Month: February 2004

Judge Patrick Murphy has issued a Memorandum and Order in the case of Cooper v. IBM Personal Pension Plan and IBM Corporation. The Memorandum and Order grants plaintiffs’ motion to strike defendants’ attempt to assert “an affirmative defense out of time, or, in the alternative, to compel discovery and for extension of time.” IBM was arguing against the retroactive relief requested by plaintiffs based upon an argument that IBM was “blind-sided by what is characterized as a drastic change in the law.” IBM argued that the Court’s declaration that IBM’s 1995 PCF and 1999 cash balance plan violated the age discrimination prohibitions of ERISA section 204(b)91)(H) was a “startling new development in pension law” so that the “Court should exercise its discretion and grant only prospective relief.”

The Court says the following, in granting plaintiffs’ motion to strike:

. . . IBM is by no means in the sympathetic position of the employer in Manhart. Defined benefit plans are highly regulated and strictly scrutinized relative to defined contribution plans. The prohibition against age discrimination existed long before the appearance of cash balance plans. Indeed, the voluminous record in this case unequivocally shows that cash balance plans were a “response” to the long standing restrictive proscriptions that are the woof [warp?] and weave of a defined benefit plan. If this Court is correct, then the class is entitled to retroactive relief. There has not been a change in the law. All that has changed is IBM’s clever, but ineffectual, response to law that it finds too restrictive for its business model. . .

“It’s getting less murky how companies should book the effects of a new Medicare bill in their financial statements”: the Wall Street Journal reports on FASB‘s meeting on Wednesday at which it was decided that “companies should book the amount of federal subsidy they expect to receive under the Medicare Act as a reduction of future benefit costs — instead of as a stream of income from continuing operations.” The article is entitled: “FASB Confirms Standard on Medicare Accounting.” (Subscription required.)

Accounting Web also reports: “FASB Confirms Existing Rules on Medicare Accounting.”

Dennis Kennedy discusses Howard Bashman’s move to a solo practice here and notes his own prediction of this solo practice trend for big firm lawyers in his article: “2004 Legal Technology Trends: Do We Stand on the Threshold of the Next Legal Killer App?“

Mike O’Sullivan at Corp Law Blog has an enjoyable discussion of an employment contract provision gone awry (brought to our attention by Professor Bainbridge in a contract intrepretation quiz).

The Mid-Atlantic Pension Liaison Group met yesterday in Philadelphia. In attendance were practitioners from the Mid-Atlantic region as well as Vicki Surguy (Area II Determinations Manager from Cincinnati), Cathy Jones (the Employee Plans (“EP”) Mid-Atlantic Area Manager), George Brim (Area Coordinator), Michael Sanders (Supervisor and Internal Revenue Agent), as well as other agents and officials.

I. EP Determinations Update: Vicki Surguy provided the following updates:

(1) She confirmed that Paul Schultz will be leaving the IRS in March.

(2) As many of you know, Dick Wickersham left the IRS last year. His replacement will be Marty Pippins.

(3) Another draft of the White Paper on the Future of the Employee Plans Determinations Program is expected soon. (You can access the first White Paper here and the second White Paper here.) Ms. Surguy indicated that the approach being favored now is referred to as the “Bifurcated Approach” and would involve staggered “remedial amendment periods” for individually designed plans, based on the employer identification numbers (“EINs”) of the plan sponsor, as well as staggered submission of specimen plans (Volume Submitter and Master/Prototype). (If you want to see my rough notes as to what the schedule might look like, I have posted it in the “Continue Reading” section below.) The bottom line in this is that the “Status Quo” approach (i.e. keeping things as they are) is no longer favored by the IRS (as was reported at the last meeting) due to the staffing issues for IRS that ensue from having Determination Letter (“DL”) applications come in all at once.

(4) The Master & Prototype and Volume Submitter programs will likely be combined into one program. The combined program will probably include ESOPs and cross-tested plans, and be administered out of Cincinnati, Ohio. There will be a Revenue Procedure coming out soon on this.

(5) The IRS is working to close some of the “old” determination letter application cases that were submitted in 2002 and 2003 and are still open.

(6) The IRS is still working on quality assurance in the issuance of determination letters. As you may recall, at a previous meeting in October, Gary Runge, Quality Assurance Staff Manager, told the group that 24% of all DLs issued have errors in them, e.g. dates that are wrong, etc. If errors are discovered after a case is closed, the specialist fixing the error will have to retrieve the file from the Federal Records Center in Dayton, Ohio, in order to get the DL fixed. Ms. Surguy also informed us that EP records are retained for 10 years at the Federal Records Center, and then destroyed after that, but that Exempt Organization records are never destroyed.

(7) Ms. Surguy also gave a briefing on the status of the Tax Exempt Determination System (TEDS), the IRS’s new system which will allow for the electronic submission of DL applications and payment of user fees. It will also give plan sponsors the ability to track the status of their applications and even to access and change certain information in the system. As Ms. Surguy described the current “hard copy” system–of how the files are constantly being placed in boxes, shipped to other locations, unloaded, and then reboxed, reshipped to other locations, and unloaded again, and how agents reviewing these documents often work from their homes–it seems almost a “miracle” that our plans ever receive the DL’s that are applied for, due to the opportunity for error along the way. TEDS will apparently be phased in over the next few years, and will eliminate much of the paper handling burdens associated with the current system.

II. Local Determinations and Examinations Update: Cathy Jones and Michael Sanders gave the following update:

(1) The Employee Plans Team Audit Program (“EPTA”) seems to be getting into full swing with six different groups being sent out from the six different areas of EP Examination. In the Mid-Atlantic Area, the EPTA agents will be located in Philadelphia, Washington, D.C., Baltimore, Trenton, Pittsburgh, and Charlotte. The Group Manager, Elsie Garcia, is located in Trenton, New Jersey. EPTA agents will be examining large employers, including 403(b) plans, multi-employer plans, and many other types of plans as well. Audits will be targeting the following 5 market segments: (1) DB/health care, (2) DB/construction, (3) Profit-Sharing/manufacturing, (4) 401(k)/Finance and Insurance, and (5)Profit Sharing and Money Purchase/Other Services.

(2) The IRS is also implementing what are called “Focus Audits” which are audits limited to only 4 issues (in addition to “form” compliance). Michael Sanders will be heading the initiative in the Mid-Atlantic Area. There will be 4 groups of agents, working out of Texas (Dallas and Austin), Tennessee (Nashville, Knoxville, and Oklahoma City), Connecticut, and Philadelphia (Philadelphia, Scranton, Cherry Hill, and Trenton.) These agents will also work from the 5 market segments listed above. The program is a pilot and will start with 1,000 returns, with 200 coming out of each targeted market segment.

If agents begin a Focus Audit, and find that the plan is noncompliant in the identified areas, the audit may be expanded into additional issues or a Full Scope audit. Audits will be limited at first to the year under examination, but could extend to all years that the plan was noncompliant, according to Mr. Sanders.

Focus Audits will involve “Internal Control Interviews” and the IRS has prepared “Internal Control Checklists” for use in the audits. According to Cathy Jones, plans that are targeted should be prepared to discuss their “internal controls” with agents upon review.

As an example of what they will be targeting, in the DB/health care arena, agents will focus on Internal Revenue Code section 404 (deduction) and 412 (minimum funding) issues, as well as lump sum issues.

(3) All examinations–whether Full Scope or Focus Audits–will involve a review of plan documents to determine if they are up-to-date and compliant.

(4) The IRS will continue to do examinations based on referrals it receives from the Department of Labor as well as the general public.

(5) Cathy Jones stated that they are starting a new pilot program which will involve the examination of section 412(i) plans. The IRS will audit 10 to 50 of these plans, starting with the “springing cash value” plans first, and then focusing on returns with Schedule A’s.

(6) The IRS is also developing an Employee Plans Examination Process Guide which will detail the different stages of an Employee Plans Audit. The Guide will be available to the public at some time in the future.

(7) There was an article in the Winter 2004 edition of the IRS’s Employee Plan News entitled “Conducting Audits at a Taxpayer’s Place of Business” in which Preston Butcher, Director, EP Examinations, states:

Our efforts are focused on conducting effective and efficient high quality audits. In this regard, we have discussed with our agents the need for audits to generally be conducted at the taxpayer’s place of business, unless facts and circumstances dictate otherwise.

Apparently, the IRS will be providing a revision to this policy in an upcoming newsletter. The policy will not be as rigid as expected. According to officials at the meeting, there will be exceptions made on a case by case basis. The Service expects that 90% of the examinations will be conducted at the plan sponsor’s venue.

(8) Cathy Jones indicated that they will begin auditing SIMPLE Plans, starting in the 3rd quarter of this year. She noted that they just completed a program of auditing SEP Plans and found a great deal of noncompliance. The IRS is looking into an outreach program to educate the public regarding SEP compliance.

UPDATE: I would like to post notes from other Pension Liaison Group Meetings in other regions of the country for readers. If you are a member of another group and would like to provide this information, please email me by clicking here.

Here are my “rough” notes regarding the proposed DL Program (“Bifurcated Approach”) discussed above:

• Year 1: Defined Contribution (DC) Specimen Documents would be submitted to the IRS, as well as all individually designed plans (both DC and Defined Benefit (DB) plans) where the EINs of the plan sponsor end in 1 or 6.
• Year 2: Individually designed plans with plan sponsor EINs ending in 2 or 7 would come in for a DL.
• Year 3: Individually designed plans with plan sponsor EINs ending in 3 or 8 would come in for a DL, and DC Specimen Document letters would be issued by EP.
• Year 4: DB specimen documents would come in for a DL, as well as individually designed plans with plan sponsor EINs ending in 4 or 9 would come in as well.
• Year 5: Individually designed plans with plan sponsor EINs ending in 5 or 0 would come in for a DL.
• Year 6: DB specimen document letters would be issued, and the individually designed plan cycle would begin again (i.e. EINs ending in 1 or 6.)

In a previous post, I discussed how the “elapsed time” regulations were recently challenged and upheld in a Ninth Circuit case. Thanks to Kirk Maldonado (of the well-known 1987 DOL plan expense Information Letter) for providing some helpful background for these regulations:

Express statutory authority for the elapsed time method of crediting service is lacking. The legislative history of the Employee Retirement Income Security Act of 1974 (ERISA) is also void of any reference to the elapsed time method, despite the fact that this method had been used by plans before ERISA (see Ryan School Retirement Trust, 24 TC 127 (1955)).

On the other hand, Service 410(a)(3)(C) grants authority to the Secretary of Labor to prescribe Regulations defining “hour of service.” This grant of authority can arguably be extended to promulgate equivalent methods of crediting “hours of service,” such as the elapsed time method.

The validity of the elapsed time Regulation was questioned in Automated Packaging Systems, Inc., 70 TC 214 (1978). In Automated Packaging the plan did not contain the service-spanning rules although it otherwise satisfied the elapsed time requirements. The taxpayer argued that these rules contravene Congressional intent because they required credit for time when the employee was not employed.

The Tax Court, citing the legislative history, held that it was consistent with the Congressional intent to provide for crediting service on a more liberal approach than required by the general method. However, the court explicitly refrained from deciding the validity of the Regulation where the elapsed time method would credit service on a less liberal basis than the general method.

Kirk also writes:

Not many people know that the proposed elapsed time regulations were drafted by the DOL. However, the DOL and the IRS realigned their jurisdictions over different employee benefit plan matters in the Reorganization Plan of 1978. That document explains, for example, why DOL has control over certain issues relating to prohibited transactions, while other issues remain with the IRS. Anyway, the responsibility for the elapsed time regulations was shifted to the IRS in the Reorg.

UPDATE 2: Kirk has posted some good information here regarding the “elapsed time” regulations.

UPDATE 1: For those of you wanting to read the Maldonado Information Letter referred to above, continue reading. It is a DOL Information Letter to Kirk Maldonado, issued on March 2, 1987, and is not posted at the DOL’s website:

March 2, 1987

Mr. Kirk F. Maldonado

Stradling, Yocca, Carlson & Rauth

660 Newport Center Dr., Suite 1600

Newport Beach, CA 92660-6441

Dear Mr. Maldonado:

This is in response to your letter of July 16, 1986, and subsequent letters of August 26, 1986, and October 14, 1986, in which you request an advisory opinion on the application of the Employee Retirement Income Security Act (ERISA) to the payment of certain expenses by the Canoga Park Hospital Retirement Plan (the Plan).

You represent that the Plan specifies that it may pay certain administrative expenses incurred in the operation of the Plan which are explicitly set forth to include:

(1) Attorney’s fees incurred in connection with amending the plan to comply with legislative, case law and regulatory developments;
(2) Annual valuations of the sponsoring employer’s stock held by the Plan;
(3) Annual audit of the Plan performed by a certified public accountant;
(4) The fees of an outside consultant performed in connection with the administration of the Plan (e.g., preparation of benefit statements to participants): and
(5) The fees paid to members of the Committee. (Subject to the rule of ERISA section 408(c)(2), prohibiting payment of compensation by a plan to any individual who is receiving full-time pay from an employer whose employees are participants in the plan.)
You ask whether the above expenses authorized by the plan constitute ?expenses of administering the plan? within the meaning of sections 403(c)(1) and 404(a)(1)(A) of ERISA. You further ask whether the expenses incurred in connection with the bonding requirements of section 412 of ERISA could be charged to the plan.

Your inquiry relating to whether or not the payment by the Plan of the expenses described in your letter would be an appropriate expenditure of plan assets involves factual considerations with respect to which the Department will ordinarily not provide an opinion. (See section 5.04 of ERISA Procedure 76-1, 41 FR 36281, August 27, 1976.) Therefore the following discussion is intended to provide general guidance with respect to the various legal issues raised by your questions.

In evaluating the propriety of the payment of plan assets for certain expenses, plan fiduciaries must first consider the general fiduciary responsibility provisions of sections 403 and 404 of ERISA. Section 403(c)(1) of ERISA provides, in relevant part, that the assets of an employee benefit plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. Similarly, section 404(a)(1)(A) of ERISA requires, in pertinent part, that a fiduciary of a plan discharge his duties for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. Thus, a payment that is not a distribution of benefits to participants or beneficiaries of a plan would not be consistent with the requirements of sections 403(c)(1) and 404(a)(1)(A) of ERISA unless it were used to defray a reasonable expense of administering the plan. For example, the use of plan assets to pay fees and expenses incurred in connection with the provision of services would not be a reasonable expense of administering a plan if the payments are made for the employer’s benefit or involve services for which an employer could reasonably be expected to bear the cost in the normal course of such employer’s business or operations. In this regard, certain services provided in conjunction with the establishment, termination and design of plans, so called ?settlor? functions, relate to the business activities of an employer and, therefore, generally would not be the proper subject of payment by an employee benefit plan. It is the responsibility of appropriate plan fiduciaries to determine whether a particular expense is a reasonable administrative expense under sections 403(c)(1) and 404(a)(1)(A) of ERISA.

The prohibited transaction provisions also come into play in connection with payments for administrative services. Section 406(a)(1)(C) and (D) of ERISA provide, in part, that a fiduciary with respect to an employee benefit plan shall not cause the plan to engage in a transaction if he or she knows or should know that such transaction constitutes a direct or indirect furnishing of goods, services or facilities between the plan and a party in interest with respect to the plan or transfer to, or use by or for the benefit of, a party in interest of any assets of the plan.

Subject to the limitations of section 408(d) of ERISA, section 408(b)(2) exempts from the prohibitions of section 406(a) any contract or reasonable arrangement with a party in interest, including a fiduciary, for office space, or legal, accounting or other services necessary for the establishment or operation of a plan, if no more than reasonable compensation is paid therefor. Regulations issued by the Department clarify the terms ?necessary service? (29 CFR Section 2550.408b-2(b) ), ?reasonable contract or arrangement? (29 CFR Section 2550.408b-2(c)) and ?reasonable compensation? (29 CFR Section 550.408b-2(d) ) as used in section 408(b)(2) of ERISA. What constitutes a ?necessary service? in a particular case, however, can only be resolved by taking into account the relevant facts and circumstances. Thus, the fiduciaries of a plan should review all services provided to determine whether such services are ?necessary services? for which payment would be lawful.

With regard to your specific question as to the payment of expenses incurred in connection with the bonding requirements of section 412 of ERISA, the Department has stated in its ERISA Interpretive Bulletin, 29 CFR Section 2509.75-5, at question and answer number FR-9, that the purchase by a plan of a bond covering plan officials, as required by section 412(a) of ERISA will not be deemed a prohibited transaction under sections 406(a) or (b) of ERISA.

We hope that this information has been helpful to you.

Sincerely,

Elliot I. Daniel

Associate Director for

Regulations and Interpretations

Last week, the Treasury Department released its legislative proposals regarding retirement plan simplification. The proposal is contained in the 2004 Blue Book entitled “General Explanations of the Administration’s Fiscal Year 2005 Revenue Proposals. Benefitslink.com has posted that portion of the Blue Book pertaining to the new proposed retirement savings proposals which you can access here. You can read the Treasury’s Press Release–“The President’s Savings Proposals: Tax-Free Savings and Retirement Security Opportunities for all Americans”–here.

Additional articles discussing the proposals:

• PlanSponsor.com: “ERSA Redux “Better”, But Doubts Linger.”
• ASPA: “Administration Announces Revised Savings Proposals — Changes Made to Address ASPA’s Concerns.”
• Urban Institute: “Key Thoughts on RSAs and LSAs.”
• LATimes.com: “Bush Plan Would Offer 4 Tax-Free Ways to Save.”
• FoxNews.com: “A Primer on Bush’s New Savings Accounts.”
• SFGate.com: “A Savings Plan Redux.”

Some critical op-eds:

• 401khelpcenter.com: “The President’s Savings Proposal (Again) Too Little and Almost Too Late.”
• DodgeGlobe.com: “Sperling: Bush retirement savings plans amount to fiscal gimmickry.”

Last week, the Treasury Department released its legislative proposals regarding retirement plan simplification. The proposal is contained in the 2004 Blue Book entitled “General Explanations of the Administration’s Fiscal Year 2005 Revenue Proposals. Benefitslink.com has posted that portion of the Blue Book pertaining the new proposed retirement savings proposals which you can access here. You can read the Treasury’s Press Release–“The President’s Savings Proposals: Tax-Free Savings and Retirement Security Opportunities for all Americans”–here.

Additional articles discussing the proposals:

• PlanSponsor.com: “ERSA Redux “Better”, But Doubts Linger.”
• ASPA: “Administration Announces Revised Savings Proposals — Changes Made to Address ASPA’s Concerns.”
• Urban Institute: “Key Thoughts on RSAs and LSAs.”
• LATimes.com: “Bush Plan Would Offer 4 Tax-Free Ways to Save.”
• FoxNews.com: “A Primer on Bush’s New Savings Accounts.”
• SFGate.com: “A Savings Plan Redux.”

Some critical op-eds:

• 401khelpcenter.com: “The President’s Savings Proposal (Again) Too Little and Almost Too Late.”
• DodgeGlobe.com: “Sperling: Bush retirement savings plans amount to fiscal gimmickry.”

Some interesting articles on 401(k) plans:

• “Avoiding mistakes in your 401(k) plan” from the Boston Globe. The op-ed by Alicia H. Munnell, director, and Annika Sunden, research associate, at the Center for Retirement Research at Boston College, discusses methods for helping participants to save and make wise choices:
  

  Public policy could greatly improve 401(k) plans by leveraging this inertia and setting the defaults in 401(k) plans to “best practice.” The plan would automatically enroll all eligible participants; it would set their contributions at the level that maximizes the employer match; diversify and rebalance their portfolios as they age; restrict investments in company stock; automatically roll over lump-sum distributions; and pay out retirement benefits in the form of a joint-and-survivor inflation-indexed annuity. . . The clear message from the 401(k) experience is that financial decisions are complicated and individuals with busy lives do not make good choices.

• Bankrate.com has this interesting article: “401(k) fees: devil in the nest egg.” The article quotes Ann Combs with the DOL as having this to say about the fees participants are paying in their 401(k) accounts:
  

  “I think it’s an evolutionary process,” says Ann Combs, assistant secretary of the Employee Benefits Security Administration at the U.S. Department of Labor.

  “First you have to get employees to participate, then you need to get them to max their contributions so they get the employer match. Then you educate them about investment options, asset allocation and checking their quarterly statements. Fees are probably on a more sophisticated level that they learn as they go along.”

  Comment: It is hard to believe that Ann Combs really said this. Perhaps she was misquoted. Can you imagine telling anyone to invest their money and then to learn about what fees they are paying, after they have already made the investment?

• SFGate.com: “Avoiding dodgy funds.” The article describes what Morningstar offers in their 401(k) plan for a mutual fund line-up. (Morningstar is a company that is in the business of researching and rating mutual funds.) What would Morningstar do if a fund being offered were charged in a mutual fund investigation?
  

  “We’d have to look at it. There’s a wide variety of misdeeds,” Phillips says. “But we would definitely consider making a change. One of the few things you can do as a fund investor is vote with your feet. I think it’s great that in the aggregate, money has continued to go into funds, but (fund assets) have been radically repositioned away from funds that have been implicated. There should be a penalty. You should lose assets if you violate the public’s trust.”

• LA Times: “Mutual fund scandal shakes up 401(k) plans.” Quote of Note:
  

  The outpouring of bad news about mutual funds has a silver lining, said Michael Scarborough, president of the Scarborough Group in Annapolis, which manages individuals’ 401(k) accounts. Workers notorious for neglecting their accounts are taking time to review them and ask questions, he said. The last time workers had a renewed interest in their 401(k)s was during the corporate scandals. “I always said Enron was a pretty good thing to happen,” Scarborough said, “as long as you didn’t work at Enron.”

• The Washington Post: “If You Depend on a 401(k), Now Is Time to Start Worrying About Retirement.” If the 401(k) retirement-savings system ever wants a mascot and a slogan, it need look no further than Mad magazine’s Alfred E. Neuman and his signature line, “What, me worry?”