Month: May 2005

The Wirtz Labor Library and the Wirtz Labor Law Library, maintained by the Department of Labor, have provided in their “Law Tip of the Week” a page of information about Labor & Employment Blogs which lists the Employment Law Blog, the Arbitration Blog, ERISAblog and Benefitsblog. Blogs are also listed here in the site’s Law Tips Archive. You can read more about the Wirtz Labor Library here and subscribe to the “Law Tip of the Week” here.

In each edition of the IRS’s quarterly newsletter for Retirement Plans, the IRS focuses on a “common plan mistake” frequently turning up on audit. In a recent edition of the Retirement News for Employers[pdf], the IRS focuses on an issue which is sure to become even more and more common as the baby boomers age and either continue in the workforce or begin drawing down on their retirement accounts. (Commentators are indicating many baby boomers will continue to work past retirement age due to a lack of savings and the need caused by demographics for employers to retain older employees in their workforce.)

As most probably are aware, the Internal Revenue Code establishes a mandatory date, known as the “required beginning date” (“RBD”), by which payments to a plan participant must begin. Normally, the RBD for a participant who is not a 5% owner is the April 1st following the end of the calendar year in which the later of two events occurs: (1) the participant reaches age 70½ or (2) the participant retires. For a participant who is a 5% owner, the RBD is the April 1st following the end of the calendar year in which the participant attains age 70½, regardless of whether he or she retires by the end of that year.

The IRS notes in its newsletter that a common plan mistake found on audit is that required minimum payments have not been paid at all from a plan or have not been paid on a timely basis. The IRS notes that “this is especially true when a non-5% owner continues working after reaching age 70½.” (My guess is that they meant to say “this is especially true when a 5% owner continues working after reaching age 70½.”) As one would expect, the IRS warns that failure to follow the minimum distribution rules can disqualify the plan and can mean that participants or beneficiaries who do not receive their minimum distribution on time are subject to a 50% additional tax on the underpayment. (Ouch!)

The IRS newsletter goes on to discuss how to “fix” the error, for those who want to learn more. On a related note, however, see also this recent paper by Jason J. Fichtner, Joint Economic Committee–“The Taxation of Individual Retirement Plans: Increasing Choice for Seniors“–which argues for the repeal or modification of the minimum distribution requirements. The paper laments that such rules force many seniors to take distributions when they do not need them and, in cases of a down market, require “seniors to sell assets at depressed prices to pay taxes, even if investment losses have been incurred.” And, as the IRS newsletter reminds us, a plan’s failure to comply with the minimum distribution requirements can also cause seniors to incur the monstrous 50% excise tax on plan underpayments.

John Wasik for Bloomberg.com has an op-ed–“Darkest Side of Pension Consultants Still Unseen“–discussing the SEC’s findings reported in a recently released “Staff Report Concerning Examinations of Select Pension Consultants” (discussed here in a previous post).

Also, the Foundation for Fiduciary Studies has provided comments on the Staff Report here. (Source: 401kHelpCenter.com)

This announcement from the IRS: “Treasury and IRS to Provide More Time to Spend FSA Funds.” Excerpt:

Today the Treasury Department and the IRS issued Notice 2005-42 which will allow employers to modify Flexible Spending Arrangements (FSAs) to extend the deadline for reimbursement of health and dependent care expenses up to 2½ months after the end of the plan year. Previously, employees were required to “use-or-lose” FSA funds by the end of the year. Under the old rules, any unspent funds at year’s end would be forfeited.

What do employers need to do to take advantage of the “grace” period for their FSAs? The Notice provides that employers must amend their plans:

An employer may adopt a grace period as authorized in this notice for the current cafeteria plan year (and subsequent cafeteria plan years) by amending the cafeteria plan document before the end of the current plan year.

See IRS Notice 2005-42 for more details.

KaiserNetwork.org reports on the development here.

This recent article from Wharton–“Retirement Programs Face an “Aging-Population Tsunami“–reports on what was said at a recent conference entitled “The Evolution of Risk and Reward Sharing in Retirement” sponsored by the Wharton School’s Pension Research Council and Boettner Center for Pensions and Retirement Research. Excerpt:

Against the backdrop of rising concerns over both public and private pension systems in the U.S., industry experts convened at a recent Wharton conference to debate ways in which retirement programs can be better managed. Participants discussed such topics as the problems facing Social Security, the solvency of the Pension Benefit Guaranty Corp., and the consequences of an increase in defined contribution plans like 401(k)s along with a corresponding decline in defined benefit plans.

Douglas Holtz-Eakin, director of the Congressional Budget Office (CBO), told the conference. “Retirement policy is the central policy issue of our time. Period.” Mark Warshawsky, assistant secretary for economic policy at the U.S. Department of Treasury stated that “[t]he pension insurance premium structure provides little or no incentive for adequate funding” of pension plans.

An interesting suggestion for improving the retirement system came from Douglas Fore, principal research fellow at the Teachers Insurance Annuity Association-College Retirement Equities Fund (TIAA-CREF):

Fore suggested the possibility of developing a portable defined benefit plan in which employees could work toward a defined benefit pension even if they switch jobs. To do that, a system based on common actuarial standards and plan-benefit design would have to be developed. He also suggested individuals could purchase service credits and carry them along as they switch jobs. “We have just begun to sketch this out, but we do think this approach has some potential.”

The Internal Revenue Service and the Treasury Department today announced the issuance of revisions to the new Circular 230 standards for written tax advice that were announced late last year. Practitioners had asked for clarification in several areas and the revisions are apparently in response to those requests.

Three of the five revisions issued expand on the definition of “excluded advice” that is not subject to the detailed covered opinion standards of Circular 230. The revisions apply to:

• Advice from in-house tax professionals to their employers;
• Situations in which the advice is provided after the client files the relevant tax return; and
• “Negative advice” wherein an advisor tells a client a transaction will not provide the purported tax benefit.

Advice that is excluded from the covered opinion standards by these revisions will continue to be subject to the general requirements for other written advice.

Read more about Circular 230 here and here.

You can access the healthcare tax relief bill (S. 978) introduced by Senators Rick Santorum (R-PA) and Jim DeMint (R-SC) at this link here. Previous post here discusses the legislation.

The Joint Committee on Employee Benefits (“JCEB”) has posted its 2004 Question and Answer session with the SEC. The questions were submitted by ABA members and the responses were given at a meeting of JCEB and government representatives.

You can access other Q & As with the DOL, EEOC, HHS and IRS here.

The SEC today announced the release of the “Staff Report Concerning Examinations of Select Pension Consultants.” The Report comes on the heels of an examination by the SEC of 24 pension consultants who are registered with the SEC as investment advisers. The examinations focused on (i) the products and services provided by the pension consultants; (ii) the method of payment for such services; and (iii) the disclosure provided to their clients. The examinations were initiated “as part of the SEC´s program to identify and investigate risks in the securities industry.”

The SEC states that the Report is intended to provide “recommendations to enhance pension consultants’ compliance programs” to help ensure that advisers are fulfilling their fiduciary obligations to their clients. However, the SEC also states that the Report raises “important issues for plan fiduciaries who often rely on the advice and recommendations of pension consultants in operating their plans.” Accordingly, the SEC has promised to work with the Department of Labor to educate pension fund trustees and other plan fiduciaries about the issues raised by the findings in the Report, and has stated that it “will continue to work closely with the Department of Labor on issues of mutual interest.”

The SEC concluded in the Report that pension consultants that are registered investment advisers (1,742 registered investment advisers list that they provide pension consulting services, according to the SEC) should be:

(1) Formalizing “policies and procedures” to address their fiduciary and regulatory obligations under the Advisers Act.

(2) Identifying conflicts of interest and other compliance factors creating risk exposure for the firm and its clients in light of the firm’s particular operations, and then designing policies and procedures that address those risks.

The SEC noted that such policies and procedures should ensure that the firm’s advisory activities are insulated from its other business activities, to eliminate or mitigate conflicts of interest in its advisory activities, and that all disclosures required to fulfill fiduciary obligations are provided to prospective and existing clients, particularly regarding “material” conflicts of interest. The SEC also noted that policies and procedures should be designed to ensure adequate disclosure concerning the consultant’s compensation, including when the pension consultant receives compensation from brokerage transactions from advisory clients or money managers.

After the Report was issued, the DOL commended the SEC here for the Report stating:

While the SEC is responsible for regulating the conduct of investment advisers, including advisers that provide pension consulting services to employee benefit plans, the Labor Department is responsible for the conduct of the plan fiduciaries. This includes, among other things, selecting the providers of pension consulting and other services for plans. The Employee Retirement Income Security Act (ERISA) requires that plan fiduciaries must act prudently in selecting and monitoring service providers. Disclosure of a service provider’s potential conflicts of interests would be an important part of the selection and monitoring process.

The SEC warns in its announcement of the Report that “[a]lthough investment advisers owe their clients a fiduciary obligation — including to adequately disclose all material conflicts of interest — some pension consultants appear to have erroneously concluded that they are not fiduciaries to their clients.”

In light of all of this, plan fiduciaries should make sure that their pension consultants have the policies and procedures in place that the SEC has recommended, as the Report provides a sort of “roadmap” for plan fiduciaries in examining their relationships with pension consultants to make sure that such relationships continue to meet the statutory standards under ERISA.

This quote from Lori Richards, Director of the SEC’s Office of Compliance Inspections and Exminations, in an article from CNN here:

[Pension consultants] sell themselves as being objective or unbiased and independent. Those are important words and they have meaning, and they have meaning to the clients who are deciding to hire the pension consultant, so if a pension consultant says that it is any one of those things: independent, objective, unbiased, it must make sure that it is so.

Article by Mary Williams Walsh for the New York Times: “SEC Investigating Pension Consultants? Disclosure.”

Also, from the Wall Street Journal: “SEC Finds Retirement-Fund Issues.”