Category: Benefits

You can access the testimony presented at the Ways and Means Committee Hearing on Individual Retirement Accounts (IRAs) and their role in our retirement system here. The focus of the hearing was a recently issued GAO Report: Individual Retirement Accounts, Government Actions Could Encourage More Employers to Offer IRAs to Employees. If you want to read a good summary about the current law relating to IRAs as well as about all of the state and federal proposals to expand the IRA concept, read the Joint Committee of Taxation’s Report entitled, “Present Law and Analysis Relating to Individual Retirement Arrangements,” which was released in connection with the hearing.

The bottom-line, of course, is that people generally aren’t saving enough, small employers are not offering retirement plan vehicles for their employees, and Congress is looking at ways to encourage savings. It is no surprise that the GAO Report indicates IRAs are being used primarily as a “parking spot” for individual rollovers from employer-sponsored retirement plans, rather than as a savings vehicle. However, mandating that small employers must offer some type of automatic IRA program, as discussed in the hearing, is definitely not the answer. Perhaps, permitting small employers to offer an automatic IRA program might help, but then again that would be adding another option to the expanding plethora of retirement vehicles already available for the small employer (SIMPLE IRA, SEP IRA, payroll deduction IRA–traditional or Roth, and qualified plans). Having that many options, unfortunately, tends to confuse them into inaction.

The IRS has taken great steps in the last few years to help alleviate this confusion by providing on their website some helpful materials for small business owners (which Tom Reeder, IRS Benefits Tax Counsel, describes here in his testimony). You can access some of their materials here: Retirement Plan Product Navigator, the IRA Online Resource Guide – Information for Business Owners, Check-Up for Your SIMPLE IRA, SEP or Similar Plan, Publication 3998, Choosing A Retirement Solution for Your Small Business, and the 2008 Small Business Resource Guide.

For years, practitioners have been wondering when the U.S. Supreme Court might re-visit the Firestone decision in light of the Circuit Court of Appeals’ decisions going different ways on the issue of how a plan administrator’s conflict of interest should affect a court’s standard of review in a benefit denial case. However, after reviewing the recent MetLife v. Glenn decision (read about the case and its facts here), it doesn’t appear that the opinion has brought much clarity, except to say that perhaps those Circuits which have appeared to have been opposed to recognizing the “structural” conflict of interest in the plan administration context may now be brought more in line with the other Circuits. You can read about the differences in the Circuits in this law review article: Barbara C. Long, Conflict of Interest and the Standard of Review in ERISA Cases: The Seventh Circuit’s Refusal to Acknowledge What Other Circuits Already Know, 1 Seventh Circuit Rev. 152 (2006). However, one of the most interesting aspects about the recent Supreme Court decision is the fact that there are now appear to be about as many differences of opinion among the Supreme Court Justices as to how the issue should be resolved as there are differences among the Circuits. (See Notable Quotes below to view the disparity in views over the issue.)

What is the impact of the decision for plan sponsors? As noted below, Justices Scalia and Thomas emphasize that the Majority’s holding is mere dictum when it is applied to employers who administer their own ERISA-governed plans in determining whether or not they are “conflicted” as the insurance company was deemed conflicted in the Majority’s holding. However, it is uncertain how courts may or may not rely on this dictum, when grappling with how to align themselves under the Supreme Court’s Majority opinion. (If you recall, there was a humorous moment related to dictum in the oral arguments portion of this case which you can read about here.) Certainly, Justices Scalia and Thomas have pointed out in their concurring opinion how the Majority opinion appeared to take what they called “throwaway dictum” in the Firestone case and built a “castle” upon it. Therefore, it seems naive to minimize the impact of this case based upon the theory that the language relating to plan sponsors is mere dictum.

To be cautious, employers may wish to consider the language espoused by the Majority and Justice Kennedy of taking “active steps to reduce potential bias and to promote accuracy” in whatever ways they and their benefits lawyers may deem advisable in the claims review process. This may or may not involve a re-evaluation of the types of employees or officers who are selected to serve on plan committees which review benefits claims. However, it seems hard to believe that employers would go so far as to hire “independent fiduciaries” to make those determinations in light of this decision. At a minimum though, plan committees who make these determinations should continue to ensure that their practices and procedures regarding benefits claims comply with DOL claims procedure regulations, and that their decisions are well-reasoned, documented, and properly communicated to claimants.

Notable quotes from the Opinion:

(1) Majority:

“The first question asks whether the fact that a plan administrator both evaluates claims for benefits and pays benefits claims creates the kind of “conflict of interest” to which Firestone’s fourth principle refers. In our view, it does. . . ”

“. . . [A] legal rule that treats insurance company administrators and employers alike in respect to the existence of a conflict can nonetheless take account of the circumstances to which MetLife points so far as it treats those, or similar, circumstances as diminishing the significance or severity of the conflict in individual cases. See Part IV, infra. . . ”

“We turn to the question of “how” the conflict we have just identified should “be taken into account on judicial review of a discretionary benefit determination.”

“In doing so, we elucidate what this Court set forth in Firestone, namely, that a conflict should “be weighed as a ‘factor in determining whether there is an abuse of discretion.’ ” 489 U. S., at 115 (quoting Restatement §187, Comment d; alteration omitted). We do not believe that Firestone’s statement implies a change in the standard of review, say, from deferential to de novo review. . . Nor would we overturn Firestone by adopting a rule that in practice could bring about near universal review by judges de novo—i.e., without deference—of the lion’s share of ERISA plan claims denials. . . Neither do we believe it necessary or desirable for courts to create special burden-of-proof rules, or other special procedural or evidentiary rules, focused narrowly upon the evaluator/payor conflict. In principle, as we have said, conflicts are but one factor among many that a reviewing judge must take into account. Benefits decisions arise in too many contexts, concern too many circumstances, and can relate in too many different ways to conflicts—which themselves vary in kind and in degree of seriousness—for us to come up with a one-size-fits-all procedural system that is likely to promote fair and accurate review. Indeed, special procedural rules would create further complexity, adding time and expense to a process that may already be too costly for many of those who seek redress. We believe that Firestone means what the word “factor” implies, namely, that when judges review the lawfulness of benefit denials, they will often take account of several different considerations of which a conflict of interest is one.”

“. . . [A]ny one factor will act as a tiebreaker when the other factors are closely balanced, the degree of closeness necessary depending upon the tiebreaking factor’s inherent or case-specific importance. The conflict of interest at issue here, for example, should prove more important (perhaps of great importance) where circumstances suggest a higher likelihood that it affected the benefits decision, including, but not limited to, cases where an insurance company administrator has a history of biased claims administration. . . It should prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decisionmaking irrespective of whom the inaccuracy benefits.”

“. . . Finally, we note that our elucidation of Firestone’s standard does not consist of a detailed set of instructions. . . In this respect, we find pertinent this Court’s comments made in a somewhat different context, the context of court review of agency factfinding. See Universal Camera Corp., supra. In explaining how a reviewing court should take account of the agency’s reversal of its own examiner’s factual findings, this Court did not lay down a detailed set of instructions. It simply held that the reviewing judge should take account of that circumstance as a factor in determining the ultimate adequacy of the record’s support for the agency’s own factual conclusion. Id., at 492–497. In so holding, the Court noted that it had not enunciated a precise standard. See, e.g., id., at 493. But it warned against creating formulas that will “falsif[y] the actual process of judging” or serve as “instrument[s] of futile casuistry.” Id., at 489. The Court added that there “are no talismanic words that can avoid the process of judgment.”

(2) Chief Justice Roberts, concurring in part and concurring in the judgment:

“I agree that a third-party insurer’s dual role as a claims administrator and plan funder gives rise to a conflict of interest that is pertinent in reviewing claims decisions. I part ways with the majority, however, when it comes to how such a conflict should matter. . . I would instead consider the conflict of interest on review only where there is evidence that the benefits denial was motivated or affected by the administrator’s conflict. No such evidence was presented in this case.”

“The Court leaves the law more uncertain, more unpredictable than it found it. . . “

“. . . [A] conflict of interest can support a finding that an administrator abused its discretion only where the evidence demonstrates that the conflict actually motivated or influenced the claims decision. Such evidence may take many forms. . . The mere existence of a conflict, however, is not justification for heightening the level of scrutiny, either on its own or by enhancing the significance of other factors. The majority’s application of its approach confirms its overbroad reach and indeterminate nature.”

“In fact, there is no indication that the Sixth Circuit viewed the deficiencies in MetLife’s decision as a product of its conflict of interest. Apart from remarking on the conflict at the outset and the conclusion of its opinion, . . the court never again mentioned MetLife’s inconsistent obligations in the course of reversing the administrator’s decision. . . ”

“In these circumstances, the Court of Appeals was justified in finding an abuse of discretion wholly apart from MetLife’s conflict of interest. I would therefore affirm the judgment below. . . ”

(3) Justice Kennedy, concurring in part and dissenting in part:

“There are two ways to read the Court’s opinion. The Court devotes so much of its discussion to the weight to be given to a conflict of interest that one should conclude this has considerable relevance to the conclusion that MetLife wrongfully terminated respondent’s disability payments. This interpretation is the one consistent with the question the Court should address and with the way the case was presented to us. A second reading is that the Court concludes MetLife’s conduct was so egregious that it was an abuse of discretion even if there were no conflict at all; but if that is so then the first 11 pages of the Court’s opinion is unnecessary to its disposition.”

“The linchpin. . . is the Court’s recognition that a structural conflict “should prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decisionmaking irrespective of whom the inaccuracy benefits.”

(4) Justice Scalia, with whom Justice Thomas joins, dissenting:

“I agree with the Court that petitioner Metropolitan Life Insurance Company (hereinafter petitioner) has a conflict of interest. A third-party insurance company that administers an ERISA-governed disability plan and that pays for benefits out of its own coffers profits with each benefits claim it rejects. I see no reason why the Court must volunteer, however, that an employer who administers its own ERISA-governed plan “clear[ly]” has a conflict of interest. See ante, at 5. At least one Court of Appeals has thought that while the insurance-company administrator has a conflict, the employer-administrator does not. See Colucci v. Agfa Corp. Severance Pay Plan, 431 F. 3d 170, 179 (CA4 2005). I would not resolve this question until it has been presented and argued, and the Court’s unnecessary and uninvited resolution must be regarded as dictum.”

“Even if the choice were mine as a policy matter, I would not adopt the Court’s totality-of-the-circumstances (so-called) “test,” in which the existence of a conflict is to be put into the mix and given some (unspecified) “weight.” . . . [A] fiduciary with a conflict does not abuse its discretion unless the conflict actually and improperly motivates the decision.”

“. . . [I]n sheer dictum quoting a portion of one comment of the Restatement, our opinion said, “[o]f course, if a benefit plan gives discretion to an administrator or fiduciary who is operating under a conflict of interest, that conflict must be weighed as a ‘facto[r] in determining whether there is an abuse of discretion.’ ” 489 U. S., at 115 (quoting Restatement (Second) of Trusts §187, Comment d). The Court takes that throwaway dictum literally and builds a castle upon it. . . ”

“The opinion is painfully opaque, despite its promise of elucidation. . . In the final analysis, the Court seems to advance a gestalt reasonableness standard (a “combination-of-factors method of review,” the opinion calls it, ante, at 11), by which a reviewing court, mindful of being deferential, should nonetheless consider all the circumstances, weigh them as it thinks best, then divine whether a fiduciary’s discretionary decision should be overturned. . . Notwithstanding the Court’s assurances to the contrary, ante, at 9, that is nothing but de novo review in sheep’s clothing.”

The Heroes Earnings Assistance and Relief Tax Act of 2008 was signed into law by President Bush yesterday as announced here. Read about the Act in this previous post.

On May 22, 2008, Congress passed the Heroes Earnings Assistance and Relief Tax Act of 2008 (Heroes Act or HEART Act) which will now go to the President for his signature. A lot of great links here on the Act. Benefits-related provisions are as follows (as taken directly from the Congressional Research Service Summary):

Section 104 – Requires tax-qualified pension plans to entitle survivors of plan participants who die while on active military duty to additional benefits and benefit accruals provided under such plans for participants who resume and then terminate employment due to death. Effective Date: applies to deaths and disabilities occurring on or after January 1, 2007. Amendments required on or before the last day of the first plan year beginning on or after January 1, 2010 (2012 for governmental plans).

Section 105 – Treats differential wage payments to an employee as a payment of wages for income tax purposes. Defines “differential wage payment” as any employer payment to an individual serving on active duty in the uniformed services for more than 30 days that represents wages such individual would have received if such individual were performing services for the employer. Treats an individual receiving differential wage payments as an employee and treats such payments as compensation for retirement plan purposes. Effective Date: Years beginning after December 31, 2008. Amendments required on or before the last day of the first plan year beginning on or after January 1, 2010 (2012 for governmental plans).

Section 107 – Makes permanent the penalty exemption for premature withdrawals from retirement plans for individuals called or ordered to active military duty on or after December 31, 2007. Effective Date: Amendment applies to individuals ordered or called to active duty on or after December 31, 2007.

Section 109 – Allows a tax-free rollover of any military death gratuity and any group life insurance payment to a survivor’s Roth individual retirement account (Roth IRA) or to an education savings account. Effective Date: The provision is generally effective with respect to payments made on account of deaths from injuries occurring on or after the date of enactment. In addition, the provision permits the contribution to a Roth IRA or a Coverdell education savings account of a military death gratuity or SGLI payment received by an individual with respect to a death from injury occurring on or after October 7, 2001, and before the date of enactment of the provision if the individual makes the contribution to the account no later than one year after the date of enactment of the provision.

Section 114 – Allows a tax-free distribution of unused benefits in a health flexible spending arrangement to any member of an Armed Forces reserve component who is ordered or called to active duty. Effective Date: Applies to distributions made after the date of the enactment.

Title IV – Parity in the Application of Certain Limits to Mental Health Benefits Amends the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 (ERISA), and the Public Health Service Act to extend through 2008 parity requirements applicable to mental health benefits offered by group health plans.

(Within the Act, there are also some complicated rules for taxation of expatriates who have benefits under qualified and nonqualified plans which are not summarized here.)

Comments by Senator Grassley (R-IA) regarding passage of the Act:

“Mr. President, the Heroes Earnings Assistance and Relief Tax Act of 2008, the HEART Act, which passed the Senate by unanimous consent today, was a bipartisan effort that incorporates most of the provisions in the Defenders of Freedom Tax Relief Act of 2007, which passed the Senate last December. The HEART Act also makes permanent and expands upon some of the tax relief measures that I coauthored with Senator Baucus in 2003, while chairman of the Senate Finance Committee.

Our men and women who serve in the military make tremendous sacrifices to keep this great Nation safe and strong. Oftentimes, this very service makes taxes complicated and sometimes unfair. It is only right that these honorable men and women get treated fairly under the Federal Tax Code. The Federal Tax Code shouldn’t penalize people for serving their country. . . “

You can access the Joint Committee on Taxation Summary here.

Once the Act is signed by the President, benefits lawyers can add the items above to their lengthy plan amendment lists. . .

Image of the Day from NASA
Phoenix Mars Mission Official Website
Visit also NASA’s Phoenix Section and NASA’s Jet Propulsion Laboratory for more images, multimedia and news.

In this previous post back in 2003 here, I noted how the IRS was targeting Simplified Employee Pensions in a compliance initiative. Joe Kristan in The Roth & Company, P.C. Tax Update Blog discusses a recent Tax Court case in which the IRS disallowed deductions for SEP contributions because the small business owner who established the SEP for employees failed to make contributions for his wife. Brown v. Commissioner, T.C. Summary Opinion 2008-56.

Know how the attribution rules under Section 318 of the Internal Revenue Code can sometimes wreak havoc for employers under the controlled group provisions? The taxpayer here tried to apply his “creative” interpretation of the attribution rules by arguing that it didn’t matter that contributions were not made for the wife because the SEP contributions made on behalf of the husband should be “attributed” to the wife. It is no surprise that the Tax Court didn’t buy that argument.

Many will remember how, close on the heels of the U.S. Supreme Court’s 2005 decision in Rousey v. Jacoway, 125 S.Ct. 1561 (2005), the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) was signed into law, providing IRAs with greater bankruptcy protection. (Read more about Rousey and BAPCPA in previous posts which you can access here.) A recent Third Circuit Court case, In Re: Krebs, finally puts to rest some confusion going on in the Third Circuit about the impact of Rousey as it pertains to pre-BAPCPA bankruptcy cases.

To give a little history, before Rousey and BAPCPA, there had been differences among the Circuits regarding whether section 522(d)(10)(E) of the Bankruptcy Code protected IRAs from creditors claims in bankruptcy. (You can read about the confusion among the Circuits in this article: Rousey and the New Retirement Funds Exemption by John Hennigan.) The Third Circuit, had in the case of Clark v. O’Neill (In re Clark), 711 F.2d 21 (3d Cir. 1983) held that money deposited in a Keogh retirement plan did not qualify for the Section 522(d)(1)(E) exemption because at the time the bankruptcy proceedings were initiated the debtor, then 43 years old, was not eligible to withdraw funds from the account without paying a ten percent penalty. Bankruptcy courts in the Third Circuit had followed this line of reasoning pre-Rousey and pre-BAPCPA, refusing to exempt amounts in an IRA when the debtor was not presently entitled to receive payments without penalty.

After Rousey in which the Supreme Court held that assets in an IRA did qualify for the exemption under section 552(d)(10)(E) as long as the amounts in question were reasonably necessary for support of the debtor and his or her dependents, bankruptcy judges in the Third Circuit continued to disagree on whether Rousey had overruled Clark, i.e. whether an IRA had to be in pay status in order to be exemptible in bankruptcy. In the recent case of In Re: Krebs (pertaining to a petition in bankruptcy filed one month before BAPCPA’s effective date), the Third Circuit settled the dispute once and for all by holding that Rousey did indeed overrule Clark and that IRAs may be exempted from the bankruptcy estate regardless of whether or not they are in pay status.

Here is what the Third Circuit had to say:

Several of our sister courts of appeals have decided the exemption issue contrary to Clark. However, we lack authority to overrule it on that basis. Nor can we overrule it because we are no longer persuaded by its reasoning. The basis that permits us to do so is the Supreme Court’s 2005 decision in Rousey, in which the Court held that the right to receive IRA payments “can be exempted from the bankruptcy estate pursuant to § 522(d)(10)(E).” 544 U.S. at 326. . .

Although the precise holding in Rousey covers only the first and second requirements of § 522(d)(10)(E), the facts in Rousey cast doubt on Clark’s interpretation of the third requirement. That interpretation, i.e., the per se rule we established, is wrong because the Rouseys had not yet reached 59 ½ years of age when they filed their bankruptcy petition, so they were not yet receiving payments (without penalty) from the IRA they sought to exempt. The pertinent part of the Rouseys’ merits brief before the Supreme Court states:

“When they filed for bankruptcy, Richard Rousey was fifty-seven years old and petitioner Betty Jo Rousey was fifty-three. Their ability to replace those funds, a substantial part of which had been accumulated through their employer-sponsored pension plan, and through the compounding of funds held for many years, is non-existent. Nothing in the language, structure, or purpose of Section 522(d)(10)(E) suggests any reason why the fortuity that they filed for bankruptcy in 2001 rather than the year in which they would be 59 ½ years old should determine the eligibility of their IRAs for exemption.”

Brief for Petitioners, Rousey, 2004 WL 1900505, at *35-36; see also Rousey v. Jacoway, 275 B.R. 307, 309, 311 (Bankr. W.D. Ark. 2002) (stating that the Rouseys would face a 10% tax penalty if they withdrew from their IRAs at that time). Moreover, it is the Rouseys’ age at time of petition filing that matters because the bankruptcy estate is created at the “commencement” of the bankruptcy case. See 11 U.S.C. §§ 301 & 541(a). The Supreme Court’s holding that IRAs may be exempted under § 522(d)(10)(E) therefore applies squarely to those debtors who have not yet reached 59 ½ years of age. Our contrary interpretation of the third requirement of § 522(d)(10)(E) in Clark thus ends up appending a sort of fourth requirement that finds no support in the statutory text and that Rousey forecloses by its facts.

See also this interesting language in footnote 3 discussing an issue that was the subject of this article: “May It Please the Court”: If I Had Been at Oral Argument in Rousey v. Jacoway: Part II by Scott Pryor:

The parties have not argued, so we do not decide, that there is a difference between exempting the right to receive payment from an IRA versus exempting the IRA itself. The Supreme Court does not appear to perceive any difference of significance. Compare Rousey, 544 U.S. at 325 (“the right to receive payment may be exempted”), with id. at 326 (“IRAs can be exempted”). Hence, we, too, will assume the semantic interchangeability and refer to exempting both in this opinion.

For years, the governmental plans segment of the benefits industry has been plagued with misinformation about the need for governmental plans to comply with the Internal Revenue Code. On April 22 of this year, the IRS hosted a governmental plans roundtable as part of an initiative to raise awareness about the need for compliance. Today’s Special Edition of the Employee Plan News summarizes what went on at the meeting and announces the IRS’s future plans for ensuring that the governmental plans segment is not left out from all of the compliance “fun” that the rest of the benefits world is experiencing. IRS officials at the meeting admitted that the the IRS has “very little history examining governmental plans” even though “one out of five employees in the United States is a government employee and that governmental plans hold $3.5 trillion in funded pension plan assets.”

So what is in store for governmental plans? The IRS announced the following at the meeting:

Representatives from EP Examinations included Monika Templeman, Director, EP Examinations, and the EP Compliance Unit (EPCU), who explained that EPCU intends to send a survey questionnaire to a small sample of governmental plans in an initial effort to obtain information about the current status of governmental plans. She assured the audience that responding to the survey would not result in an examination, but if issues were identified, the taxpayer would be directed to an IRS web site with information needed to achieve compliance. If the survey questionnaire is not returned, EP Examinations will conduct compliance activity, which could eventually result in an examination of the taxpayer.

Here are some of the issues raised by practitioners at the meeting that seem to be prevalent for governmental plans:

A plan may not have filed for a determination letter in a very long time, maybe as long as 40 to 50 years, and the plan is concerned about the consequences if the IRS finds a problem with the plan.

Uncertainty as to what documentation a plan sponsor should submit to the IRS when requesting a determination letter where the plan document may be made up of a number of statutory provisions, ordinances, etc.

During the determination letter process, IRS may require amendments to the plan. The state or local legislative body that adopts the amendments may only meet a limited number of times during a year (or may not even meet on an annual basis). The time to adopt the IRS required amendments may not be sufficient for governmental plans.

States are subject to Freedom of Information Act laws, which may force the government entity to disclose information submitted to the IRS that could be misrepresented or misunderstood by plan participants or the public.

Potential conflicts between state constitutional protections for certain public sector retirement benefits and federal tax law may arise.

The IRS has also announced its new website devoted to governmental plans which you can access here. Posted there are the roundtable presentations. Also, the IRS has provided an email address established for the purpose of allowing the governmental plans community to ask questions of the IRS: governmentalplansdialogue@irs.gov.

This all reminds me of similar compliance efforts targeting educational institutions which have been in the news recently. (Read about the 403(b) universal availability compliance initiative here.) Also, read about compliance efforts focused on IRA-based retirement plans in this previous post “Plan Audits or Pre-Audit Preparation Packs.”

ERISA practitioners will want to note this recent DOL posting of the Report on the 2007 ERISA Advisory Council’s Working Group on Fiduciary Responsibilities and Revenue Sharing Practices. While the Report carries a disclaimer that its contents “do not represent the position of the Department of Labor,” the report (as well as other Working Group Reports which you can access here) have a lot of good information in them regarding the current thinking of practitioners as well as the DOL on certain “hot” issues. Regarding revenue-sharing, the Working Group came up with these recommendations:

(1) The DOL should develop definitions of revenue sharing-related terms designed to assist benefit plan sponsors, fiduciaries, service providers, and participants.

(2) The DOL should issue guidance clarifying that revenue sharing is not a plan asset under ERISA unless and until it is credited to the plan in accordance with the documents governing the revenue sharing.

(3) The DOL should issue guidance regarding the treatment of revenue sharing received by a plan. Specifically, there should be guidance patterned after Field Assistance Bulletins 2003-03 and 2006-01 regarding the allocation of revenue sharing received by a plan. Consistent with the approach taken in those FABs, such guidance would confirm that there is not a single permissible method of allocation because cost, efficiency and other factors may enter into the fiduciary’s allocation decision. Such guidance should be coordinated with the U.S. Department of Treasury in order to address any possible tax consequences.

It is interesting to note that the Working Group urges the DOL to issue guidance clarifying that revenue sharing monies do not constitute “plan assets” under ERISA in order to avoid confusion in the courts over the issue. The Report notes:

Concern in this area is amplified in the considerable recent case law. For instance, a recent decision of the U.S. District Court for the District of Connecticut in Haddock v. Nationwide Financial Services, 419 F. Supp. 2d, 156 (D. Conn. 2007) held that fees, such as revenue sharing payments received from mutual funds and their affiliates by companies providing services to ERISA covered employee benefit plans, could be characterized as “plan assets” of those plans for purposes of the fiduciary responsibility requirements of ERISA. Other cases have held to the contrary. As one witness opined, the state of litigation and the “law in this arena remains uncertain at this time.” Other witnesses suggested that the failure by the DOL to issue regulations or provide clear guidance might well result in conflicting Court decisions and inconsistent requirements for plan sponsors and service providers.

See also the comments of Louis Campagna (Chief of the Division of Fiduciary Interpretations, Office of Regulations and Interpretations, EBSA) regarding revenue sharing:

Mr. Campagna next addressed his second topic that of Revenue Sharing payments with offsets. He testified that there is no inherent violation of ERISA involving revenue sharing with one exception which he would discuss. Nor is there any requirement under ERISA to allocate these payments to participants.

He testified that the DOL view is that revenue sharing may be good, in that it reduces overall plan costs and provides the plans, especially small ones, with services and benefits which might not be affordable.

He then discussed the exception which could result in a violation. He described a situation where a plan fiduciary through its discretion causes payments to itself or an affiliate or other interested party. He testified that this transaction could result in an act of self dealing under the prohibited transaction rules unless the revenue sharing payments are given to the plan or used to offset the plan’s obligation to that advisor with any excess above that amount returned to the plan. He indicated that this offset could best be handled in the negotiation process with the service provider.

Mr. Campagna followed this testimony with a discussion of ERISA’s requirement to allocate revenue sharing payments back to participants. He stated that if revenue sharing payments are returned to the plan, they are plan assets subject to all of ERISA’s fiduciary and prohibited transaction rules. However, he further indicated that nothing in ERISA addresses the proper allocation of these payments to participants or describes the process by which such allocations are made. He stated that in the absence of statutory guidance, allocation decision must be made taking into account the terms of the plan and the obligations of [plan fiduciaries to act prudently and in the sole interest of the participants and beneficiaries. He stated that plan sponsors have considerable discretion as a matter of plan design how revenue sharing proceeds will be allocated to and among plan participants.

He discussed that the principles set forth in Field Assistance Bulletin 2003-03 and FAB 2006-01 can lay the foundation for a proper allocation among participants. He said the principles in these FABs provide the fiduciaries three options; they can (i) be used to reduce overall expenses, (ii) be allocated among all participants on a pro rata or per capita basis, or (iii) they can be allocated to particular participants and beneficiaries accounts who generated the revenue sharing. He further testified that when a plan is silent or ambiguous on how proceeds might be allocated, fiduciaries must be prudent in their selection of an allocation method. This means that the fiduciary using a rational basis must weigh the competing interests of the various classes of participants and the effects of the allocation method on each group. He also addressed a need to consider the cost and benefit to the plan and participants in implementing any allocation method.

Taxpayers may be unaware that by choosing the direct deposit option for their 2007 tax refund, they were also choosing to have their Economic Stimulus Payments directly deposited as well. Without IRS relief, taxpayers then might be unable to access those funds without incurring a penalty. However, the IRS has come up with a fix for this “problem.” According to Announcement 2008-44, if the taxpayer withdraws the payment “no later than the time for filing the taxpayer’s income tax return for 2008, plus extensions,” the amount withdrawn will be treated as “neither contributed to nor distributed from the account.” Therefore, according to the IRS, “the amount withdrawn will not be subject to regular federal income tax nor to any additional tax or penalty under the Code.”

The wrinkle in all of this, however, is that as the IRS states in their Announcement, “financial institutions may not be able to distinguish these contributions and distributions from others that may occur.” The IRS states in the Announcement that financial institutions should go ahead and “report the deposit and distribution in the usual manner.” The IRS then promises to take care of this wrinkle in the instructions to Form 1040 next year.

Want to know what that ES payment might be worth if left in your IRA? You can find an assortment of various savings calculators at Choose to Save.org (here) or at this link here if you want to calculate it.

Read more about the Economic Stimulus Payments at the IRS’s Economic Stimulus Payments Information Center.