The statute and regulations require the election to be filed with the IRS no later than 30 days after the date the property is transferred to the service provider.

As a result of a Sec. 83(b) election, the property’s value is included in the gross income of the service provider at the time of the transfer, even though the property is substantially nonvested. Any subsequent appreciation in the property’s value is not taxable as compensation to the service provider, and no compensation is included in the service provider’s gross income when the property later becomes substantially vested.

Upon a subsequent sale or exchange of the property, the basis equals the amount paid for the property (if any) plus the amount included in income with the Sec. 83(b) election. If the property is forfeited while it is substantially nonvested (e.g., the employee forfeits the stock because of a termination of employment before vesting) the forfeiture is treated as a sale or exchange. The service provider realizes a loss equal to the excess of the amount paid (if any) for the property over the amount realized (if any) upon the forfeiture but is not entitled to a deduction or credit for taxes paid as a result of the Sec. 83(b) election.

Sec. 162(m) Performance-Based Compensation

Rev. Rul. 2012-19 37 makes clear that dividends and dividend equivalents relating to restricted stock and restricted stock units that are performance-based compensation under Sec. 162(m) must separately satisfy the requirements of Sec. 162(m)(4)(C) to qualify as performance-based compensation that is excluded from employee remuneration for purposes of the $1 million deduction limit. Focusing on two situations, the IRS notes that if the dividends and dividend equivalents are payable only if the same performance goals that apply to the restricted stock and restricted stock units are satisfied, they qualify as performance-based compensation and are excluded from employee remuneration for purposes of the Sec. 162(m) deduction limitation.

Alternatively, where the dividends and dividend equivalents are paid to the employee during the period from grant through vesting of the performance-based restricted stock and restricted stock unit awards granted to the employee, and the dividends and dividend equivalents do not vest and become payable solely on account of the attainment of preestablished performance-based goals, they do not qualify as performance-based compensation and are included in remuneration subject to the Sec. 162(m) deduction limitation.

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.

Authors’ note: The authors gratefully acknowledge the valuable assistance provided by Balasubramanian Yogishwar and Sandra Rolitsky in compiling this article.


1 Available here; see also Notice 2011-97, 2011-2 C.B. 923.

2 Small Business Jobs Act of 2010, P.L. 111-240.

3 Available here.

4 IRS, Section 401(k) Compliance Questionnaire: Interim Report (February 2012).

5 Rev. Rul. 2012-3, 2012-8 I.R.B. 383.

6 REG-115809-11.

7 Moving Ahead for Progress in the 21st Century Act, P.L. 112-141.

8 See Notice 2012-47, 2012-31 I.R.B. 98, and Notice 2004-34, 2004-1 C.B. 848, for guidelines for determining the corporate bond weighted average interest rate. See also Notice 2006-75, 2006-2 C.B. 366, and Notice 2007-81, 2007-2 C.B. 899, for guidelines to determine monthly corporate bond yield curve. Notice 2012-55, 2012-36 I.R.B. 332, contains adjusted 2012 segment rates, and Notice 2012-61, 2012-42 I.R.B., provides other guidance.

9 Notice 2011-96, 2011-52 I.R.B. 915.

10 IRS Letter Ruling 201143034 (10/28/11).

11 Milgram v. Orthopedic Assocs. Defined Contrib. Pension Plan, No. 10-1862-cv (2d Cir. 11/29/11).

12 REG-110980-10.

13 IRS Letter Ruling 201228045 (7/13/12).

14 Rev. Rul. 2012-4, 2012-8 I.R.B. 386.

15 IRS, Employee Plan News, Issue 2012-2, p. 6 (June 8, 2012).

16 Publication 794, Favorable Determination Letter; Rev. Proc. 2012-6, 2012-1 I.R.B. 197.

17 REG-157714-06 (advance notice of proposed rulemaking).

18 See also ERISA §§3(32) and 4021(b)(2) for definitions of “governmental plan” for purposes of titles I and IV of ERISA.

19 Preamble to REG-157714-06.

20 Notice 2012-29, 2012-18 I.R.B. 872.

21 Regs. Sec. 1.457-4(c)(3)(v)(A) provides that, for purposes of the special Sec. 457 catch-up, a plan must specify the NRA under the plan. It further provides that a plan must define NRA as any age that is on or after the earlier of age 65 or the age at which participants have the right to retire and receive, under the basic defined benefit pension plan of the state or tax-exempt entity, immediate retirement benefits without actuarial or similar reduction because of retirement before some later specified age.

22 Publication 794; Rev. Proc. 2012-6, 2012-1 I.R.B. 197.

23 Announcement 2011-82, 2011-52 I.R.B. 1052.

24 Available here.

25 Available here.

26 RIN 1210-AB08, 77 Fed. Reg. 5631 (Feb. 3, 2012). See also DOL Field Assistance Bulletin No. 2012-02 and FAQs on Schedule C (Form 5500), Service Provider Information, available at the Department of Labor website.

27 ERISA §406(a).

28 RIN 1210-AB08.

29 ERISA Regs. Sec. 2550.408b-2(c)(1)(iii).

30 ERISA Regs. Sec. 2550.404a-5.

31 Field Assistance Bulletin No. 2012-02.

32 REG-153627-08.

33 REG-141075-09.

34 Robinson, 805 F.2d 38 (1st Cir. 1986).

35 Rev. Rul. 2005-48, 2005-2 C.B. 259.

36 Rev. Proc. 2012-29, 2012-28 I.R.B. 49.

37 Rev. Rul. 2012-19, 2012-28 I.R.B. 16.


Deborah Walker is a tax partner at Deloitte Tax LLP’s National Tax Office in Washington, D.C., where Thomas Pevarnik is a director in the Global Employment Services practice. For more information about this article, contact Ms. Walker at


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