ERISA and Employee Benefits Law
Roth CPA is giving out the Procrastinator of the Year Award here: Thirteen years is enough time for your kindergartener to start attending college classes; if you lose your IRS check, you need to take action by middle school. And…
Roth CPA is giving out the Procrastinator of the Year Award here:
Thirteen years is enough time for your kindergartener to start attending college classes; if you lose your IRS check, you need to take action by middle school.
And if you have trouble with procrastination, you might want to read about “Structured Procrastination.” Or, if that doesn’t help, maybe this will:
“Procrastination: A hardening of the oughteries.” (Anonymous)
“You may delay, but time will not.” (Benjamin Franklin)
Today's Federal Register contains corrections to the final regulations governing split-dollar life insurance arrangements which you can access here. I have added the final split-dollar regulations (with related links) to the "Hot Topics" section on the right (scroll down): Final…
Today’s Federal Register contains corrections to the final regulations governing split-dollar life insurance arrangements which you can access here. I have added the final split-dollar regulations (with related links) to the “Hot Topics” section on the right (scroll down):
Denise Howell, who coined the word "blawg" for law blog, has a great deal to say about the benefits of blogging over here. By the way, the term "blogress" (female blogger) seems to be catching on. . .Taranto keeps using…
Denise Howell, who coined the word “blawg” for law blog, has a great deal to say about the benefits of blogging over here.
By the way, the term “blogress” (female blogger) seems to be catching on. . .Taranto keeps using it at Best of the Web Today (here). (Calblog mentions it here.)
At the ALI-ABA Annual Fall Employee Benefits Law and Practice Update mentioned in a previous post, Jim Holland, Employee Plans Group Manager (Actuarial 1) for the IRS, discussed a new phenomena in the benefits world-how U.S. attorneys are seeking to…
At the ALI-ABA Annual Fall Employee Benefits Law and Practice Update mentioned in a previous post, Jim Holland, Employee Plans Group Manager (Actuarial 1) for the IRS, discussed a new phenomena in the benefits world–how U.S. attorneys are seeking to levy against qualified plan assets pursuant to the Federal Debt Collection Procedures Act of 1990 (“FDCPA”). The Act authorizes the federal government to collect against all property of individuals for payment of criminal fines or for restitution to victims of crimes. Mr. Holland stated that the IRS did not know that this practice under the FDCPA was going on until they received a request for a private letter ruling from a federal district court. When they received the request, they discovered that there had already been two federal district court cases on the subject allowing the garnishment, and holding that garnishment should not disqualify the plan under the anti-alienation provisions of section 401(a)(13) of the Internal Revenue Code or under the anti-alienations provisions of section 206(d)(1) of ERISA.
In response, the IRS issued Private Letter Ruling 200342007 (via Benefitslink.com) which held that “the general anti-alienation rule of Code section 401(a)(13) does not preclude a court’s garnishing the account balance of a fined participant in a qualified pension plan in order to collect a fine imposed in a federal criminal action.” The IRS accepted the reasoning of the courts which had held that section 3713(c) of the FDCPA (which provides that “an order of restitution . . .is a lien in favor of the United States on all property and rights to property of the person fined as if the liability of the person fined were liability for a tax assessed under the Internal Revenue Code . . .”) was to be treated as if it were a tax lien so that it fell within the exception to the anti-alienation provision as enunciated under Treasury Regulation section 1.401(a)-13(b)(2)(ii). That exception provides:
(b) No assignment or alienation–(1) General rule. Under section 401(a)(13), a trust will not be qualified unless the plan of which the trust is a part provides that benefits provided under the plan may not be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process.
(2) Federal tax levies and judgments. A plan provision satisfying the requirements of subparagraph (1) of this paragraph shall not preclude the following:
(i) The enforcement of a Federal tax levy made pursuant to section 6331.
(ii) The collection by the United States on a judgment resulting from an unpaid tax assessment.
Mr. Holland stated that there are still a great deal of unanswered questions regarding levies against qualified plan assets under the FDCPA. In the Private Letter Ruling, the garnishment had to do with a defined contribution plan and sought immediate payment from the plan. The Private Letter Ruling stated that the participant had an account in the 401(k) plan, but also stated that “[c]urrently, Participant A [had] no right to a distribution of amounts standing to his credit under Plan X.” However, the IRS went ahead and allowed the garnishment despite the fact that the participant did not have a right to an immediate distribution.
Mr. Holland stated that there were issues pertaining to defined benefit plans that had not yet been addressed, and that the issues can be difficult, especially when plan administrators are being threatened with contempt if plan monies are not turned over.
What about the tax consequences to the individuals involved? The panel stated that the amounts garnished would be includible in the income of the participant, but that it would not be subject to the section 72(t) early withdrawal penalty since levies are exempt from section 72(t). However, the question was asked about an obligation to withhold, and the answer was that it was unclear at this point since the question had not yet been addressed.
The following may also be relevant:
At the ALI-ABA Annual Fall Employee Benefits Law and Practice Update mentioned in a previous post, Jim Holland, Employee Plans Group Manager (Actuarial 1) for the IRS, discussed a new phenomena in the benefits world and how U.S. attorneys are…
At the ALI-ABA Annual Fall Employee Benefits Law and Practice Update mentioned in a previous post, Jim Holland, Employee Plans Group Manager (Actuarial 1) for the IRS, discussed a new phenomena in the benefits world and how U.S. attorneys are seeking to levy against qualified plan assets pursuant to the Federal Debt Collection Procedures Act of 1977 (“FDCPA”). The Act authorizes the federal government to collect against all property of individuals for payment of criminal fines or for restitution to victims of crimes. Mr. Holland stated that the IRS did not know that this practice under the FDCPA was going on until they received a request for a private letter ruling from a federal district court. When they received the request, they discovered that there had already been two federal district court cases on the subject allowing the garnishment, and holding that garnishment should not disqualify the plan under the anti-alienation provisions of section 401(a)(13) of the Internal Revenue Code or under the anti-alienations provisions of section 206(d)(1) of ERISA.
The IRS issued Private Letter Ruling 200342007 (via Benefitslink.com) which held that “the general anti-alienation rule of Code section 401(a)(13) does not preclude a court’s garnishing the account balance of a fined participant in a qualified pension plan in order to collect a fine imposed in a federal criminal action.” The IRS accepted the reasoning of the courts which had held that section 3713(c) of the FDCPA (which provides that “an order of restitution . . .is a lien in favor of the United States on all property and rights to property of the person fined as if the liability of the person fined were liability for a tax assessed under the Internal Revenue Code . . .”) was to be treated as if it were a tax lien so that it fell within the exception to the anti-alienation provision as enunciated under Treasury Regulation section 1.401(a)-13(b)(2)(ii). That exception provides:
(b) No assignment or alienation–(1) General rule. Under section 401(a)(13), a trust will not be qualified unless the plan of which the trust is a part provides that benefits provided under the plan may not be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process.
(2) Federal tax levies and judgments. A plan provision satisfying the requirements of subparagraph (1) of this paragraph shall not preclude the following:
(i) The enforcement of a Federal tax levy made pursuant to section 6331.
(ii) The collection by the United States on a judgment resulting from an unpaid tax assessment.
Mr. Holland stated that there are still a great deal of unanswered questions regarding levies against qualified plan assets under the FDCPA. In the Private Letter Ruling, the garnishment had to do with a defined contribution plan and sought immediate payment from the plan. The Private Letter Ruling stated that the participant had an account in the 401(k) plan, but also stated that “[c]urrently, Participant A [had] no right to a distribution of amounts standing to his credit under Plan X.” However, the IRS went ahead and allowed the garnishment despite the fact that the participant did not have a right to an immediate distribution.
Mr. Holland stated that there were issues pertaining to defined benefit plans that had not yet been addressed, and that the issues can be difficult, especially when plan administrators are being threatened with contempt if plan monies are not turned over.
What about the tax consequences to the individuals involved? The panel stated that the amounts garnished would be includible in the income of the participant, but that it would not be subject to the section 72(t) early withdrawal penalty since levies are exempt from section 72(t). However, the question was asked about an obligation to withhold, and the answer was that it was unclear at this point since the question had not yet been addressed.
The following may also be relevant:
As part of Howard Bashman's November edition of "20 Questions for the Appellate Judge," Howard asked Senior Circuit Judge Richard S. Arnold of the U.S. Court of Appeals for the Eighth Circuit about his most favorite aspect of being a…
As part of Howard Bashman‘s November edition of “20 Questions for the Appellate Judge,” Howard asked Senior Circuit Judge Richard S. Arnold of the U.S. Court of Appeals for the Eighth Circuit about his most favorite aspect of being a federal appellate judge. Judge Arnold’s answer was, in my opinion, profound and refreshing:
The aspect of the job I like most is that all I have to do is do right. Every day when I come to work and pick up a file, that is my only job. Let right be done.
It is a philosophy which this generation and those after us should really learn from and take to heart. . . and unfortunately, as this article from CFO.com relates, it is not a philosophy espoused by very many today: “Whatever Happened to Doing the Right Thing?” According to the article, “[w]hen Americans were asked what the main business benefit of being a responsible corporate citizen is, their number-one response was “improving brand image.” One-third of the respondents replied “increase sales,” according to the survey. Doing the right thing was apparently way down the list.”
Another article from Beth Matter of Vanderbilt University highlights the issue: “After Enron: the (Un)Certain Future of Corporate Responsibility.” The article notes:
The Enron debacle resulted from a total failure of professionals to do their jobs— from executives running the company to investment bankers giving advice—which helped to push the pendulum into the Sarbanes Oxley Act . . Companies are worried about extra liabilities, but many of the regulations can be distilled down to four words: Do the Right Thing. For companies already doing the right thing, the future is not uncertain. Those not doing the right thing are going to have to venture into different territory, but it is not uncharted. Shouldn’t audit committees already have been independent? Shouldn’t officers already have been responsible for their financial statements?”
Bill Sweetnam, Benefits Tax Counsel for the Department of Treasury, and Roger Siske, attorney with Sonnenschein Nath & Rosenthal, spoke at the ALI-ABA "Annual Fall Employee Benefits Law and Practice Update" and enlightened practitioners on the cash balance plan controversy….
Bill Sweetnam, Benefits Tax Counsel for the Department of Treasury, and Roger Siske, attorney with Sonnenschein Nath & Rosenthal, spoke at the ALI-ABA “Annual Fall Employee Benefits Law and Practice Update” and enlightened practitioners on the cash balance plan controversy. (For those who do not know, a cash balance pension plan is a defined benefit plan that is designed to work like a defined contribution plan. A cash balance plan establishes a “hypothetical account” for each employee and credits the account with hypothetical “pay credits” and “interest credits.” However, under these plans, the employer bears the investment risk which results in retirement security not available under a defined contribution plan.)
Bill Sweetnam gave an overview of what has transpired in the cash balance plan arena:
(1) Mr. Sweetnam remarked that, back in December of last year, the Treasury had issued regulations governing cash balance plans which basically opined that cash balance plan formulas and conversions in and of themselves were not age discriminatory if certain conditions were met. (Note: When the IRS issued its proposed cash balance plan regulations, they dealt with two separate types of discrimination: (1) discrimination in favor of highly compensated employees, and (2) discrimination against older employees. When the IRS withdrew a portion of the regulations, it withdrew the portion pertaining to discrimination in favor of highly compensated employees, but not the portion of the regulations pertaining to age discrimination.)
(2) Mr. Sweetnam also went on to say, that when the IBM cash balance plan decision was issued this summer (Cooper et al. v. the IBM Personal Pension Plan et al.) and ruled that cash balance plans were inherently age discriminatory, this sparked a lot of interest in the Treasury’s cash balance plan regulations. Both the House and the Senate passed amendments to the Appropriations Bills blocking the Treasury from issuing regulations. Mr. Sweetnam said that there are various other measures on cash balance plans being proposed which would seek to resolve the differences in the House and the Senate measures. (You can access the House amendment called the “Sanders Amendment” here and the Senate amendment called the “Harkin Amendment” here from previous posts.) One of the most interesting comments made by Mr. Sweetnam was that when both of these measures were introduced in the House and the Senate, respectively, there was little, if any, support expressed on the House or Senate floor for cash balance plans.
(3) There is very little hope that the IRS will begin issuing determination letters for the cash balance plans which are “stuck” at the national office (400 or so of them, according to Mr. Sweetnam) due to the “freeze” on determination letters. Under this “freeze,” determination letters will not be issued for cash balance plans which have been converted from defined benefit plans.
What should plan sponsors be doing regarding cash balance plans? Roger Siske stated that, even though the IBM decision did not reach a good result, in his opinion, it nevertheless was “well-reasoned” so that other courts may end up adopting this reasoning as well. For employers with current cash balance plans, the recommendation was to do a “risk analysis” and determine what it would mean for the employer if the IBM case is upheld. Because ERISA prohibits discrimination based upon increased age at all ages and not just for employees who have attained age 40, the possibility is raised that each employee would have to be “topped up” to the highest rate of benefit accrual of any other younger employee under the plan so that any “risk analysis” should include this possibility.
Employers should weigh the risks of continuing their plans and should consider amending their plans to traditional defined benefit plans or defined contribution plans, according to Mr. Siske. Regarding amendments to plans, the following was discussed:
(1) It is unclear whether any amendments may be made to reduce or even change the future interest crediting rates for existing accruals.
(2) The cash balance plan formula could be frozen, though, to limit the accrued benefits to benefits accrued on the date of the amendment.
(3) The Plan could be amended to provide for a benefit equal to the larger of the frozen cash balance plan accrued benefit or a new traditional defined benefit formula which over time would wear away the damage exposure with respect to employees who continue to accrue a benefit provided under the traditional defined benefit formula.
Bill Sweetnam, Benefits Tax Counsel for the Department of Treasury, and Roger Siske, attorney with Sonnenschein Nath & Rosenthal, spoke at the ALI-ABA "Annual Fall Employee Benefits Law and Practice Update" and enlightened practitioners on the cash balance plan controversy….
Bill Sweetnam, Benefits Tax Counsel for the Department of Treasury, and Roger Siske, attorney with Sonnenschein Nath & Rosenthal, spoke at the ALI-ABA “Annual Fall Employee Benefits Law and Practice Update” and enlightened practitioners on the cash balance plan controversy. (For those who do not know, a cash balance pension plan is a defined benefit plan that is designed to work like a defined contribution plan. A cash balance plan establishes a “hypothetical account” for each employee and credits the account with hypothetical “pay credits” and “interest credits.” However, under these plans, the employer bears the investment risk which results in retirement security not available under a defined contribution plan.)
Bill Sweetnam gave an overview of what has transpired in the cash balance plan arena:
(1) Mr. Sweetnam remarked that, back in December of last year, the Treasury had issued regulations governing cash balance plans which basically opined that cash balance plan formulas and conversions in and of themselves were not age discriminatory if certain conditions were met. (Note: When the IRS issued its proposed cash balance plan regulations, they dealt with two separate types of discrimination: (1) discrimination in favor of highly compensated employees, and (2) discrimination against older employees. When the IRS withdrew a portion of the regulations, it withdrew the portion pertaining to discrimination in favor of highly compensated employees, but not the portion of the regulations pertaining to age discrimination.)
(2) Mr. Sweetnam also went on to say, that when the IBM cash balance plan decision was issued this summer (Cooper et al. v. the IBM Personal Pension Plan et al.) and ruled that cash balance plans were inherently age discriminatory, this sparked a lot of interest in the Treasury’s cash balance plan regulations. Both the House and the Senate passed amendments to the Appropriations Bills blocking the Treasury from issuing regulations. Mr. Sweetnam said that there are various other measures on cash balance plans being proposed which would seek to resolve the differences in the House and the Senate measures. (You can access the House amendment called the “Sanders Amendment” here and the Senate amendment called the “Harkin Amendment” here from previous posts.) One of the most interesting comments made by Mr. Sweetnam was that when both of these measures were introduced in the House and the Senate, respectively, there was little, if any, support expressed on the House or Senate floor for cash balance plans.
(3) There is very little hope that the IRS will begin issuing determination letters for the cash balance plans which are “stuck” at the national office (400 or so of them, according to Mr. Sweetnam) due to the “freeze” on determination letters. Under this “freeze,” determination letters will not be issued for cash balance plans which have been converted from defined benefit plans.
What should plan sponsors be doing regarding cash balance plans? Roger Siske stated that, even though the IBM decision did not reach a good result, in his opinion, it nevertheless was “well-reasoned” so that other courts may end up adopting this reasoning as well. For employers with current cash balance plans, the recommendation was to do a “risk analysis” and determine what it would mean for the employer if the IBM case is upheld. Because ERISA prohibits discrimination based upon increased age at all ages and not just for employees who have attained age 40, the possibility is raised that each employee would have to be “topped up” to the highest rate of benefit accrual of any other younger employee under the plan so that any “risk analysis” should include this possibility.
Employers should weigh the risks of continuing their plans and should consider amending their plans to traditional defined benefit plans or defined contribution plans, according to Mr. Siske. Regarding amendments to plans, the following was discussed:
(1) It is unclear whether any amendments may be made to reduce or even change the future interest crediting rates for existing accruals.
(2) The cash balance plan formula could be frozen, though, to limit the accrued benefits to benefits accrued on the date of the amendment.
(3) The Plan could be amended to provide for a benefit equal to the larger of the frozen cash balance plan accrued benefit or a new traditional defined benefit formula which over time would wear away the damage exposure with respect to employees who continue to accrue a benefit provided under the traditional defined benefit formula.
As part of a pilot program, the IRS is providing Plan Information Packets to businesses that have adopted an IRA-based retirement plan "in order to promote a better understanding of the requirements for these plans." Three types of IRA-based plans…
As part of a pilot program, the IRS is providing Plan Information Packets to businesses that have adopted an IRA-based retirement plan “in order to promote a better understanding of the requirements for these plans.” Three types of IRA-based plans have been selected for this pilot program:
Using employee and employer tax information to determine probable IRA-based plan sponsors, plan information packets will be provided to “100 probable SIMPLE IRA plan sponsors in the greater Los Angeles Area” and “100 probable SARSEP sponsors in the greater Boston Area.” In addition, the Service will be distributing plan information packets on SEPs.
The packets will include:
(The foregoing links are links to information in the SIMPLE IRA packet. You can access the SEP IRA packet here and the SARSEP IRA packet here.) The IRS is urging business owners to review the checklists and to correct errors under the Employee Plans Compliance Resolution System (“EPCRS”).
Note: It is nice to think of the IRS as “helping” employers in this program since there does seem to be a big push for the IRS to provide training and guidance to employers. However, being “selected” to receive an information packet in this program likely brings little comfort to employers. Employers should, with the help of their advisers as needed, carefully review the checklists enclosed in the packets and make sure that their plans are in compliance. After attending the Mid-Atlantic Pension Liaison Group Meeting in Philadelphia in October where the IRS emphasized its audit focus and specifically mentioned how it intends to audit SARSEPs, one might tend to think that these packets should, instead, be re-named “Pre-Audit Preparation Packets.” In other words, maybe it is not the time to be singing, “We got a packet, we got a packet, we got a packet, hey–hey–hey–hey.” (To the tune of “We got a dollar . . .” from the Little Rascals.)
The dilemma faced by ERISA plan fiduciaries and other fiduciaries in the current mutual fund scrutiny is highlighted in these two articles:"Pension Plans Faced With Dilemma in Dropping Funds Caught Up in Scandal: CalPERS and CalSTRS consider firing Putnam, but…
The dilemma faced by ERISA plan fiduciaries and other fiduciaries in the current mutual fund scrutiny is highlighted in these two articles:
The latter article discusses the various solutions being proffered for those who must make decisions on behalf of participants as to whether or not to continue to offer a mutual fund which has been the focus of an investigation. One adviser recommends that plan sponsors inform workers of the timing scandals, provide a substitute offering for any implicated funds and let participants decide their course of action. However as another adviser correctly states “[S]aying we recognize there is a problem, but we are still going to offer it to you sets up a big fiduciary issue.”
Quote of Note from the Denver Post article:
Just being under investigation causes problems for a mutual fund, adds Don Trone, president of the Foundation for Fiduciary Studies near Pittsburgh. “When a company is being investigated for wrongdoing, management will be consumed with dealing with those charges,” he said. “The product will suffer.” Investors are also more likely to pull their money out, hurting returns, he said.
This article from the Wall Street Journal today (subscription required)–“Public Pension Funds React to Probe: Some States Have Fired: Others Wait and Watch“–highlights how the issue is also important for fiduciaries of college-savings plans which are invested heavily in mutual funds. In addition, the article notes that one of the most difficult problems of the ongoing scrutiny is that of not knowing who might be implicated next. The article quotes Thomas Mann, director of the $4.5 billion Wyoming Retirement System, as saying: “If you fire a firm and pick up another that ends up having the same problems, you haven’t gained anything.”