Month: July 2004

The Wall Street Journal today (subscription required) contains this article: “401(k) Payoffs: Are They Legit?“:

Federal securities regulators, expanding their scrutiny of the mutual-fund industry, are examining whether some funds are paying retirement plans to be included in their lineup of available funds. Officials are concerned that the payments aren’t being disclosed and may result in retirement plans offering funds that aren’t in the best interest of investors. The Securities and Exchange Commission said it wants to know why mutual funds and their investment advisers make certain payments to 401(k) plans, what the money is used for and whether it creates an incentive for retirement plans to favor certain funds over others.

Also, from the New York Times: “S.E.C. Inquiry to Encompass 401(k) Plans.”

And from The McHenry Group, this alert: “SEC Launches Sweep Examination of Mutual Fund 401(k) Payments.” The alert inclues the list of twenty-five questions sent to mutual fund companies by the SEC over the past several weeks.

(Obviously, whatever the SEC finds here would also interest the DOL since, under ERISA, fiduciaries are obligated to select plan investment options under the ERISA standard of “solely in the interest of participants amd beneficiaries.”)

From Bloomberg.com, “MCI, WorldCom’s Ebbers Settle 401K Suit for $51 Mln.” According to the article, former executives of WorldCom have agreed to pay about $51 million to settle a class action suit by employees involving the 401(k) plan. The pact must be approved by U.S. District Judge Denise Cote and apparently leaves the 401(k) fund directed trustee as the only active defendant.

Read more about the lawsuit here.

The New York Times has an interesting article here discussing how United Airlines may have to take drastic steps regarding its pension plans in the near future. According to the article, the airline just a few weeks ago said in a bankruptcy court filing that it viewed its pension plans “as untouchable unless there was no other choice.” However, the article states that many now are predicting that United will have to “gut the pension plans” and that there is no other way for United to survive.

The article goes on to make predictions regarding the airline industry as a whole:

Whatever United does will be closely watched by the other major airlines and their employees, who have substantial pensions of their own to worry about. If United ultimately revives itself by terminating one or more of its pension plans, other airlines may also try to shed pension debt, to remain competitive.

This would not happen overnight. Pension terminations are difficult and costly. But over time, the industry could find itself in a long, slow race to the bottom – a succession of bankruptcies and pension defaults similar to those in the steel industry over the last quarter of a century. Steel maker after steel maker went bankrupt, and the only ones to bounce back were those that scuttled their pension plans.

Read about another airline’s pension funding woes here.

Thanks to the 401khelpcenter.com for the pointer to this article–“Crossing the Line: Managing Fiduciary Responsibilities of Financial Advisors and Avoiding Prohibited Transactions.” The article from GoldK provides some good information for brokers and financial advisors on the topic of how they can inadvertently become ERISA fiduciaries when they advise 401(k) plans regarding investments. The article notes that “few financial advisors have understood their potential status as plan fiduciaries, and the risks they run as a result.”

For all those involved with qualified plan administration in some way, add this to your to-do list: print out or bookmark recently issued Private Letter Ruling 200426027 [pdf] and place it in your files for future reference. The PLR expresses the IRS’s views regarding many of the questions practitioners have had in connection with a recent phenomena in the benefits world–that of U.S. attorneys seeking to levy against qualified plan assets pursuant to the Federal Debt Collection Procedures Act of 1990 (“FDCPA”). Read about it in a previous post–U.S. Attorneys Seeking To Levy Against Qualified Plan Assets Under the FDCPA. In the previous post, I mentioned that Jim Holland, Employee Plans Group Manager (Actuarial 1) for the IRS had remarked at an ALI-ABA Annual Fall Employee Benefits Law and Practice Update that there were “still a great deal of unanswered questions regarding levies against qualified plan assets under the FDCPA.” The IRS has answered many of these “unanswered questions” in this PLR.

The IRS makes it clear in the PLR (courts could differ, I suppose) that the U.S. Government cannot garnishee or otherwise collect against a plan participant’s or beneficiary’s benefit until the participant or beneficiary has a right to a distribution under the terms of the plan at issue. In addition, the IRS states that the U.S. Government steps into the shoes of either the participant or beneficiary and can make an election on his or her behalf when such person is eligible for a distribution but has not elected the same. The government is also subject to the qualified joint and survivor annuity rules and other plan provisions to the same extent as either the participant or beneficiary.

Other nuggets of information in the PLR:

(1) Payments made pursuant to the garnishment are not subject to the 10-percent additional income tax imposed under section 72(t) of the Internal Revenue Code.

(2) Lump sum payments made pursuant to orders of garnishment obtained under the Act constitute eligible rollover distributions and are subject to the mandatory 20-percent tax withholding. If payments are in the form of periodic distributions, they are not eligible rollover distributions and are not subject to mandatory withholding.

The IRS has issued a press release and Announcement 2004-58 (access both via Benefitslink.com) stating “there will be a delay in the effective date for recently issued regulations that set forth information required to be explained to pension plan participants regarding the optional forms of benefit offered by the plan.” The announcement warns, however, that the delay will not “apply to the extent a plan offers a lump sum payment that is less valuable than the qualified joint and survivor annuity offered by the plan.”

The press release goes on to say:

Participants who are eligible for a subsidized early retirement annuity and a lump sum payment that does not include that subsidy shouldn’t have to pay for professional advice to find out the value of the subsidy that is lost if the lump sum is elected,” said Greg Jenner, Treasury’s Acting Assistant Secretary for Tax Policy. “However, for plans offering lump sums that include this subsidy, we have delayed the effective date so that they may evaluate all of their optional forms. This should be done in coordination with rules we hope to finalize next year regarding burdensome and complex forms of payment that are of de minimis value to participants.”

The announcement also clarifies certain issues that have been raised about the new required disclosure, including that a plan will not fail to satisfy the spousal protection rules merely because the plan’s lump sum payment is calculated using the statutory required interest and mortality assumptions.

When is the effective date now? The announcement provides:

The regulations will generally be effective for QJSA explanations provided with respect to annuity starting dates beginning on or after February 1, 2006. In the interim, plans that do not comply with section 1.417(a)(3)-1 will be required to comply with prior guidance regarding disclosure of relative value and financial effect. See sections 1.401(a)-11(c)(3) and 1.401(a)-20, Q & A-36 as they appeared in the April 1, 2003 edition of the Code of Federal Regulations.

Congratulations to Paul Caron of the TaxProf Blog for making it to the Wall Street Journal. (He writes about it here.) A short article about the blog had this to say:

“TaxProf Blog” is a recently created Web site for tax professors (taxprof.typepad.com), set up by Paul L. Caron of the University of Cincinnati College of Law. Recent topics include a report of astronomical weekly pay for summer associates at major New York City law firms. … Why do our tax laws keep getting more and more complex? In Congress, tax-law simplification “is everyone’s second choice,” says Sheldon Cohen, a Washington lawyer and a former IRS Commissioner. “Their first choice is some tax benefit for a constituent.”

Paid subscribers can access the article here. The rest of the world can access it here [pdf].