Business of Benefits

Business of Benefits

403(b) Document Delays; the “Once In Always In” Rule; and the “Effective Date Addendum”

Posted in 403(b), Plan Administration

The implementation of the IRS’s 403(b) pre-approved plan program by a number of vendors has been delayed by at least one thorny issue which will cause concern for a number of 403(b) plan sponsors. The IRS seems to have technically resolved the issue with its guidance on “effective date addendums,” (see https://www.irs.gov/retirement-plans/pre-approved-403b-plans-effective-date-addendum ).  But at least one of the issues it was meant to address has left many plan sponsors with questions of what to do now.

One of the roots of the problem is what the IRS generally refers to as the “once in, always in” rule of 403(b)’s “universal availability” requirement.  “Once in, always in” refers to the IRS position that once an employee has become eligible to make elective deferrals into the plan by reaching the 1000-hour benchmark in one year, that employee will remain eligible to make elective deferrals in future years-even in years where that employee does not complete 1000 hours of service.  That person can only lose that ability to defer if they become part of one of those limited categories of employees which can be excluded (such as certain students).

Now, this rule is not explicitly stated in the 403(b) regulations, nor is it part of the Code Section 403(b). Though this position has not been widely publicized over the years, the IRS applies it on audit, and the Internal Revenue Manual itself contains this interpretation as well.

It all came to a head in the pre-approved document process. The IRS requires that the “once in, always in” term be included in the pre-approved document.  The practical problem that came to the attention of the IRS is that many employers may not have not applied this rule, over time, consistent with the required plan document term. With the pre-approved document covering practices back to January 1, 2010, plans which adopted this the pre-approved plan with this term automatically included term might immediately have a “form and operation” problem which would force them into EPCRS.

This problem is not limited to the “once-in-always-in”rule, as there can be any number of practices required by the pre-approved document which the employers have not “practiced” since January 1, 2010. The “effective date addendum” addresses this “automatic” form and operation problem, though it will really serve to complicate plan 403(b) plan documents even further. Why I say “even further” is because 403(b)plan documents are complex beasts to begin with. For example, they incorporate by reference the underlying annuity contracts and custodial agreements as plan terms. A number of us have raised the issue that there are going to be inevitable conflicts between the central plan document and those (often complex)  underlying contracts, and the IRS’s position that the centralized plan document must control in the event of such conflicts may not always be tenable.

The “effective date rule” does address the technical issue of adopting terms which were not applicable back to January 1, 2010. What plan sponsors need to be aware of, though, is the need to implement the once in, always in rule going forward. But it does not address the elephant in the room: what happens to the employer which did not use that rule back to January 1, 2010, and admits in their plan document that they didn’t?

How to Do a 403(b) Collective Trust: “Reverse-Engineering” the University of California 403(b) CIT

Posted in 403(b)

A couple of years ago, I noted in a blog the legal challenges of offering to 403(b) plans the type of collective trust investments  are sold to 401(k) plans. This can be very diffiuclt-if not virtually impossible- to do because of the way the technical rues apply.

The University of California made news when it announced that it has found a way to apply the collective trust rules in such a way  to make just such an offering to its 403(b) plan. I was not involved with its development. However, if they did what I think they did, it really does speak to the sophistication of their counsel AND the hoops through which one must jump in order to make it happen. The downside to this is that it still does not “crack the nut” to make CIT’s  available on a bulk basis as 81-100 trusts for unrelated employers. But it still is pretty cool.

It is possible they could have done something like the  following. Make sure you have a copy of your US Code handy (or at least you’ve pulled up the  Cornell’s on-line US Code  tool). Its complicated. Or, as they say, don’t try this at home…..

403(b)(7)(C) requires that a custodial account hold shares of a “regulated investment company” (or a “RIC”) as defined in Code Section 851(a). 851(a) actually has thee different types of RICS. Two of them are under 851(a)(1), which are your run-of-the-mill mutual fund and a unitized investment trust  (for example, a 403(b) annuity contract uses the unitized investment trust version of a RIC). My earlier blog focused on these two types, because that is what is typically offered in the marketplace.

However, 851(a)(2)  permits a third type of RIC. An 851(a)(2) RIC is  a common trust fund “or similar fund” which is otherwise excluded from the definition of a RIC  under 15 USC 80a-3(c)(3) (which is part of the Investment Company Act of 1940, which regulates investment companies). 80a-3(c)(3) excludes a common trust from the definition of RIC (for that section’s purposes, but not for 403(b))  as long as the trust interests are not (i) advertised; (ii) offered for sale to the general public; and (iii) “fees and expenses charged by such fund are not in contravention of fiduciary principles established under applicable Federal or State law.”

In order to qualify use this type of RIC as a 403(b) regulated investment company,  the common trust also cannot be included in the definition of “common trust fund”under Code Section 584(a) (per Code Section 851(a)(2)).  584(a) does NOT include state chartered  trust companies, it only covers national banks and trusts.

What does this all mean? It means that as long as the CIT is offered by a state chartered trust company, and meets the 80a-3(c)(3) limitations (and the other limitations under 851) explained above, the interests in the trust can be purchased by a 403(b) custodian.

Add to this the fact that the UC plan is a governmental plan, the CIT interests would be exempt from registration under the Investment Company 40 Act-meaning no prospectuses, proxies, or other such requirements the typical mutual fund or registered annuity contract must provide. The plan’s 403(b) custodial account could then hold the interests in that CIT.

There’s even a PLR on it; PLR 8003155.

Even if this is not what actually happened, (and there are a number of details and legal issues which needed to be resolved in order to actually make this work), it could be something close to this. For sophisticated state universities with large plans, or even those large  consolidated K-12 plans, this could be a very real option. I suspect we’ll be seeing more of the same.

My hat’s off to the folks who put it together!

IRS’s New 401(k) Pre-Approved Document Rules Suggests a Path To Address 403(b) Document Challenges

Posted in 403(b)

One of the more difficult rules that the IRS has imposed on the 403(b) market in recent years is the complete ban on issuing determination letters on individually designed 403(b) plan documents, under any circumstance. The IRS has taken the position that all 403(b) plans must be on a pre-approved document in order to gain the “reliance” value of a determination letter. Unlike the 401(a) market, where there remains a process for IRS approval of individual designed documents, 403(b) plans have been granted no such grace.  This can be a challenge for many “legacy” 403(b) plans which have been in existence for many generations (keep in mind that the first 403(b) type of plan showed up in 1919).

Now the IRS has issued Rev Proc 2017-41, where it has fundamentally changed the structure of the pre-approved plan program fro 401(a) plans (2017-41 specifically does not apply to 403(b) plans). That Rev Proc eliminated the term “determination letter” for pre-approved plans, as well any distinction between “volume submitter” and “prototype “plan documents.

Buried in that Rev Proc is something we have been looking for in the 403(b) space, which actually would help alleviate some of the concerns document drafters have with these long-standing plans. Here’s what it says, in Section 8.03:

“Notwithstanding the preceding sentence, the following types of amendments will not cause a plan to fail to be identical to a Pre-approved Plan and, thus, will not result in the employer losing reliance on the Opinion Letter:

(7) Amendments to the administrative provisions in the plan (such as provisions relating to investments, plan claims procedures, and employer contact information), provided the amended provisions are not in conflict with any other provision of the plan and do not cause the plan to fail to qualify under § 401.”

There are actually a whole host of terms under a 403(b) plan to which this could be applied, especially given the fact that many plans have used  a wide multitude of vendors over a long period of time.  It may not address all of the issues we have, but given the fact that there really are only a relatively small handful of 403(b) plan terms which can actually affect the 403(b) status of a plan, this type of approach may prove some of the answers for which we are looking.

Does this suggest that the IRS will be willing to take a similar, flexible approach to 403(b) plan documents?

DOL Advisory Opinion Demonstrates Structure for Bundling Plans

Posted in Multiple Employer Plans

The DOL issued an important Advisory Opinion in January, AO 2017-01, which provides relevant guidance for those who are seeking viable “scale” alternatives to the MEP.  The Opinion really acts as a sort of “follow-on” to the DOL’s discussion of the “prototype” arrangement it first described in its legislatively revoked Interpretive Bulletin which permitted state based MEPs. Though it specifically opines on health plans, it has broad applicability to retirement plan arrangements, as well.

An Association of over 360 employers who employ over 9% of the U.S. private sector workforce is developing a package of health plan related services for its members. The idea is to engage in an extensive number of initiatives designed to improve the way in which its employer-members and their employee benefit plans purchase healthcare coverage for their covered employees. It is designed to give its members access to cost, quality and standards for medical networks they could not get on their own, while providing substantially improved care. The initiatives also involves gathering and distributing information to its members and health care providers that will help the members and providers improve their own employee communications and engagement practices.

Here is the key for retirement plans:  the Association will act as a negotiating agent on behalf of its members in order to leverage their combined purchasing power to get favorable terms and conditions from their members’ benefit plan vendors.

The DOL addressed two legal questions related to this arrangement which are important to the retirement plan market. The first is whether or not the package of benefit services they negotiated for their clients constituted, themselves, an ERISA plan. The DOL answered “no”, stating that the aggregation services being provided to employers for assistance in their own plans does not give rise the Association providing an employee benefit program. Secondly, the DOL affirmed that a “bundle of administrative services” established under the provisions of the initiative does not give rise to multiple employer (welfare) plan status.

This Opinion matters much in the retirement market: it demonstrates that the scale we seek is not exclusively the purview of the MEP.  Vendors have the ability to safely “bundle administrative services” to the same effect of a MEP, provided that they have enough scale on their own to negotiate the sort of investment pricing and expert services which the market seeks.  There are product designs which can facilitate these types of arrangements as well, such as insurance company pooled separate accounts and collective trust arrangements, if they are properly priced.

What the Opinion did not address are the fiduciary issues related to the “bundling” functions for retirement plans, which really are at the core of making this work in the retirement market. Yet even here, as more vendors become more comfortable with what is being called the “3(16)” services, the way is further opened for effective bundling.

 

 

 

The SCOTUS’s Church Plan Ruling in Stapleton Affirms Both the QCCO’s and Non-QCCO’s Ability to Maintain ERISA Exempt 403(b) Plans

Posted in Uncategorized

There are three kinds of 403(b) church plans: the plans of “steeple church”; those of the “Qualified Church Controlled Organizations” (or ”QCCO”, of which the K-12 parochial schools of a church are the best example); and of the “Non-Qualified Church Controlled Organization” (or “Non-QCCO”, of which church hospitals and universities are among the most common examples).

A number of “Non-QCCO” hospitals were sued for the way the managed their defined benefit plans. The lawsuits claimed that, due to a quirk in ERISA’s statutory language, only a “steeple church” could actually establish a church plan that was exempt from ERISA. This would mean that nether a QCCO or a Non-QCCO plan could qualify as an exempt church plan  unless it was established by the steeple church to which they were related; they themselves could only maintain such a plan, not establish it. It also means that all of the QCCO and Non-QCCO 403(b) church plans which were not actually established by the “parent” church would not be exempt from ERISA.

Three different U.S. Courts of Appeal agreed with this analysis. Those rulings have caused more than a bit of consternation in the 403(b) world: just think of the logistical nightmare for all of those church related charities, universities and hospitals who have never, for example, filed a Form 5500.

The United States Supreme Court, in a case named  Stapleton, has now disagreed with those lower courts, and unanimously ruled otherwise. It ruled that “church affiliated” organizations (meaning QCCOs and Non-QCCOs)  can, indeed, establish retirement plans which are exempt from ERISA as church plans.

This has lifted a menacing cloud. Those 403(b) plans of church affiliated organizations which weren’t established by their related religious organization can still claim ERISA exempt church plan status.

The funny thing about this ruling is the impact it may have on the church plan challenge we typically deal with on a regular basis: is the organization affiliated “enough” with their related religious organization to be considered a church? The Supreme Court expressly did not address this question. What may be helpful, however, was the Court’s reliance on the historical treatment of those organizations in reaching its decision. I wonder if there may not be a bit of a “halo” effect (so to speak), and whether this will discourage further challenges to church plan status.

 

 

Is Lifetime Income’s Future-and, Ultimately, That of Retirement Security- Through the IRA?

Posted in Auto-IRA, IRA, IRA Fintech, Lifetime Income, QLAC, QLAC IRA, Retirement Plan Securities Issues

It was telling. The Treasury released in early 2012 its new regulations enabling the Qualified Longevity Annuity Contract (“QLAC”), along with an extraordinarily helpful Revenue Ruling which  provided the technical clarification needed for the simple distribution of these (and other) annuities from defined contribution plans.  These are seminal actions in the wonkish world of lifetime income.  Taken together, they lay out the basis by which DC plans can provide lifetime income.

Something strange then happened. While assisting a client in using these new regulatory tools to design a program by which they could transform the typical DB plan into a more flexible and useful DC plan with lifetime income, we discovered that retirement plan annuity providers were reluctant to take advantage of these new opportunities. The cupboards were bare, and we had a difficult time finding the retirement plan products which we could use. This was not the case, however, with the IRA “side” of their houses, which dove in quickly.  Within a very few months of the issuance of the QLAC rules, there were a dozen or more annuity carriers which had IRA products on the street which took full advantage of the new rules- offering them in a broad range of products.

We have since then seen a growing innovation movement within the IRA marketplace, driven largely by a new generation of Fintech.  Incredible tools are being created by a number of companies which are using Fintech to not only develop fascinating iterations of retirement income, and investment platforms, but also integrating these with other important lifestyle features which will provide for a secure retirement. Think about planning your lifetime income around advanced models which take into account a wide range of financial, health and life choice elements to identify key decisions which need to be made.  These models also have some ability to bring a measure of scale and selection to the individual marketplace, much in the manner that aggregation models and MEPs  do in the retirement plan marketplace.

All of this is tied to IRAs, not retirement plans. Add to this the movement by the majority of states to develop universal IRA platforms -which may well also bring scale to the individual marketplace- and one can begin to see an evolving picture of where the future of retirement security may lie.

There is really quite bit of arrogance in the retirement plan marketplace, especially when it comes to dealing with IRAs. Most of us tend to actively ignore them, or not even give them a second thought (except to the extent we may need to perhaps support a “deemed IRA” inside of a plan). The high degree of technical skill needed to maintain plans seems to engender this attitude. But it also has fostered a great deal of resistance to innovation. Even Fintech seems to run into a brick wall when it comes to dealing with retirement plans: think of the graveyard of failed IT projects in which most service providers have interred what seemed at their inception to be great IT plans.

IRAs, for whatever reason, are stealthily changing the retirement future. When you look closely at their structures, they can be designed to be incredibly flexible (though often “off-the-shelf” IRAs are not). There are a number of major “houses” which provide the technical and legal support for “plug and play” investment arrangements (though, admittedly, there are a few SEC rules which need to be changed to make them really work well). They  provide a personal platform through which retirees can consolidate their assets in a way which can better serve their retirement in ways an employer sponsored DC or DB plan cannot.

Please do not be mistaken in believing that IRAs are the “be all” and “end all” of retirement security: their increased success will continue to generate regulatory  pressure similar to that brought under the DOL’s fiduciary rule; and there are a number of shortcomings in the marketplace which will need to be addressed. They should be viewed in conjunction with employer sponsored plans, and as a possible path by which to successfully pull off “de-cumulation.” DC plans designed as “IRA feeders” may eventually put 401(k) and 403(b) plans on par with with DB plans as strong retirement platforms, should the IRA marketplace continue in its innovative ways.

 

The Most Effective Proposed MEP Legislation Happens Not To Be MEP Legislation

Posted in Multiple Employer Plans, Plan Administration

The DOL’s 2012 Advisory Opinion on MEPs had seemed to effectively close the door to small, unrelated employers leveraging their pooled resources to obtain both advantageous investment pricing and access to professional fiduciary management which are otherwise unavailable to them because of their size.

The potential impact of an Open MEP® on small plan coverage really is striking. The data we had submitted to the DOL on the MEP  which was the subject of the 2012 Advisory Opinion showed that 46% of the plans were start-ups, with less than $100,000 in assets, and 81% of the plans had less than 100 employees. These small plans were virtually all safe harbor plans, and had an amazing average deferral rate for active employees of 6% of comp. These plans were receiving investment pricing and selection, and an expert level of services, that was not available to them anywhere else in the marketplace.

The market has struggled since that 2012 Advisory Opinion to replicate the MEP benefits using a variety of hybrid platforms (including a number of vendors just ignoring completely the 2012 Advisory Opinion), some successful and some with mixed results, and there have been impressive attempts in the States to attempt to provide this sort of access. Even the State’s efforts, however, are being crippled by much of a hidebound industry which is engaged in legislative and regulatory efforts impeding this expansion effort to small employers. There has also been a flourish of proposed federal legislation which would effectively overturn the Advisory Opinion-each which their own strengths and weaknesses.

All of these efforts have, to date, focused on the thought that the MEP platform is a sort of Nirvana for increasing small plan coverage. But MEPs are hard to do. As I’ve noted in previous blogs, the recordkeeping is difficult; employers can be surprised by the way vesting rules apply; care has to be taken in the allocation of authority; it is tough and risky to disgorge bad acting players; and there are still a number of unresolved issues in their administration and in the manner fiduciary rules apply.  Though EPCRS grants significant relief in correcting errors, the MEP sponsor still needs to price for it having to pay for the errors of the participating members. In short, MEPS carry inherent risk for the MEP organizer and the participating employer.

But what is the alternative? One possibility is the “aggregation model”, or what the DOL referred to in its State MEP Interpretive Bulletin as the “Prototype Approach.” In 2013, I published a “Fixing-the-MEP-White-Paper” that went into a bit of detail on this, in the PEO context. With recent advances in retirement plan Fintech, this approach becomes even more workable. What we have found is that the aggregation approach could mimic a MEP in all respects except in the filing of the Form 5500.  Each participating employer in those programs still need to file their own 5500s, including their own plan audits for large plans.

An impressively short, but impactful, piece of proposed legislation could change all of that. With one small change, it has the potential to make aggregation programs better and more useful than the MEP platform in increasing small plan coverage. The bill was introduced in the Senate by Sens. Mark R. Warner (D-VA), a member of the Senate Finance Committee, and Susan Collins (R-ME), who chairs the Senate Special Committee on Aging;  and the House version was sponsored by Reps. Linda Sánchez (D-CA), a member of the Committee on Ways & Means, and Phil Roe (R-TN), a member of the Committee on Education and the Workforce.

The bill would simply permit unrelated employers which have the same plan administrator, trustee, one or more named fiduciaries which are the same, the same investments and the same plan year to file a “single aggregated” Form 5500.

This legislation could fundamentally change the MEP landscape, and even lessen the contention over state run MEPs. It would do this by opening the market for the advantageous pooling of the resources of small employers which would have otherwise been reserved to the State programs. It also could minimize any need for new federal MEP legislation, and promote models which are a lot less risky than the MEP.

All in one very short, bipartisan, non-controversial piece.  Isaac Asimov, the scientist and incredible science-fi writer, would be proud, methinks of this real life use of his concept of “Minimum Necessary Change” .

By the way, this can also be accomplished by regulatory fiat by the DOL. See the comment letter to the DOL which lays out the details.

Managing Critical 403(b) Issues through Proper Allocation of 3(16) and 3(21) Fiduciary Responsibility

Posted in 403(b), Fiduciary Issues, Multiple Employer Plans

The “3(16) services” market is growing in sophistication, and is demonstrating that it is just not a passing fancy, a manufacturing of a need for a non-existent purpose. Service providers are demonstrating their ability to customize their fiduciary services to their customers’ needs and-just as important-to their own capacity to provide selected services where they feel they can add value. Selective design of these “allocated fiduciary” service arrangements are really their hallmark.

“Allocated fiduciary” arrangements is a much better term for these service packages than “3(16),” as they provide not only “Plan Administrator” services as defined by the Code and ERISA, but also “run of the mill” fiduciary services which are generally covered under ERISA Section 3(21). For example, making a determination of who is the proper beneficiary under a plan is technically a service covered under 3(21), while making a QDRO determination is technically a service covered by 3(16). The more sophisticated programs also appoint to the service provider some measure of “settlor” function for a number of necessary plan actions which are not fiduciary in nature.

These allocated fiduciary services are also at the heart of what makes a MEP work-it is virtually beyond the capacity of the typical association which offers a closed MEP to its members to properly operate in today’s demanding regulatory environment without the use of a fiduciary service provider. They are also what makes an “aggregation” arrangement (the only alternative available to Open MEPs ®) work.

Which then brings me to my point: the complex nature of handling 403(b) plans-and, in particular, the unique manner in which the fiduciary rules apply to them-make these plans uniquely suited to customized fiduciary services. It is well beyond the skill set of many 501(c)(3) organizations to make sense of their often complicated 403(b) programs, and to put them into some kind of sensical order. This must be done all the while applying a number of rules intended for the 401(k) market (with their centralized recordkeeping systems) in a plan which may have significant assets held by multiple vendors under a variety of contracts with differing terms. These sponsors at one time could rely upon the insurance carrier or their custodian to bear the burden of compliance, but the 2007 403(b) regulations have virtually eliminated that service.

Allocated fiduciary services are especially critical in the growing movement toward 403(b) MEPs, both of the ERISA and non-ERISA types. It takes a special expertise to manage the “legacy” contract issues in a coordinated and meaningful way between a significant number of employers between which employees can often transfers. Transferring employees are  surely a problem for 401(k) plans. But they are especially exacerbated by other challenges in 403(b) arrangements, with their unique service and aggregation rules; excludable contracts rules; needs for special arrangements for transfers between different vendors from a wide number of employers; and in collecting and harmonizing data from a potentially large number of disparate investment platforms. For ERISA 403(b) plans, the Form 5500s can be a nightmare for those not well versed in collecting and managing the unique data related to those plans.The 403(b) MEP lead sponsor should be cautious when considering stepping into that lead role without having allocated significant responsibility to a well qualified fiduciary service provider, as the liabilities related to failure can be significant.

 

ERISA and Mom: Sláinte!!

Posted in General Comment

We have done this post a number of years in the past as an “Almost Annual Mother’s Day” piece; our attempt to put a very personal twist to the things we do,  with a larger and hopeful light on many of the mundane tasks that make up much of our business. We now post it as a memoriam to Patti Anne Courtney, the finest of Irish Moms, who has passed early this morning. She is the inspiration of much of the work I do today.

On the rare morning when the breeze would blow in from the east, from the river, the orange dust from the prior night’s firings of the open hearth furnaces at Great Lakes Steel would settle onto the cars parked in the street. My Mom’s father worked there; my Dad’s father was a furnace brick mason at Detroit Edison; my father a tool and die maker at Ford’s Rouge Plant, not far down the road. Yes, I am a native Detroiter.

ERISA wonks such as ourselves tend to get lost in the press of details which seem to flow non-stop from our regulators and legislators in D.C. It is this background that reminds me that it is sometimes helpful to step back and see the personal impact of the things we do, even on the plant floor.

A few years back, a good friend of mine who ran the retirement plan operations of a large insurance company asked me to speak about ERISA to a meeting of his administrative processing staff. At the time, they were still struggling with some of the more difficult administrative processes related to the QJSA and QPSA rules. Here’s what I told them:

My father died at the Rouge Plant in 1970, after 20 years with the company. Back then, the normal form of benefit under a defined benefit plan was a single life annuity, covering the life of only the employee. There was no such thing yet as a qualified joint and survivor annuity or a qualified pre-retirement survivor’s annuity. This meant that my father’s pension died with him. My mother was the typical stay-at-home mother of the period who was depending on that pension benefit for the future, but was left with nothing. With my father’s wages topping at $13,000 annually and five kids at home, there was also little chance to accumulate savings.

The Retirement Equity Act of 1984 (a copy of which I still keep in my office) was designed to change all of that. By implementing the requirement of a spousal survivor annuity, a whole class of non-working spouses received protection which was desperately needed. So in that speech to my friend’s administrative staff, I asked them to take a broader view-if just for a moment- of the important task they were being asked to implement. It was valuable social policy with real, human effect which they were responsible for pulling off, and they should take a measure of pride in the work they were doing.

Things have evolved much over the years, and some of those same rules which provided such valuable protection have become the matter of great policy discussions centering on whether they are appropriately designed, and whether they can be modified in a way to accommodate new benefits like guaranteed lifetime income from defined contribution plans. But the point is that Congress sometimes gets it right, and there is very valuable social benefit often hidden in the day to day “grunge” of administering what often seems to be silly rules.

*************************

Mom lived a long and good life. She left us with, among other things, the gift of music. A song from my youth which I sang to her last night seemed fitting, written by an Irishman, no less:

Sing your way home, at the close of the day; 

sing your way home, drive the shadows away. 

Smile every mile, for wherever you roam;

it will lighten your load,

it will brighten your road,

when you sing your way home.

And we are grateful that she did go gently into the good night, for there was no dying of the light.

Sláinte!!

Bob and Conni

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