Category: Erisa

The Tax Guru-Ker$tetter Letter has this.

The following articles discuss reaction to the agreement made by Congressional conferees to adopt the Harkin’s Amendment relating to cash balance plans (discussed here and here):

• New York Times: “Employers Denounce Move on Pensions“
• Washington Post: “Pension Regulation Advances On Hill: Compromise Would Curb Conversions”
• LA Times: “Congress Derails New Rules on Pensions”
• Reuters via Forbes: ” US employers mad at blow to cash balance pension plan“

Also, from the Wall Street Journal:

• “Cash-Balance Plans Appear To Face a Regulatory Limbo” and
• “IBM Blasts Congress On Pension Inaction”

From Plan Sponsor: “Cash Balance Regs “On” Again – But…“

From the American Benefits Council: “Council Condemns Inclusion of Cash Balance Provision in Appropriations Bill“

From ERIC: “ERIC Statement on Passage of Harkin Cash Balance Amendment“

Reuters is reporting on what transpired late yesterday as representatives from the House and the Senate hashed out how to go forward with the Sanders’ and the Harkin’s measures addressing cash balance plans. (Previous post on the issues here.) The article by Reuters–“U.S. lawmakers hit cash balance pension rules“–indicates the following:

Negotiators from both chambers had to reconcile the two approaches as part of the annual spending bill that funds the Treasury Department. They basically embraced the Senate provision and dropped the House language involving the court case.

The article stated further:

. . . lawmakers also said the Treasury must offer legislation within 180 days on how best to convert traditional pensions to the newer cash balance plans — giving the administration another chance to set out a regulatory framework for such changes that Congress might embrace.

You can read about the Senate provision here.

More on this later . . .

At first glance, this seems like “not putting your money where your mouth is.” At second glance, you realize it is likely ERISA plan fiduciaries of a retirement plan seeking to act solely in the interests of plan participants and beneficiaries even though such action goes against what is good for the company that sponsors the retirement plan. [ERISA section 404(a)(1)]

The American Benefits Council states on their website that “Congressional appropriations conferees are expected to meet no later than November 12 to reconcile the House and Senate versions of the Treasury/Transportation appropriations bill (H.R. 2989) containing harmful cash balance plan provisions.” They also state that “[a]s part of the Council’s continuing effort to strip these provisions from the final conference report” they have developed a draft letter for plan sponsors to complete and fax to the appropriations conferees and congressional leadership staff. You can access this information on their website.

At the ALI-ABA “Annual Fall Employee Benefits Law and Practice Update” (discussed in previous posts here and here) Bill Sweetnam, Benefits Tax Counsel for the Department of Treasury, encouraged practitioners to write their Congressmen regarding cash balance plans, since he said that there seems to have been very little support for cash balance plans expressed on the House or the Senate floor when the Sanders and the Harkin’s measures were passed.

The American Benefits Council also has a legal opinion on cash balance plans prepared by Richard Epstein which you can access here. Highlights of the opinion are as follows:

(1) “In the House floor debate, the proponents of Section 742 [Sanders Amendment] portrayed CBF pension plans as a witch’s brew of age discrimination, breach of contract, and theft of employe pension assets, which they claimed the Cooper decision remedies. Their portrayal of CBF plans and Cooper does not withstand scrutiny. . .”

(2) “The apparent aim of this provision is to block the Treasury Department from issuing further regulations on ERISA section 204(b)(1)(H) or from participating in the Cooper litigation or other litigation insofar as it wishes to register its disagreement with Cooper. Even the requirement that the Department be silent on the entire matter would be deeply troublesome. Even more troublesome is that the agency may be allowed to speak on one side of the issue but not the other (i.e. it may not assist in overturning, but could assist in upholding Cooper) . . . . It is a generally accepted principle of constitutional law that the Congress may not through its legislation trample on the prerogatives of the Executive Branch in the discharge of its duty to see that the laws are faithfully executed. . . .”

(3) “The IBM plan and all other CBF plans satisfy ERISA section 204(b)(1)(H) by using the same rate of interest throughout the plan. The district court, however, ruled that the rate of benefit accrual referred to in that provision is the same as the employee’s total benefit accrued, thereby requiring the same dollar amount of interest for the 24- and 64-year old employees in the above example. The district court, in effect, confused velocity with distance. It is as though the court decreed that two people, one 24 and the other 64, running at the same speed, will be deemed to have run at the same speed only if both cover the same distance by the time each reaches age 65, 40 years apart. That, however, is a conceptual muddle and a physical impossibility. Congress clearly did not mandate such a nonsensical result.”

(4) “The result in Cooper cannot be justified on a public policy basis to avoid discrimination against older employees. To the contrary, it effectively mandates reverse age-discrimination, on an unprecedented scale.”

(“CBF” stands for “cash balance formula.”)

The irony of all of this is that tomorrow will be a big day for deciding issues pertaining to reverse age-discrimination: Congressional appropriations conferees will be deciding the fate of the Sanders and Harkin’s measures while at the same time the U.S. Supreme Court will hear oral arguments in the General Dynamics case to decide the fate of reverse age-discrimination claims.

Law.com‘s article–“Now for Law Firms, Too: Competing for Business Online“–has some very interesting information, but the most surprising, in my opinion, is this statement:

Other GE divisions have sought to reduce legal costs by outsourcing work to lawyers in India.

I have heard of the outsourcing to India in the computer industry and even in the financial services industry, but this is the first I have heard of the outsourcing to India occurring in the legal field. If anyone else has any good information or links on this, I would love to read them and would pass them along to readers.

At the ALI-ABA Annual Fall Employee Benefits Law and Practice Update mentioned in a previous post, Jim Holland, Employee Plans Group Manager (Actuarial 1) for the IRS, discussed a new phenomena in the benefits world and how U.S. attorneys are seeking to levy against qualified plan assets pursuant to the Federal Debt Collection Procedures Act of 1977 (“FDCPA”). The Act authorizes the federal government to collect against all property of individuals for payment of criminal fines or for restitution to victims of crimes. Mr. Holland stated that the IRS did not know that this practice under the FDCPA was going on until they received a request for a private letter ruling from a federal district court. When they received the request, they discovered that there had already been two federal district court cases on the subject allowing the garnishment, and holding that garnishment should not disqualify the plan under the anti-alienation provisions of section 401(a)(13) of the Internal Revenue Code or under the anti-alienations provisions of section 206(d)(1) of ERISA.

The IRS issued Private Letter Ruling 200342007 (via Benefitslink.com) which held that “the general anti-alienation rule of Code section 401(a)(13) does not preclude a court’s garnishing the account balance of a fined participant in a qualified pension plan in order to collect a fine imposed in a federal criminal action.” The IRS accepted the reasoning of the courts which had held that section 3713(c) of the FDCPA (which provides that “an order of restitution . . .is a lien in favor of the United States on all property and rights to property of the person fined as if the liability of the person fined were liability for a tax assessed under the Internal Revenue Code . . .”) was to be treated as if it were a tax lien so that it fell within the exception to the anti-alienation provision as enunciated under Treasury Regulation section 1.401(a)-13(b)(2)(ii). That exception provides:

(b) No assignment or alienation–

(1) General rule. Under section 401(a)(13), a trust will not be qualified unless the plan of which the trust is a part provides that benefits provided under the plan may not be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process.

(2) Federal tax levies and judgments. A plan provision satisfying the requirements of subparagraph (1) of this paragraph shall not preclude the following:
      (i) The enforcement of a Federal tax levy made pursuant to section 6331.
      (ii) The collection by the United States on a judgment resulting from an unpaid tax assessment.

Mr. Holland stated that there are still a great deal of unanswered questions regarding levies against qualified plan assets under the FDCPA. In the Private Letter Ruling, the garnishment had to do with a defined contribution plan and sought immediate payment from the plan. The Private Letter Ruling stated that the participant had an account in the 401(k) plan, but also stated that “[c]urrently, Participant A [had] no right to a distribution of amounts standing to his credit under Plan X.” However, the IRS went ahead and allowed the garnishment despite the fact that the participant did not have a right to an immediate distribution.

Mr. Holland stated that there were issues pertaining to defined benefit plans that had not yet been addressed, and that the issues can be difficult, especially when plan administrators are being threatened with contempt if plan monies are not turned over.

What about the tax consequences to the individuals involved? The panel stated that the amounts garnished would be includible in the income of the participant, but that it would not be subject to the section 72(t) early withdrawal penalty since levies are exempt from section 72(t). However, the question was asked about an obligation to withhold, and the answer was that it was unclear at this point since the question had not yet been addressed.

The following may also be relevant:

• Chief Counsel Advice 199936041(PDF)
• Chief Counsel Advice 200102021(PDF)
• Chief Counsel Advice 200249001(PDF)
  

Bill Sweetnam, Benefits Tax Counsel for the Department of Treasury, and Roger Siske, attorney with Sonnenschein Nath & Rosenthal, spoke at the ALI-ABA “Annual Fall Employee Benefits Law and Practice Update” and enlightened practitioners on the cash balance plan controversy. (For those who do not know, a cash balance pension plan is a defined benefit plan that is designed to work like a defined contribution plan. A cash balance plan establishes a “hypothetical account” for each employee and credits the account with hypothetical “pay credits” and “interest credits.” However, under these plans, the employer bears the investment risk which results in retirement security not available under a defined contribution plan.)

Bill Sweetnam gave an overview of what has transpired in the cash balance plan arena:

(1) Mr. Sweetnam remarked that, back in December of last year, the Treasury had issued regulations governing cash balance plans which basically opined that cash balance plan formulas and conversions in and of themselves were not age discriminatory if certain conditions were met. (Note: When the IRS issued its proposed cash balance plan regulations, they dealt with two separate types of discrimination: (1) discrimination in favor of highly compensated employees, and (2) discrimination against older employees. When the IRS withdrew a portion of the regulations, it withdrew the portion pertaining to discrimination in favor of highly compensated employees, but not the portion of the regulations pertaining to age discrimination.)

(2) Mr. Sweetnam also went on to say, that when the IBM cash balance plan decision was issued this summer (Cooper et al. v. the IBM Personal Pension Plan et al.) and ruled that cash balance plans were inherently age discriminatory, this sparked a lot of interest in the Treasury’s cash balance plan regulations. Both the House and the Senate passed amendments to the Appropriations Bills blocking the Treasury from issuing regulations. Mr. Sweetnam said that there are various other measures on cash balance plans being proposed which would seek to resolve the differences in the House and the Senate measures. (You can access the House amendment called the “Sanders Amendment” here and the Senate amendment called the “Harkin Amendment” here from previous posts.) One of the most interesting comments made by Mr. Sweetnam was that when both of these measures were introduced in the House and the Senate, respectively, there was little, if any, support expressed on the House or Senate floor for cash balance plans.

(3) There is very little hope that the IRS will begin issuing determination letters for the cash balance plans which are “stuck” at the national office (400 or so of them, according to Mr. Sweetnam) due to the “freeze” on determination letters. Under this “freeze,” determination letters will not be issued for cash balance plans which have been converted from defined benefit plans.

What should plan sponsors be doing regarding cash balance plans? Roger Siske stated that, even though the IBM decision did not reach a good result, in his opinion, it nevertheless was “well-reasoned” so that other courts may end up adopting this reasoning as well. For employers with current cash balance plans, the recommendation was to do a “risk analysis” and determine what it would mean for the employer if the IBM case is upheld. Because ERISA prohibits discrimination based upon increased age at all ages and not just for employees who have attained age 40, the possibility is raised that each employee would have to be “topped up” to the highest rate of benefit accrual of any other younger employee under the plan so that any “risk analysis” should include this possibility.

Employers should weigh the risks of continuing their plans and should consider amending their plans to traditional defined benefit plans or defined contribution plans, according to Mr. Siske. Regarding amendments to plans, the following was discussed:

(1) It is unclear whether any amendments may be made to reduce or even change the future interest crediting rates for existing accruals.

(2) The cash balance plan formula could be frozen, though, to limit the accrued benefits to benefits accrued on the date of the amendment.

(3) The Plan could be amended to provide for a benefit equal to the larger of the frozen cash balance plan accrued benefit or a new traditional defined benefit formula which over time would wear away the damage exposure with respect to employees who continue to accrue a benefit provided under the traditional defined benefit formula.

The dilemma faced by ERISA plan fiduciaries and other fiduciaries in the current mutual fund scrutiny is highlighted in these two articles:

• “Pension Plans Faced With Dilemma in Dropping Funds Caught Up in Scandal: CalPERS and CalSTRS consider firing Putnam, but replacing a money manager carries risks” from the LATimes.com
• “Retiree plans weigh scandal risks” from the Denver Post

The latter article discusses the various solutions being proffered for those who must make decisions on behalf of participants as to whether or not to continue to offer a mutual fund which has been the focus of an investigation. One adviser recommends that plan sponsors inform workers of the timing scandals, provide a substitute offering for any implicated funds and let participants decide their course of action. However as another adviser correctly states “[S]aying we recognize there is a problem, but we are still going to offer it to you sets up a big fiduciary issue.”

Quote of Note from the Denver Post article:

Just being under investigation causes problems for a mutual fund, adds Don Trone, president of the Foundation for Fiduciary Studies near Pittsburgh. “When a company is being investigated for wrongdoing, management will be consumed with dealing with those charges,” he said. “The product will suffer.” Investors are also more likely to pull their money out, hurting returns, he said.

This article from the Wall Street Journal today (subscription required)–“Public Pension Funds React to Probe: Some States Have Fired: Others Wait and Watch“–highlights how the issue is also important for fiduciaries of college-savings plans which are invested heavily in mutual funds. In addition, the article notes that one of the most difficult problems of the ongoing scrutiny is that of not knowing who might be implicated next. The article quotes Thomas Mann, director of the $4.5 billion Wyoming Retirement System, as saying: “If you fire a firm and pick up another that ends up having the same problems, you haven’t gained anything.”

Regarding the mutual fund industry scrutiny going on, you can access testimony from the hearing entitled “Mutual Funds: Trading Practices and Abuses that Harm Investors” held yesterday by the Senate Committee on Governmental Affairs at this link. The Wall Street Journal reports on the hearing: “Regulators Testify to Abuses
In Mutual-Fund Arena.” (Subscription required.) The article states that “securities regulators are planning to bring enforcement actions against about two dozen brokerage firms for overcharging customers who bought large amounts of mutual-fund shares.” Quote of Note: “In conducting recent checks, the Securities and Exchange Commission said it found that 25% of brokerage firms allowed clients to place potentially illegal “late” orders for mutual-fund shares and that three fund companies appeared to have arrangements that allowed such late trading. In addition, the SEC said that about 30% of the brokerage firms may have actively assisted some investors in conducting improper trading.”

Today, a hearing entitled “Mutual Funds: Who’s Looking Out for Investors?” is being held by the House Committee on Financial Services:

• Press Release on the Hearing is here.
• Today’s prepared testimony is here.
• You can actually listen to today’s hearing at this link. (Scroll down, on the left under “Capital Markets.”)

Also, the 401khelpcenter.com has a very helpful article entitled “Recapping the Mutual Fund Scandal Fund by Fund” for those looking for information regarding the different funds involved in the mutual fund scrutiny.

The LAtimes.com is reporting in this article–“Senate Banking Panel to Examine Fund Abuses“–that the Senate Banking Committee will also hold a hearing tentatively set for November 13th.

The Wall Street Journal today has this article: “Weighing the Alternatives For Frazzled Fund Investors.” Another good article that someone should write is: “Weighing the Alternatives for Frazzled ERISA Plan Fiduciaries.” A law firm has tried to do just that in their article: “What ERISA Fiduciaries Should Do About the Mutual Funds Investigation.” The article drew my attention to remarks made by Assistant Secretary Ann L. Combs before the Annual Conference of The National Defined Contribution Council where she stated:

And as you know, another front has been opened in the war against fraud. New York Attorney General Eliot Spitzer and the SEC have recently launched investigations into alleged late trading and market timing by mutual funds.

I recognize that the practice of short-term trading is discouraged by mutual funds, but in certain cases, the fund managers have overlooked or agreed to short-term trading by certain investors in return for investments that would increase their fees.

How do these allegations impact defined contribution plans? Market timing would disadvantage long-term investors, including 401(k) plans, by increasing fund administrative expenses. The problem with late trading is obvious – it’s illegal. What should plan fiduciaries do in light of the allegations?

ERISA requires that plan investment decisions, including the selection of mutual funds, must be prudent and solely in the interest of the plan’s participants and beneficiaries.

Allegations of improper mutual fund practices where a plan is invested must be factored into the fiduciary’s determination of the continuing appropriateness of that investment. The plan fiduciary may need to contact the mutual fund’s management for information regarding the trading practices and take appropriate action.

We expect that fiduciaries will be attentive to activities that materially affect the plan’s investment in the mutual fund or expose the plan to additional risk. Therefore, plan fiduciaries should have more active communication with mutual fund management in order to meet their obligations under ERISA.

Fiduciaries may also ultimately have to decide whether and how to participate in lawsuits or settlements arising from improper mutual fund activities. Of course, a plan fiduciary must weigh the cost of participating in a lawsuit against the likelihood and amount of potential recovery.

Perhaps one of the beneficial side effects of the unfortunate spate of corporate fraud and mutual fund investigations is a renewed emphasis on good corporate governance and good plan governance. I hope that the issues raised by Enron and similar cases have focused corporate officials on the important role fiduciaries play in protecting plan participants and has provided a necessary wake up call for people to take their fiduciary responsibilities seriously. In the long run, a renewed focus on fiduciary responsibility will benefit us all.