Month: July 2008

If you read my previous post here discussing a recent Tax Court case illustrating the perils of borrowing from a 401(k) plan, you will also want to read this Advisory Alert just posted on the SEC’s website regarding 401(k) plan debit cards: “401(k) Debit Cards: What You Might Not Know.” See also this FINRA Alert as well: “401(k) Debit Cards—Think Before You Swipe.”

More links:

• Read about recent attempts by legislators to ban 401(k) debit cards here: “Schumer, Kohl Offer Legislation to Ban Debit Cards That Raid Retirement Accounts.” The lawmakers are arguing that the average American should not be allowed such easy access to funds in their 401(k) when they are saving too little already.
• Read an article about the 401(k) debit card generally: “Retirement debit cards sound like a nightmare, but have some benefits.”

There has been a great deal written about why borrowing from your 401(k) plan is a bad idea. If you want to read a good case in point that illustrates how things can go awry when it comes to a 401(k) plan loan, read the recent Tax Court case of Tilley v. Commissioner. The participant in that case had borrowed from her 401(k) account to purchase a home, but when she was terminated, couldn’t pay the loan off. Even though the participant received a Form 1099R indicating that the unpaid loan balance was taxable, the participant failed to pay any additional tax on the distribution. The IRS ended up assessing tax on the loan balance, a 10% early distribution penalty as well as a 20% negligence penalty. After trying to allege that a call center representative for the provider had indicated that the distribution was not taxable, the Tax Court stated that it was not reasonable for the taxpayer “to rely on a. . . call-center representative for tax advice.” The participant was also hoping to obtain a waiver of the 60-day rollover requirement from the Tax Court, offering to put the money in an IRA, but the Tax Court declined:

Four years later, petitioners urge the Court to grant them a waiver of the 60-day requirement. See sec. 408(d)(3)(I). They argue that [the provider] made a mistake sending them the check and that they would now be willing to put the money into [the participant’s] IRA. On these facts we decline to grant the waiver, and we do so without offense to equity or good conscience.

(The case was brought before the Tax Court under Internal Revenue Code section 7463 pertaining to amounts in controversy of $50,000 or less. That is why the opinion states that the case is not precedential.)

From the TaxGuru here.

How much is the benefit of health insurance worth to employees? According to a study at the Center for Retirement Research at Boston College, forty-seven percent (47%) of individuals with health insurance said they would not be willing to forego health insurance, even if offered a 30-percent raise.

The DOL has issued its new fiduciary disclosure requirements for participant-directed individual account plans. You can access the following regarding the regulations:

News Release
Fact Sheet
Preamble and Prop. DOL Reg. Secs. 2550.404a-5 and 2550.404c-1
Model Comparative Chart

Some brief observations:

(1) The regulations have a proposed effective date of January 1, 2009 and would apply to all participant-directed plans, regardless of whether or not they have sought to comply with ERISA section 404(c).

(2) The DOL states its legal basis for issuing the regulations in the preamble:

The Department believes, as an interpretive matter, that ERISA section 404(a)(1)(A) and (B) impose on fiduciaries of all participant-directed individual account plans a duty to furnish participants and beneficiaries information necessary to carry out their account management and investment responsibilities in an informed manner. In the case of plans that elected to comply with section 404(c) before finalization of this proposal, the requirements of section 404(a)(1)(A) and (B) typically would have been satisfied by compliance with the disclosure requirements set forth at 29 CFR § 2550.404c–1(b)(2)(i)(B). However, the Department expresses no view with respect to plans that did not comply with section 404(c) and the regulations thereunder as to the specific information that should have been furnished to participants and beneficiaries in any time period before this regulation is finalized.

(Query regarding that last statement and how it might impact current fee litigation.)

(3) The proposed regulation would amend the regulation under ERISA section 404(c), 29 CFR 2550.404c–1, to make the disclosure requirements for section 404(c) compliant plans consistent with those that would apply to all participant-directed individual account plans generally.

(4) The Department estimates that approximately 437,000 participant directed individual account plans covering 65,269,000 participants would be affected by the proposed regulation. Of these plans, 275,000 plans, covering 49,212,000 participants and beneficiaries are reported to comply with ERISA section 404(c), and the remaining 162,000 plans covering 16,057,000 participants and beneficiaries are not.

(5) The Department assumes that in the year of implementation, all 437,000 affected plans will conduct a legal review to verify their compliance with the proposed regulation and prepare the required disclosures. The Department estimates that the review would, on average, take one-half hour of a legal professional’s time at an (in-house) hourly rate of $113 resulting in a total aggregate estimate of approximately 218,000 legal hours at an equivalent cost of approximately $24,628,000.

(Doubtful that it will only take one-half hour.)

(6) Regarding the required investment-related information, it is interesting what the DOL has to say about risk:

. . . [T]he Department attempted to define the most essential information about available investment options that should be automatically furnished in a comparative format to participants and beneficiaries, and included that information in the proposal. That information includes historical and benchmark performance, and fees and expenses. In addition, the Department considered including information on risk, but believes that risk information is not easily translated into a simple uniform comparative format that can be described in a regulatory standard. The Department notes that in most cases more detailed information, including information on risk is readily available to participants and beneficiaries through Internet Web sites, should they decide to review such information in assessing the various investment options available under their plan.

(7) Written comments on the proposed regulation should be received by the Department of Labor on or before September 8, 2008. You can make your comments here. (Click on “Add Comments.”)