Business of Benefits

Business of Benefits

DOL Provides Key ERISA Guidance on QLAC/DC Lifetime Income

Posted in Fiduciary Issues, Lifetime Income

Sláinte! to Mr. Hauser and Company at the DOL. OK, admittedly I’m still recovering from our recent trip to Ireland where, yes, I attempted to drive on their country “roads.” “Sláinte is one of the Gaelic terms for Cheers! And, yes, that is a pint from the Blind Piper in County Kerry.

SlainteThe DOL just published its first serious guidance on supporting lifetime income with the publication of FAB 2015-2, guidance which is very necessary for the success of the Qualified Longevity Annuity Contracts, as well as DC lifetime income income.

The FAB is an initial, but substantial, step in addressing one of the most pressing of the ERISA issues related to providing lifetime income from defined contribution plans: concerns by employers and their advisors regarding the potential of a substantial “tail” of liability related to buying an annuity. Who wants to purchase an annuity if some 30 years after the purchase of an annuity, an insurer becomes insolvent while the annuity is in its payout stage, after which the fiduciary can be held liable for that long ago decision?

Addressing this “fiduciary anxiety,” the DOL helpfully described the manner in which ERISA’s six-year statue of limitations serves to restrict the “window of liability” related to those purchases.

The DOL also discussed the manner in which it views that the ongoing obligation to monitor a chosen annuity vendor will apply. The fiduciary will need to periodically review the chosen insurer, but will not need to do so before the purchase of each annuity. The obligation to review ceases should annuities no longer be able to be purchased under the plan or, with regard to any particular carrier, that carrier’s annuities cease to be  an option under the plan.

It is also very helpful that the distribution of the annuity was recognized as a distribution option under the plan.

Through two simple examples using the QLAC type of annuity upon which the Treasury has issued guidance, the DOL stated that:

“Thus, for example, if the plaintiff bases his or her claim on the imprudent selection of an annuity contract to distribute benefits to a specific participant, the claim would have to be brought within six years of the date on which plan assets were expended to purchase the contract.”

This helps forms the basis upon which much more work can now be done. Next up will be guidance on a safe harbor, for the steps the fiduciary should take in choosing an annuity carrier. This is a project upon which the DOL is currently working. The FAB gave an important clue regarding the DOL’s approach to that ‘work-in-progress,” which is likely to help shape that safe harbor:

“Consistent with this statutory language, the prudence of a fiduciary decision is evaluated with respect to the information available at the time the decision was made – and not based on facts that come to light only with the benefit of hindsight. The conditions of the Safe Harbor Rule embody this general principle of fiduciary prudence. A fiduciary’s selection and monitoring of an annuity provider is judged based on the information available at the time of the selection, and at each periodic review, and not in light of subsequent events.”

This will be a critical element of the safe harbor, demonstrating that what is required is prudence, not prescience, as I had noted in a previous blog.

Evan Giller and I testified before the ERISA Advisory Council this past May, where we suggested the DOL work to ease fiduciary anxiety with this sort of guidance. We also suggested in the Testimony the factors which a safe harbor should require-noting that the burden to provide the information should be on the insurers in a competitive circumstance. Let the insurers’ poke at the accuracy of their competitors’ data; and let the fiduciary rely upon that.

You may find our written Testimony with its specifics related to what should be sought by the fiduciary helpful.

As with the Treasury’s guidance in Rev Rule 2012-3, this will help form the fundamental basis for making lifetime income work.

Fiduciary Liability for 403(b) Non-ERISA Plans?

Posted in 403(b), Fiduciary Issues

A number of us have been arguing about the extent of fiduciary liability for non-ERISA 403(b) plan sponsors for years now. This was caused by the 2007 changes to the 403(b) tax regulations, which  significantly increased employer responsibility for the maintenance of 403(b) plans. This greater level of employer involvement lead to our ongoing discussions on the sort of liability could these plans cause for the non-ERISA plan sponsor. Of particular concern to me was that of school districts which sponsored 403(b) plans. Those districts had typically viewed themselves as having minimal, if any, exposure to the operation of a 403(b) plan. This was in large part because of the lack of exposure to ERISA and its fiduciary obligations.

What school districts had never paid close attention to was their potential liability under non-ERISA, state law based legal claims, such as breach of contract, negligence, and other similar duties. ERISA, by the way, would preempt the assertion of these claims if they related to the operation of an ERISA plans, but public schools have no such protection.

Though these discussions (yes, Richard!) had always taken the nature of a nerdish argument between lawyers who really needed to get a life, a Wisconsin court has shown us that this could be a matter of very real concern to public schools.


The Wisconsin Court of Appeals has recently decided a matter in what appears to be one of the first reported appeals court cases involving school district liability under state law related to a wrongfully administered 403(b) plan. The case was technically one under which the issue was whether the federal tax code preempted a claim for participant tax losses related to errors in 403(b) plan administration.

What the Court found was that an action alleging a failure to exercise ordinary care in the administration of a 403(b) plan…, if proven, may entitle the Retirees to relief in state court.  Scary. Now it seems all so very real.

The facts won’t be unfamiliar to many school districts. In negotiating a layoff of teachers during the recession, the school district agreed to continue to make post severance contribution to the laid-off employees for 10 years following their termination of employment. The problem is that 403(b) only permits such post-severance payments for 5 years.

The IRS audited the school district’s plan,  found the error, and entered into a settlement agreement with the district under which the district agreed to pay $60,000 to the federal government.  The IRS agreed to treat the first five and one-half years of the plan’s payments as compliant with 403(b). The district then sought reimbursement from those former employees for amounts that it claimed it had paid to the IRS for the “employee share” of FICA taxes.

Those former employees didn’t take it laying down. They  filed a lawsuit against the district and its 403(b) third party administrator, claiming breach of fiduciary duty under Wisconsin law (not ERISA), breach of contract, misrepresentation, a federal civil rights violation, negligence, and unjust enrichment on the part of the district and breach of fiduciary duty, misrepresentation, and negligence on the part of the TPA.

The trail court first found against the former employees, finding that this was merely a “tax situation,” under which the former employees should make claims for tax refunds against the IRS.

The Court of Appeals disagreed, in no uncertain terms. The Court found, instead, that the suit could proceed if the former employees could prove they were erroneously promised that they could avoid FICA taxes and defer income taxes by use of a ten- year payment period in the 403(b) plan that the District was charged with administering (and the TPA was responsible for structuring). The Court agreed with the former employees, that the case is “essentially no different than an action against an accountant who commits malpractice and whose client, as a result, incurs additional tax obligations and costs that the client would not have incurred had the accountant not been negligent in the performance of his or her duties.”

The Court went on to find that the school district could be held liable for the tax exposure if it failed to use the degree of care, skill, and judgment that reasonably prudent administrators would exercise under like or similar circumstances.

This finding may well be the first step in establishing an “ERISA fiduciary-like” cause of action against school districts and plan administrators in the improper handling of non-ERISA 403(b) plans.

The case is Ann Cattau v. National Insurance Services of Wisconsin, Midamerica Administrative & Retirement Solutions, Neenah Joint School District, and Community Insurance Corporation; Appeal No. 2014AP1357, State of Wisconsin.


The 403(b) QLAC

Posted in Lifetime Income, Uncategorized

I went into quite a bit of detail on the value of the the Qualified Longevity Annuity Contracts” (the “QLAC”) last year in a  posting right after the QLAC regs were finalized.What the QLAC does is remove a logistical problem caused when you purchase an annuity to provide lifetime income, while creating a minor tax break for participant electing to annuitize.

As a quick update, here’s how it works: a participant can use up to 25% (or, if less, $125,000) of their 403(b) account balance to purchase a straight life annuity which becomes payable no later than age 85. If that annuity qualifies as a “QLAC”, the participant will not have to use the value of the annuity (which will effectively be the premium pad for it) in computing the required minimum distribution payments which may otherwise payable under the 403(b) contract after age 70 ½.

A QLAC can be purchased and held within a plan, or it can be purchased by a plan and distributed to the participant, depending on plan design. The QLAC is really intended to be used in conjunction with a systematic withdrawal program from a participant’s account balance: the systematic withdrawal program will cover the retirement needs until the date the QLAC’s annuity payments begin.

There are some very specific rules governing the QLAC:

It must be an annuity contract. Though a participant can take systematic withdrawals from their custodial account until the lifetime annuity kicks in, the QLAC itself can’t be the custodial account.

  • It must be an annuity contract. Though a participant can take systematic withdrawals from their custodial account until the lifetime annuity kicks in, the QLAC itself can’t be the custodial account.
  •  The annuity contract itself must state that it’s a QLAC, beginning January 1, 2016.
  •  There can be no account balance or surrender value (other than the return of premium), and the only death benefit is a lifetime annuity in favor of the joint annuitant. This means there can be no GMWBs in a QLAC program; and that a 403(b) account balance –even if in a 403(b) contract-will need to be transferred to a QLAC for it to work.
  • Payments must start no later than age 85, though earlier payment can be elected.
  • The insurer must act as the administrator, and comply with “IRA-like” annual reporting obligations. The employer doesn’t have these reporting obligations. The annual report to the participant includes
    • Information about the issuer, including contact information.
    • Information on the individual for who contract is purchased.
    • If still part of the plan, plan information.
    • Starting date of annuity, if not yet commenced
    • For the year purchased, the amount of premium and date paid
    • Total premiums paid for contract over time
    • The fair market value of the QLAC at close of year
  • No Roth funds can be used to purchase the contract.

Now, we see the marketplace beginning to offer some products, but it appears that insurers are mostly offering them as IRA products as opposed to being purchased by plans and distributed to participants. Which then causes us to pause some and consider how you do a 403(b) QLAC.

The QLAC seems to be in the 403(b) “sweet spot”, considering that 403(b) annuities were originally designed to provide lifetime income in the first place. However, as with all things 403(b), however, there are a few unusual twists when trying to put a QLAC in a 403(b) arrangement. Here are a few of the things to consider:

  •  For existing 403(b) individual annuity contracts, or certificates under a group contract, it does not appear that a new contract will actually need to be issued. It seems like the insurer can issue a rider to an existing contract which provides that a portion of the account balance can be used to partially annuitize the contract. This, however, will be the choice of the vendor.
  • Where the vendor will require a rollover to another contract, there can be issues for those 403(b) contracts which have been distributed from a plan: a vendor may be reluctant to do so for these contracts, given the 403(b) tax regulation requirements of employer control. If there is no employer, the vendor may not be willing to arrange for a QLAC.
  • An employer’s approval of a 403(b) QLAC may trigger ERISA status for a non-governmental, non-ERISA plan.
  • The 403(b) plan document will need to provide for a QLAC, to the extent that the 403(b) contract still is in the plan.

As we implement, I suspect we will be flushing out a few more concerns-some of them related to the manner in which we combine 403(b) contracts for purposes of having a single 403(b) QALC.  But this is the beginning of an exciting time.


ERISA and Mom

Posted in General Comment

This is our “Annual Mother’s Day” posting, our attempt to put a very personal twist to the things we do, hopefully putting a larger and hopeful light on many of the mundane tasks that make up much of our business.

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, 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 has yet now recovered from her sixth stroke, at the end of 2014. She is doing well, though her dementia has been exacerbated by her latest episode, and she still can amazingly maintain in Assisted Living. As I noted last year, “doing well” takes on a whole different set of meanings. She is still healthy, does still know all of us, and remembers well many important things from a very precious past. We come more fully to the understanding that blessings truly come in many different forms.

Happy Mother’s Day

Bob and Conni

DOL’s Proposed Fiduciary Rules May Unexpectedly Open Lifetime Income Door, If…….

Posted in DOL Proposed Fiduciary Regs, Fiduciary Issues, Lifetime Income

I don’t remember a bolder regulatory move in my career that compares to what the DOL has undertaken with its issuance of its new fiduciary rules. Regardless of what one may think of the new set of rules in substance, EBSA’s organizational courage needs to be appreciated. I have little doubt that this comment will garner more than a few guffaws from those who have been engaged in this emotional battle for the past few years. For those cynics, however, I invite you to step back for a moment to see what has been done.  EBSA has been willing to conduct an extensive  self-review of the sort I have never seen in any organization (other than those private companies on the verge of collapse), in the face of tremendous (and often conflicting) political pressure, with the full knowledge that it will be open to incredible  scrutiny during the public comment period. It has really broken the bureaucratic mold in a way that I expect not to see again in my practice.

Complicated4This effort represents a fundamental change in a very broad regulatory scheme which will ultimately have some effect on most every part of the ERISA marketplace, many of which we will never really know until we bump into them in the years that follow their eventual finalization. Though the rule changes themselves are not particulalry complicated, they will affect ERISA plan relationships in so many different ways that it really will be hard to judge its ultimate impact-other than it will be substantial.

There is much to like in the new rules; some troubling things;  and, I think, perhaps a mistake or two which will be all flushed out in the coming months.

In my own, small world, I think there are a couple of technical points which I think are worthwhile sharing because they represent what we can expect of the “unexpected” as we work through the changes’ impact.

The first has to do with our old friend, the provision of lifetime income from defined contribution plans. Lurking in the shadows of the implementation of these programs is a problem to which none of us has given much attention yet: ultimately, participant decisions to use a portion of account balances to purchase any annuity (because, remember, guaranteed lifetime income still requires an annuity of some sort) are very personal decisions. They are based on the individual participant’s circumstance, not the least of which being age, marital status, and other assets.  This, then would make any counseling by an advisor clearly the provision of fiduciary advice, even under existing rules.  In the small to mid size markets, where there is a lack of employer staff to assist in these decisions, this advice will often only be able to be given by advisers many who, by the way, may also receive potentially conflicted compensation from the purchase of the annuity.

I wasn’t sure how we were going to able to solve this problem, as there has been bigger fish to fry in the regulatory scheme (such as insurer insolvency risk and education) before we even got to this point. Quite unexpectedly, the new rules will permit annuity contracts under commission arrangements be sold as long as the adviser is willing and able to “pay the piper” and comply with the Best Interest Exemption, as it really expands the current state of affairs as provided under PTE 84-24. The “if” is that it will be dependent on the DOL working out some of the quirks and potentially fatal logistical challenges in some of the proposed terms of that exemption. But that is the purpose of the comment process, which will flush out the most legitimate of these issues, and hopefully cause appropriate changes. This will be a robust comment process, no doubt.

The second is an example of what I truly hope is merely unfortunate drafting.  In Section VI of the Best Interest Exemption, the DOL flatly states that :

“In addition to prohibiting fiduciaries from receiving compensation from third parties and compensation that varies on the basis of the fiduciaries’ investment advice, ERISA and the Internal Revenue Code prohibit the purchase by a Plan, participant or beneficiary account, or IRA of an insurance or annuity product from an insurance company that is a service provider to the Plan or IRA….purchases of insurance and annuity products are often prohibited purchases and sales involving insurance companies that have a pre-existing party in interest relationship to the Plan or IRA.”

The DOL then goes on to say that the Best Interest Exemption will apply to plans with less than 100 employees to permit such sales. What this appears to say is that an insurance company with an existing relationship with a plan, cannot provide a new annuity (such as those for providing lifetime income) to a plan participant without it being a prohibited transaction or, for small plans, using the Best Interest Exemption or,  for large plans, apparently using the large plan carve-out rules.

What is troubling about this broad statement is that it seems to ignore the statutory exemptions for the purchase of annuities under ERISA Sections 408(b)(2) and 408(b)(8), and unnecessarily forces annuity purchases into the burdens of the Best Interest Exemption or the large plan carve out rules. But even worse, before these new rules come into play, the DOL seems to be saying that plans cannot purchase lifetime income annuities-including QLACs- from insurers from whom they have already purchased a contract or which is serving the plan unless they somehow comply with PTE 84-24 for more than just commission payment. Please say it ain’t so!



Lifetime Income: Using the Statute Of Limitations to Minimize Insurer Insolvency Risk

Posted in Fiduciary Issues, Lifetime Income, Uncategorized

Tim Hauser, EBSA’s Deputy Assistant Secretary for Program Operations, mentioned something very striking regarding lifetime income at the annual meeting of the 5 regional TE/GE Councils this past February, something I’ve taken some time to consider. His thoughts, as it turns out, can have a significant impact on the eventual success of the ability of DC plans to provide lifetime income .

We were talking about the DOL’s effort to provide further guidance for DC plan fiduciaries who purchase annuities to provide lifetime income-including QLACs.  What is proving to be the most difficult issue to resolve as we work through the regulatory landscape is the insurer insolvency issue: how do we protect the fiduciary from a participant’s breach of duty claim should an insurer become insolvent years hence, and be unable to the pay the retirement benefit otherwise promised under the annuity?

The insurance industry has repeatedly sought relief and guidance, even to the point of having legislation passed which directed the DOL to provide safe harbor guidance.  The DOL has tried. It has issued a non-exclusive safe harbor on fiduciary standards for the purchase of DC annuities, but even that guidance provides little comfort for sponsors on the long-term risk of insurer insolvency.

Then Tim, being a long-time litigator, suggested the simplest of things. Why, he asked wouldn’t the fiduciary be protected by ERISA’s 6-year statue of limitations under ERISA section 413.

I was actually stunned, mostly by the simplicity and sensibility of his point. A lot of folks, much smarter than myself, have spent serious time in trying to crack this nut. It struck me that this might actually be the answer. Think about it: insurance companies do not become insolvent overnight. There is usually much hand wringing, review, public scrutiny and regulatory action which precedes an insurer’s failure. The public, at least those which follow the financial services world, have long notice of something currently being amiss in an insurer’s balance sheet.  And even when it does go wrong, the other insurers typically cover policyholder losses  through the (admittedly very imperfect) state guaranty associations.

This suggests that a workable fiduciary standard can be reasonably constructed which would not require a crystal ball, or one which relies upon the state bearing that sort of risk as a matter of public policy. I become even more interested when I thought about the non-ERISA cases, where the statute of limitations would be based on contract or fraud, which are often even less than the ERISA six year statute.

Given a six-year risk window, I think we have the tools now to construct a workable standard which addresses the insurer insolvency risk.


For those of you who may be interested, I am putting on a webinar with Thompson Publishing on the technicals of QLACs and lifetime income on Tuesday, April 14, 2015. Here’s the link to register.


State Auto-IRAs and Federal Law: “We’ve already stepped on that rake…..”

Posted in 403(b), Auto-IRA, Automatic Workplace Pension, B/D-IA Issues, Lifetime Income, Retirement Plan Securities Issues, Uncategorized

Chuck Thulin, a fine ERISA attorney from Seattle, WA, chaired the DOL practitioner panel at the latest (and very successful) annual meeting of the 5 regional TE/GE Councils, in Baltimore.  When I commented that we’d  “been there, done that” when discussing some obscure rule,  he told me of reading of the Russian language version of that well worn phrase: Na eti rabli my uzhe nastupali, or  “we’ve already stepped on that rake.” What immediately came to mind was one of my favorite Robert Frost poems, which I share at the end of this blog.

More importantly, however, was that phrase came to mind when I was reviewing some technicalities implementing state-auto-IRAs. Auto-IRAs will be very real, with at least some 17 states at some level of development of a program. This “rake” we are stepping on is  one that which we have stepped on before: that being the same combination of ERISA and federal securities laws which continues to “str(ike) me a blow in the seat of my sense” (as Robert Frost put it so well below) in our dealings with 403(b) plans.

The ERISA issues related to state-auto-IRAs are well recognized, which are similar to the issues related to 403(b) plans: how do you established a payroll based auto-IRA without causing the arrangement to be governed by ERISA?  Like 403(b)s, there is a regulatory safe harbor to prevent the application of ERISA.  Like 403(b)s,  the safe harbor was not exactly  designed with the current state of affairs in mind.

I suggested what I think is the most supportable ERISA analysis on on this point on the AARP Auto-IRA website; and it is helpful that the President’s 2016 Budget would set aside nearly $6.5 million to help implement “State-based automatic enrollment IRAs or 401(k)-type programs.”  This is likely to include the EBSA exploring sound ways to address this issue. Until then, however, we need to work with the existing rules.

A close working of the details also reveals critical issues related to securities laws which, again, are similar to the securities law issues we deal with on the 403(b) side of things-an example being well described in the recent SEC letter to the American Retirement Association (formerly ASPPA) which granted certain disclosure relief from securities law related to non-ERISA 403(b) participant disclosures.  Unlike participant investments in 401(k) plans which enjoy extensive securities law exemptions, providing investments and investment advice to individuals related to their IRA investments enjoy no such exemptions.  Attention needs to be paid to such matters within the SEC’s and FINRAs purview, such as suitability, pooling of assets, the natiure of asset allocation models, and other like- regulated matters. This host of securities law issues is one which IRA providers will need to work around until legislators and securities regulators pay the attention necessary in order to make state-based auto-IRAs work simply. Unfortunately, these issues are not currently getting the attention they need.


In the meantime, here’s the Robert Frost poem:

The Objection To Being Stepped On
By: Robert Frost

At the end of the row
I stepped on the toe
Of an unemployed hoe.
It rose in offense
And struck me a blow
In the seat of my sense.
It wasn’t to blame
But I called it a name.
And I must say it dealt
Me a blow that I felt
Like a malice prepense.
You may call me a fool,
But was there a rule
The weapon should be
Turned into a tool?
And what do we see?
The first tool I step on
Turned into a weapon.

Dealing with “Small Amount” 403(b) Annuities of Former Participants, and Other Matters

Posted in 403(b)

It is going on 8 years now since since the IRS fundamentally changed the 403(b) world with the issuance of regs which were designed to make 403(b) plans more like 401(k) plans, and to formally impose more employer accountability on the operations of those plans.  Though those regs brought very valuable change in many ways, and the attempt to hold employers more accountable is really crucial to the success of the retirement system, they were also overreaching in many other ways.  We continue to see the negative impact from some of the more myopic and unfortunate portions of those  rules, often showing up in the most mundane but important ways. Or, as Doonesbury once well put it in one of my favorite strips, “Even in Utopia there’s Myopia, Sir.”

Doonesbury, April 19,1976

Doonesbury, April 19,1976

Perhaps the most persistent of the regs’ shortcomings is the failure to adequately recognize, and deal with, the fact that individuals- and not plan sponsors-control vast aspects of plan operations under individually owned annuity contracts and custodial accounts. This results in circumstances  (often in the otherwise most simple matters) which offer no easy solutions,  compelling us to seek unique procedures addressing some of this regulatory myopia’s most difficult effects. We often must look to “dusty” and unfamiliar sections of the Code and ERISA for solutions.

One of the more useful tools we have found is one to deal with “small amounts” in former employees 403(b) annuity contracts. It really is indicative of the sort of thinking in which one must engage to adequately to deal with some of the more intractable 403(b) problems we face almost daily.

This particular problem arises for plans with  contracts of former participants which cannot be excluded from plans under DOL FAB 2009-2 and Rev Proc 2007-71 which also have balances less than $5,000.  401(k) plans can easily distribute these small amounts, under 401(a)(31).  But 403(b) plans have a challenge. Though the “small amount” rules of 401(a)(31) do apply to 403(b) plans, how do you distribute small amounts out of an individually owned contract over which the plan has no ability to force a cash rollover?  These contracts typically need the participants consent to distribute even the “small amount.” This has a two very real impacst for many plans:

  • That former participant’s “small amount” contract is  counted toward the participant counts in determining determining eligibility for the small plan exception to the annual audit.
  • It also can cause a serious “form and operation” problem with the plan document: just about every 403(b) plan document I’ve looked at blindly incorporates 401(k)’s “small amount”  distribution terms into the plan. This term virtually always mandates the distribution and rollover of those amounts, as 401(a)(31) requires that the employer have no discretion in making the distribution if the term is in the document.  However, the inability to force the distribution causes an operational failure, which can only be fixed by plan amendment-meaning a submission to EPCRS.

This really means is that you need look to an entirely different method other than 401(a)(31) to manage these small amounts, to the extent that there is no employer ability to force a cash distribution from a contract.  That method would be to “distribute” those small annuity contracts from the plan as an “in-kind” distribution, not as a mandatory roll-over under 401(a)(31)(B). Because the distribution of an annuity contract is NOT (and really cannot be) a rollover, 401(a)(31)(B) can’t work.

The analysis is an interesting one.  You start with the basic premise: forcing the small distribution from a plan before retirement age is generally not permitted without a statutory exception. For ERISA purposes, ERISA Section 203(e) covers this. It specifically permits the mandatory distribution of an accrued benefit of less than $5,000. ERISA does not require the distribution to be in cash, nor that it  be accomplished through a rollover. This means that it is permissible to force an in-kind distribution of a “small” annuity contract from the plan under ERISA.

For Code purposes,  we rely upon one of the basic differences between 401(a) and 403(b): though  411(a)(11)(A) prohibits a forced distribution (except, as a practical matter, as provided under 401(a)(31)), 411 does not apply to 403(b) plans. 403(b)(1)(C), on the other hand,  only requires that “the employees rights under the contract are nonforfeitable.”  Any individual 403(b) annuity contract (or custodial account, for that matter) must be, by its terms, nonforfeitable in order to qualify as an 403(b) annuity contract.

Therefore, making a distribution of a small annuity contract is a viable alternative to 401(a)(31).  Note that ERISA 203(e) will not apply to governmental and church 403(b)plans-which also raises the possibility of forcing out larger amounts. You do not save on the Form 5500 and audit fees (there are none), but it offers some interesting planning opportunities for plan sponsors.

There are a few details to make this all work, of course, (for example, a plan document would want both 401(a)(31) and the above machination) and the IRS is still resisting treating custodial accounts as annuity contracts for distribution purposes. But at least the rules are forcing us to take a fresh look at rules for which we have otherwise fallen into “conventional wisdom” in our dealings.

A few other notes:

  • Our thanks to Chris Carosa and Fiduciary News for listing us as one of the 10 Insider Blogs Every 401k Plan Sponsor & Fiduciary Must Read.”  Thank you Chris for the high compliment.
  • Chris noted in his review that I do have an opinion on matters. There is a fascinating piece on Legal Blogging and self-censorship by Kevin O’Keefe in the aftermath of the Paris killings I do invite you to read. I do write much- my favorite Christmas gift from Conni was a beautiful fountain pen with a nib which absolutely dances on the page-and do so cherish and value the opportunity to express my opinions.
  • Finally, for the curious among you, the following is the full Doonesbury strip from which I have quoted, above:

Myopia Strip


Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.

MEP Reform: Is it Necessary? A Rebuke

Posted in Multiple Employer Plans, Uncategorized

There is a serious, and important, debate occurring whether, and to what extent, should there be MEP reform following the DOL’s restrictive advisory opinion on the matter in 2012.  There appears to be bi-partisan support for the changes proposed in Senator Hatch’s SAFE Act, which makes wholesale changes to  the current MEP rules, and will make them much more widely available.

My own position on the matter has really transformed with time and experience since the Advisory Opinion. The real question now is whether the benefit from re-opening MEPS outweighs the potential regulatory difficulties which will accompany it.  Though I believe MEPs can be valuable tools under the right circumstances, the Holy Grail is NOT the MEP. The MEP is only a tool; the goal is to cost effectively bring the advantages of scale to the small case marketplace.  What we have discovered over time in developing MEP alternatives since the Advisory Opinion is that there can be better ways to bring scale to the market, one that involves traditional methods of fiduciary allocation and pooling of investments.

I have long been an advocate of making the simplest regulatory change to achieve the necessary goal (see, for example, my blog on annuity regs). To my mind, then, the only “MEP” Reform really needed is a modest change to the Form 5500 rules which would permit employers which aggregate their investments and fiduciary allocations to also pool their Form 5500s. The TAG Statement of Troy Tisue to the ERISA Advisory Council lays out this position nicely.

Now the Rebuke.  What is NOT helpful, however, to this discussion is the misinformation of the sort contained in an article entitled “Multiple Employer Plans (MEPs) are a marketing play, not a way to cut costs. We don’t need them” on something called the Employee Fiduciary blog, linked on Benefitslink on December 10.  The article took direct aim at “Open Meps”®, (note that the term Open Mep® is actually a registered trademark of TAG Resources) claiming their promotion is a conspiracy of Wall Street to hoist unnecessary and expensive financial products on small plans, as a way to further promote mutual fund interests.

Quite frankly, I could choose to either be flattered or flabbergasted by the article, given my deep involvement in the development of Open Meps® with TAG Resources, and Advisory Opinion, 2012-04.

To a long-time corporate attorney like myself, with a pedigree in the financial services industry, being accused of being a Wall Street shill could be, in a very real way, considered a sign of significant success in our fine profession. It surely demonstrates my skills as a rainmaker of the highest order with the kind of clients of which most attorneys could only dream of having.

I choose, however, to be flabbergasted by the misinformed view expressed in that article that small employers are fine, thank you, and that they need no assistance in dealing with large financial service companies with what amount to contracts of adhesion. Those who are familiar with the small end of the 401(k) market know of the pressure to adopt proprietary funds with the highest expense loads; the limited access to competing fund families; the lack of affordable expertise; and the often-lousy level of services which accompany the lack of scale. Its not that this is part of a diabolical plot; its just a matter of economics. This has not gotten better over the past 25 years, as the article states. It has, actually, gotten much worse.

In spite of the absurd assertion to the contrary, small employers do need to be able access the buying power which is only available with scale, for which it is still far too hard for them to obtain. The question is how it will most effectively be done.

“Hidden” New MEP 5500 Legislation Requires Substantial New Reporting for 2014 Plan Year

Posted in Multiple Employer Plans

Buried deep within “The Cooperative and Small Employer Charity Pension Flexibility Act of 2014 (CSEC Act),” enacted on April 7, 2014 is a new MEP Form 5500 reporting requirement. It is one which, frankly, most of us missed. It came to light as the DOL issued its Interim Final Rule (to be published November 10 in the Federal Register) implementing the reg for the 2014 plan year (yes, this plan year). MEPs will now have to report all of their participating employers, their EIN and a good faith estimate of the “percentage of the contributions made by all participating employers made by each employer relative to the total contributions made by each employer.”

Here’s the language from the new reg:

The instructions to the Form 5500 and Form 5500-SF will now provide that the Annual Return/Report filed for a multiple-employer plan must include an attachment that identifies the participating employers in the plan by name and employer identification number (EIN) and includes for each participating employer an estimate of the percentage of the contributions made by each employer (including employer and participant contributions) relative to the total contributions made by all participating employers during the plan year. This attachment, entitled “Multiple-Employer Plan Participating Employer Information,” supplements and does not replace other Form 5500 filing requirements that apply to multiple-employer plans.

The CSEC Act effectively created a new sort of multiple employer defined benefit plan for certain charities. The new reporting rules, however, did not apply just to these new types of plans. It applies to all MEPs, including those 401(k) MEPs run by PEOs and payroll companies.

This will have a significant impact on these types of arrangements:  now that the each participating employer name and EIN will be listed in the Form 5500, I would expect these plans to see substantially increased audit activity from both the DOL and the IRS.  This is because of the simple math. Prior to this rule, only the Lead Employer in a MEP would (as a practical matter) be audited. Now each participating employer will individually show up on the agencies’ audit protocols (think IRS’s EPCU (creators of the infamous 401(k) Questionnaire)). We do know, for a fact, that this will be demanding on a MEP’s resources.

This will also increase the scrutiny of MEPs and the applicability of the DOL’s MEP Advisory Opinion AO2012-04A. However, even should legislation pass permitting “Open MEPS”®, the landscape for these arrangements will be permanently changed.