Category: Benefits

• Notice 2005-92: Guidance Relating to the Application of KETRA to Hurricane Katrina Victims and Employer-Sponsored Retirement Plans and IRAs
• Notice 2005-95: Transitional Relief Provided for Certain Plan Amendment Deadlines
• Revenue Ruling 2005-74: Guidance Regarding Sale of a Home by an Employee to an Employer Through a Relocation Management Company
• Proposed Regulations: Updated Mortality Tables

If you are wondering what ever happened to that determination letter request that you made for a client, the IRS has provided a web page to assist practitioners with checking on the status of their requests. The web page entitled “Where is My Determination Letter Request?” allows you to gauge how back-logged the IRS is with respect to reviewing Forms 5307, 5300, 5310, and 6406, and tells you which ones the IRS is currently reviewing based on a “Received Date.” For instance, the IRS says it is currently reviewing 5300’s that were submitted back in July of this year. (The web page can be somewhat reassuring since IRS Forms that have been submitted by taxpayers have been known to end up in some pretty surprising places.)

Read about the IRS’s redesign of its website here.

The Treasury and IRS have issued Notice 2005-92 providing some much-needed guidance relating to the application of the Katrina Emergency Tax Relief Act of 2005 (“KETRA”) for Hurricane Katrina victims and employer-sponsored retirement plans and IRAs. Some highlights of the notice:

1. An individual’s principal place of abode is where the individual lives unless temporarily absent due to special circumstances. If an individual’s principal place of abode was in the Hurricane Katrina disaster area immediately before August 28, 2005, and the individual evacuated because of Hurricane Katrina, the individual’s principal place of abode will still be considered to be in the Hurricane Katrina disaster area on August 28, 2005.

2. An employer is permitted to expand the distribution options under its plan to allow an amount attributable to an elective, qualified nonelective, or qualified matching contribution under a qualified cash or deferred arrangement to be distributed as a Katrina distribution even though the distribution is before an otherwise permitted distributable event, such as severance from employment, disability, or attainment of age 59½. However, KETRA does not change the requirements for when plan distributions are permitted to be made from employer retirement plans. Thus, for example, a qualified plan that is a pension plan (e.g. a money purchase plan) is not permitted to make in-service distributions merely because the distribution, if made, would qualify as a Katrina distribution. Furthermore, a pension plan is not permitted to make a distribution under a distribution form that is not a qualified joint and survivor annuity without spousal consent merely because the distribution, if made, could be treated as a Katrina distribution.

3. If a distribution is treated as a Katrina distribution by a retirement plan, the plan is not required to offer the qualified individual a direct rollover with respect to the distribution. In addition, the plan administrator does not have to provide a § 402(f) notice.

4. An employer is permitted to choose whether to treat distributions under its plans as Katrina distributions. Furthermore, the employer (or plan administrator) is permitted to develop any reasonable procedures for identifying which distributions are treated as Katrina distributions under its retirement plans.

5. A plan will not fail to satisfy any requirement under the Code merely because a qualified individual’s total Katrina distributions exceed $100,000, taking into account distributions from IRAs or other eligible retirement plans maintained by unrelated employers.

6. The IRS will be issuing guidance in the future relating to plan amendments for KETRA. For employer retirement plans other than a governmental plan, the date by which any plan amendment to reflect KETRA is required to be made will not be earlier than the last day of the first plan year beginning on or after January 1, 2007.

Access previous posts on KETRA here.

For those who can’t wait to read it, I am posting a copy of the Memorandum issued by the court in the Sandra Register vs. PNC Financial Services Group Inc. case. The decision, which addresses the issues involved in cash balance plan conversions, was rendered on November 21, 2005 by the Federal District Court for the Eastern District of Pennsylvania. The court granted the defendants’ motion to dismiss. PlanSponsor.com has a summary of the case here: “Cash Balance Plan Foes Lose in PA Federal Court.”

The US Supreme Court has again decided to shed some light on the issue of an ERISA plan’s ability to obtain reimbursement from a participant who recovers a settlement from a third party. The Court announced November 28th that it will decide the issue in MidAtlantic Medical Services, LLC v. Sereboff – a case from the Fourth Circuit Court of Appeals. Ross Runkel’s Employment Law Blog has a good summary of the case and the issues here. The DOL had filed an Amicus Brief in the case which you can access here.

Those who draft subrogation provisions in plans and have had the occasion of researching the law in a particular jurisdiction with respect to this issue understand how confused the state of the law is, even after the Supreme Court’s decision in Great West. There are some great resources on the topic, however, a few of which are John H. Langbein’s article–“What ERISA Means by “Equitable”: The Supreme Court’s Trail of Error in Russell, Mertens and Great-West“, David Levin’s article–“Recovering Money Owed to Plans: Subrogation Agreements Can Be Enforced” and this one by James Zalewski –“Welcome to the Jungle.” (The title is very apropos.)

The Treasury and IRS have issued Notice 2005-86 which provides guidance regarding the interaction of the?2-1/2 month?flexible spending arrangement (“FSA”) grace period (established earlier this year by Notice 2005-42) and eligibility to contribute to health savings accounts (“HSA”). The guidance confirms that coverage by the FSA grace period disqualifies an individual to contribute to an HSA during the grace period.? However, the notice also provides some limited ways that an FSA can be amended to enable a covered individual to contribute to an HSA during the grace period and clarifies a number of technical questions concerning the grace period.

The notice provides a special transition rule for?coverage years ending before June 5, 2006.? For those years, an otherwise eligible individual may contribute to an HSA during coverage by a health FSA grace period if the?individual’s?health FSA has no unused contributions or if the employer amends the cafeteria plan to provide that the grace period is not available to individuals electing HDHP coverage during the grace period.

Read the press release here.

The Pennsylvania Bar Association is reporting:

On Monday, Nov. 21, the Pennsylvania House of Representatives will vote on the Commonwealth Caucus’ “Plan for Pennsylvania’s Future” (special session House Bills 39-43). This legislation, specifically special session [1] HB 43, would impose a five percent sales tax on numerous items such as food, clothing, and services, including legal professional services.

The Pennsylvania Bar Association has launched a major grassroots effort in opposition to the expansion of the sales tax to include legal professional services. Links are here, including a summary of the legislation here and links here for composing a “Message to Your Legislator Opposing a Sales Tax on Legal Professional Services.”

From Reuters.com, “US Senate approves pension bill with airline aid.” Excerpt:

Legislation aimed at strengthening traditional corporate pensions and shoring up the deficit-ridden pension insurance agency was easily approved by the U.S. Senate on Wednesday with a generous exemption for struggling airlines.

Senators gave distressed airlines up to 20 years to repair their underfunded pension plans, in addition to the seven years provided by the bill to all companies to fix pension shortfalls. . .

It passed 97-to-2 despite a White House warning of a veto if Congress does not produce a tougher version of the legislation that leaves out targeted relief for any industry.

The bill is S. 1783 – The Pension Security and Transparency Act of 2005. Text of the legislation is here and amendments are here.

CRS Summary:

Pension Security and Transparency Act of 2005 – Amends the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC) to establish new minimum funding standards for single-employer and multiemployer defined benefit pension plans. Limits benefits under underfunded plans. Establishes additional funding rules for multiemployer plans in endangered or critical status. Requires measures to forestall insolvency.

Revises deduction limits for such plans. Revises deduction rules for combinations of defined contribution plans and defined benefit plans. Sets forth interest rate assumptions for determining lump sum distributions and for applying benefit limitations to such distributions.

Increases certain premiums to be paid to the Pension Benefit Guaranty Corporation (PBGC). Provides for phasing-in increases of: (1) the annual flat-rate premium paid by all single-employer plans; and (2) the additional risk-based premium, which is to be paid by all underfunded plans. Limits PBGC guarantee of shutdown benefits and other unpredictable contingent event benefits under single employer plans. Revises requirements for defined benefit plan funding notices. Requires additional disclosures in annual reports and to plan participants and beneficiaries.

Provides that defined benefit pension plans, including hybrid plans such as cash balance plans, may be deemed nondiscriminatory as to age if they comply with certain requirements, in cases of reduction in accrued benefits because of attainment of any age.

Requires defined contribution plans to allow employees to divest employer stock and diversify their pension asset investments. Sets forth participant protections, including diversification rights, under defined contribution plans. Revises requirements relating to: (1) portability and distribution rules; (2) information, including investment advice and retirement planning, to assist pension plan participants; (3) spousal pension protection under ERISA and the Railroad Retirement Act of 1974; (4) employee plans compliance resolution systems; (5) governmental and tribal pension plans; (6) black lung disability trust funds; (7) treatment of death benefits from corporate-owned life insurance; and (8) compensation and pensions of Tax Court judges.

The American Benefits Council website reports:

It is also possible that the House of Representatives could act on the Pension Protection Act (H.R. 2830), the pension funding reform bill developed by the House Committee on Education and the Workforce and recently approved by the House Ways and Means committee. The House bill contains similar reforms for defined benefit pension plans, as well as a number of provisions addressing defined contribution plans and flexible spending account rollovers.

Marty Pippins, Manager, Employee Plans Technical Guidance and Quality Assurance, Internal Revenue Service, gave a very helpful presentation at the recent ASPPA Annual Conference in D.C. which I attended. While he refrained from answering some of the questions posed at the meeting, he did provide the audience with some “nuggets” of information which were useful to those of us who assist plan sponsors with plan amendments and plan compliance issues.

One of the topics of discussion had to do with plan amendment requirements pertaining to implementation of retroactive annuity starting dates (“RASDs”). According to Mr. Pippins, many people were under the impression that amendments allowing a plan to operate with a RASD could have been made before the end of 2005, as seemed to have been indicated in Notice 2004-84 (See page 6 “Designation of Disqualifying Provision”).

By way of background, Regulation § 1.417(e)-1 (in accordance with SBJPA) provides that the qualified joint and survivor annuity (“QJSA”) explanation may be furnished on or after the annuity starting date under certain circumstances. A RASD may be used only if the plan specifically provides for the use of the RASD and the participant affirmatively elects to use the RASD. The effective date was for plan years beginning on or after January 1, 2004.

However, Mr. Pippins indicated that Revenue Procedure 2005-66 issued in August of 2005 (discussing interim plan amendment requirements) would have required that an amendment permitting the plan to employ RASDs for the 2004 plan year would have had to have been adopted by the tax filing date for the 2004 year. Mr. Pippins stated that guidance is forthcoming which will likely state that the amendment can be made through the end of 2005.

Mr. Pippins went on to note guidance that would be “coming soon” which would address plan amendment requirements pertaining to the following:

(1) automatic rollover requirements
(2) final 401(k) regulations
(3) Roth 401(k) plan provisions (the guidance will include sample amendments and will supposedly answer whether a plan sponsor can have a Roth-only 401(k) plan and whether Roth 401(k) provisions would need to be adopted before the beginning of the plan year for which they are effective),
(4) 401(a)(9) DB amendment requirements (no interim amendments would be required, he said), and
(5) KETRA.

Mr. Pippins also indicated that the IRS will be issuing a new Cumulative List of Changes in Plan Qualification Requirements. This list will be updated to include all of the qualification changes that have to be reflected in plan documents, and will cover amendment requirements for both defined contribution and defined benefit plans. Mid-November is the targeted date for issuance, he reported.

Finally, he noted an issue pertaining to safe harbor notices for 401(k) plans that has been of keen interest to practitioners, due to the fact that the final 401(k) regulations seem to differ with the safe harbor notice requirements provided under Notice 2000-3 (link via Benefitslink.com). Notice 2000-3 contained a list of 4 items which could be incorporated by reference from the summary plan description into the safe harbor notice:

. . . a plan will not fail to satisfy the content requirement merely because, in the case of the information described in items (ii) (relating to any other contributions under the plan), (iii) (relating to the plan to which safe harbor contributions will be made), (iv) (relating to the type and amount of compensation that may be deferred), and (vii) (relating to withdrawal and vesting provisions) of paragraph 1.a., the notice instead cross-references the relevant portions of an up-to-date summary plan description that has been provided (or concurrently is provided) to the employee.

Final 401(k) regulations had listed only 3 items which could be incorporated by reference from the summary plan description (Reg. section 1.401(k)-3(d)(iii)):

(iii) References to SPD. A plan will not fail to satisfy the content requirements of this paragraph (d)(2) merely because, in the case of information described in paragraph (d)(2)(ii)(B) of this section (relating to any other contributions under the plan), paragraph (d)(2)(ii)(C) of this section (relating to the plan to which safe harbor contributions will be made) or paragraph (d)(2)(ii)(D) of this section (relating to the type and amount of compensation that may be deferred under the plan), the notice cross-references the relevant portions of a summary plan description that provides the same information that would be provided in accordance with such paragraphs and that has been provided (or is concurrently provided) to employees.

The 4th item was apparently dropped from the final regulations and pertains to incorporation of information relating to withdrawals and vesting. Mr. Pippins indicated that he was unaware of the reason for the change, but would look into the IRS possibly providing some “grace” for employers who might have given “defective” notices. Apparently, many employers have already issued the notice and have done so without complying with the final regulations. Employers were urged to comply with the new rules if they have not promulgated the notice yet.

Disclaimer: These are unofficial comments from an IRS official as of the time of the discussion, and do not necessarily represent agency policy. In other words, don’t rely on this until you see it in writing in an official IRS promulgation.

The Government Accountability Office has issued its report on Cash Balance Plans:

• Abstract
• Highlights
• Report [pdf]

Concluding Remarks from the Report (“CB” stands for “cash balance, “DB” stands for “defined benefit” and “FAP” stands for “Final Average Pay”):

Our analysis illustrates one of the difficult choices facing the Congress in crafting comprehensive DB pension reform legislation, including the controversial issues surrounding the legal status of CB plans, and particularly CB conversions. The current confusion concerning CB plans is largely a consequence of the present mismatch between the ongoing developments in pension plan design and a regulatory framework that has failed to adapt to these designs. Although CB plans legally are DB plans, they do not fit neatly within the existing regulatory structure governing DB plans. This mismatch has resulted in considerable regulatory uncertainty for employers as well as litigation with potentially significant financial liabilities. For many workers, this mismatch has raised questions about the confidence they may have in the level of income they expect at retirement, confidence that has already been shaken by the termination of large pension plans by some bankrupt employers.

CB plans may provide more understandable benefits and larger accruals to workers earlier in their careers, advantages that may be appealing to a mobile workforce. However, conversions of traditional FAP plans to CB plans redistribute benefits among groups of workers and can result in benefits for workers, particularly those who are longer tenured, that fall short of those anticipated under the prior FAP plan. Our simulations suggest that grandfathering plan participants who are being converted can protect those workers’ expected benefits, and, in fact, such protections, in some form, are fairly common in conversions. Our simulations also show that without such mitigation, many workers can receive less than their expected benefits when converted from a traditional FAP plan, even in cases where the CB plan is of equal cost to the FAP plan it is replacing. As a result, as we noted in our 2000 report, additional protections are needed to address the potential adverse outcomes stemming from the conversion to CB plans. For example, requirements for setting opening account balances could protect plan participants, especially older workers, from experiencing periods of no new pension accruals after conversion while other workers continue to earn benefits.

Our simulated comparison of CB plans with the termination of a FAP plan leads to several important observations. First, the immediate vesting of all unvested workers requirement in a plan termination actually leads to a greater number of workers getting some retirement benefits and highlights the portability limitation of DB plans. Workers in an ongoing DB plan only receive benefits if they are vested. Appealing to a mobile workforce would seem to place an even greater significance on pension portability. Yet even CB plans, which often feature lump sum provisions in their design, do not address this issue because they typically have similar vesting requirements as traditional FAPs.

In our simulations, vested workers under either a typical or equal cost CB plan still fare better than if the FAP plan is terminated. We note further that some sponsors of CB plans have already exited the DB system, a system that has been declining in sponsorship and participation for several decades now. There is a crucial balance between protecting workers’ benefit expectations with unduly burdensome requirements that could exacerbate the exodus of plan sponsors from the DB system. Congress, as it grapples with the broader components of pension reform, has the opportunity not only to protect the benefits promised to millions of workers and eliminate the legal uncertainty surrounding CB plans that employers face, but also to craft balanced reforms that could stabilize and possibly permit the long-term revival of the DB system.

It is interesting that the media is going crazy over this report, noting that “Democratic lawmakers, who last year asked the GAO to examine the matter, [have] seized on the report as fresh evidence that the so-called cash balance pension plans hurt workers.” See Pension Plan Switch Hurts Employees. In addition, the article reports:

The GAO study “is further proof of the need to stop companies from slashing the pension benefits of older workers through cash balance schemes,” Rep. Bernie Sanders, I-Vt., said Friday in a statement.

However, that is not the main message of the report at all. See bolded portion above which states that a CB plan is far better than a terminated FAP plan, and that Congress should “eliminate the legal uncertainty surrounding CB plans” and do everything possible to keep plan sponsors from exiting the DB system. In other words, employers are always free to terminate their DB plans (freezing accruals as of the date of termination) without adopting any plan to replace it. Such a scenario is far worse for the employee than replacing it with the “controversial” cash balance plan, “warts and all.”

See also this Plan Sponsor article here with some success stories involving cash balance plans. (One could hardly call them “schemes.”)