Business of Benefits : Employee Benefits Lawyer & Attorney : Law Office of Robert J. Toth, Jr. : 403(b) Plans, Annuity & Insurance Law : Business of Benefits Blog

The IRS's Employer Plans Compliance Unit  is in the process of issuing a 21 question questionnaire, Form 866a, to a sampling of colleges and universities, aimed at  testing  whether or not there is compliance with 403(b)'s "universal eligibility rule."

This inquiry is different than the 401(k) questionnaire that EPCU issued a while back, and is more like the "soft audit" it conducted of K-12 school districts a couple of years ago.  Where the IRS committed that the answers to the questions in the 401(k) questionnaire would not, by themselves, trigger any follow-up enforcement activity, the IRS intends to follow-up with the plan sponsor should the 403(b) questionnaire reveal any problems with either universal eligibility or plan documents. It expects employers to use the EPCRS programs to correct eligibility problems it uncovers.

The "Universal Eligibility" rule is the discrimination test for elective deferrals under 403(b), standing in the stead of ADP testing. It requires that all employees (except for small classes of excludable employees) be given an "effective" opportunity to make elective deferrals into the sponsor's 403(b) plan, which includes giving employees regular notice of their right to defer.  The most difficult part of this rule is that it is vastly different than the 401(k) eligibility rule, where full time employees can be required to wait a year or two before becoming eligible to defer; where substantial classes of employees can be carved out of participation; and where there is no special requirement to regularly (and currently) advise them as to their right to defer.

This can be a very expensive proposition. EPCRS requires employers who improperly exclude classes of employees to contribute to the plan on behalf of those employees 50% of the average deferral amount that others have made to the plan for all years for which they were improperly excluded, as well as lost earnings on those amounts.

Anyone who has been through the corrections process knows how expensive this can get, as it also includes making a match on those monies where a match was otherwise also made under the plan. Further adding to to the scare on this one is that it is not a new rule that became into play with the 2007 regulations: "Universal Eligibility" has been a requirement for a very long time. It will be interesting to see how the IRS will approach any "long-failing" plans.

The plan document failures, on the other hand, are a recent phenomena-and one in which we will need the EPCRS changes (which are expected to have "non-adopters" corrections) to be published to provide relief under this new "review."

Like the 401(k) questionnaire, the IRS has promised to follow-up on those who fail to answer the questionnaire-as they are now following up on non-responders to the 401(k) questionnaire with formal investigations. 

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I would think that it is a basic law of physics that, whenever you attempt to apply a number of different and complicated principles to a single object, that the consequences on that object will be hard to predict, or even readily ascertained.

So it is with a potential impact 408(b)(2) may have on many 501(c)(3) sponsors of ERISA 403(b) plans. It shows up when you take an 403(b) ERISA plan, impose a fundamentally new set of basic principles (by way of the 2007 403(b) tax regulations); revoke its exemptive relief  from reporting requirements (the Form 5500); while nearly simultaneously superimposing a tremendous new disclosure scheme (participant and service provider disclosures);  there are inevitably going to be some unusual results.

Take a typical example. A hospital sponsors an ERISA 403(b) plan with 10,000 current employees. Over time, it has merged with a number of different hospitals, each which had separately maintained its own 403(b) arrangements in the past with a wide number of vendors. The hospital, in anticipation of the problems with the 2007 tax regulations, consolidated all the affiliates plans into a single platform on 1/1/2009.

Over its history, though, it and its affiliated hospitals had selected and deselected a number of other vendors (no one is quite sure how many) many with whom they have long lost contact.

All of these contracts over the history of the plans have been owned by the individual participants. Though the employer did have an audit done, it did not report many of those "lost" deselected vendor contracts, as it didn't know much about them or the vendors. They reported those old plans as merging with the 2009 Form 5500.

The deselected vendors all still have some old contracts that participants have hung onto,  even after those participants have left the employee of the hospital. The records of the vendor shows that these were ERISA contracts, and that they earn a "mortality and expense", or some other contract charge, and they are indeed "recordkeepers" for the investments in those contracts as defined by 408(b)(2). In order to prevent that compensation from being prohibited, and from the need to be prudent, the vendor decides to make the required disclosures to the hospital's "responsible plan fiduciary-" with whom they have not had contact for many years.

Imagine that fiduciary's surprise when it receives these "blasts from the past," the ghosts of decisions made long ago, often by folks with which they were never affiliated with at the time decisions were made. 

The hospital never knew about these contracts for which they are receiving disclosures, but can't ignore them.  They have just completed all of their work with regard to participant fee disclosures, but now someone is telling them that there may be a dozen more companies' investment products upon which they have to report. They also just filed their 2010 Form 5500, and didn't report many of these contracts as assets of the plan.  

Now what? This is just one scenario, they are others which may be likely once vendors seek to comply with 408(b)(2) on their books of old ERISA contracts. Though the regulator view may be that this flushing of old contracts is a good thing, it can actually be quite a mess to sort through-including whether or not you still have relief and can exclude them from compliance responsibility under Rev Proc.2007-71, and just at a time when the IRS is beginning their 403(b) 2009 audits. I suspect that the management of the problems can only resolved by closely looking at all of the particular facts which will apply to the plan.

I leave it to your imagination as to the myriad of difficulties this may cause; as there are potentially many. I also may be wrong, and this may never happen.......

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 I have had the pleasure recently of making a presentation to the National Society of Compliance Professionals Midwest Compliance Meeting with Chris Guanciale of PlanMember Services. The NSPC is a nonprofit membership organization dedicated to serving and supporting compliance officials in the securities industry. What we had to say to them was not particularly good news for these overworked professionals. 

There has been a distant relationship in the past between the application of securities law and the application of ERISA. See, for example SEC Release 33-6188 (among other releases) where the SEC describes its essentially "hands off " position with regard to retirement plans.

Over the past few years, with the new found activism of the DOL and the growing impact of retirement plans in the securties market (as of 3rd quarter last year, retirement plans-both ERISA and non-ERISA- had a value equal to about $16 trillion, which was some 88% of the value of publicly traded securities in the Unitied States. Individual account plans like most 401(k) and 403(b) plans, are a "mere" $4 trillion dollars of that total, or some 23% of the value of publicly traded securities), this distance has been "shortening". I have blogged a number of times on this point. 

So now we have the new 408(b)(2) regs, which I often term as potential "business busters" because they speak to the fundamental basis of doing business in this very large retirement plan marketplace: getting paid for the services provided. If you are in this business, compliance with 408(b)(2) is a fundamental issue, because it is a prohibited transaction exemption. Without compliance with 408(b)(2), the business often cannot receive some of their compensation for services related to ERISA retirement plans.

The sorts of things 408(b)(2) covers are at the heart of the Security Compliance Professionals' practice: disclosure, particularly with regard to fees generated off of investments. It seems that "Compliance" is really the only institutional structure many financial firms have under which they can implement, manage and control their 408(b)(2) practices.  And any new "fiduciary" rules only further complicates this task.

Attached is the outline provided for this presentation. Hopefully, you'll find it helpful. 

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I drafted the following article for the DCPI Weekly Exchange as part of an ongoing series of comments on fiduciary issues.  DCPI's newsletter can be accessed (with a free subscription) at http://www.dcpinstitute.com.

As I review advisors’ websites and advisory agreements, I sometimes see “plan design consulting” as a service offered to retirement plan clients. While there is nothing inherently wrong with assisting clients with the design of their plans, I would caution that the DOL has long viewed such services as being materially different from other non-fiduciary activities. 

Specifically, in a publication entitled “Guidance on Settlor v. Plan Expenses,” the DOL noted:

The department has taken the position that there is a class of activities which relates to the formation, rather than the management, of plans. These activities, generally referred to as settlor functions, include decisions relating to the formation, design and termination of plans and, except in the context of multi-employer plans, generally are not activities subject to Title I of ERISA. Expenses incurred in connection with settlor functions would not be reasonable expenses of a plan.

While the same publication claims that, “Plan design expenses clearly constitute settlor expenses and, therefore, are not payable by the plan,”[1] the basis for the DOL’s position is less than clear.  In fact, the term “plan design” is never used in ERISA. Neither is “settlor expenses.” Instead, the DOL appears to draw support for its position from the law’s emanations and penumbras. 

For example, in Advisory Opinion 97-03A, the DOL indicated its position was required, in part, by the following language in §403(c)(i):

(T)he assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan. 

In order to tie its position to this statute, the DOL must necessarily conclude employers do not form retirement plans “for the exclusive purpose of providing benefits to participants in the plan” but, instead, primarily to further their own interests. To be fair, our Supreme Court has opined that employers derive some incidental benefits by forming a retirement plan (e.g., in the recruitment and retention of employees).[2] Surprisingly, though, the DOL brushed aside any reliance on this argument, arguing that such incidental benefits are not sufficient to convert an activity into a “settlor expense.”[3]

As a result, advisors should be forgiven for not having a good understanding of when their advice becomes a “plan design expense” that cannot be paid from plan assets. The best guidance the DOL has offered in that regard is that, “Typically, plan design expenses are incurred in advance of the adoption of the plan or a plan amendment.”[4] 
 

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It has been a while since I jumped on the blogging trail, but the question "What comes first, the Written Plan or the Implementation Date?"  seems more and more like...  "the Chicken and the egg." 

Taking this one step at a time, there are a significant number of employer/plan sponsors, administrators and others tackling this question.  I have had a number of conversations with individuals and groups that began pulling together the "Written Plan" for their 403(b) plan(s) and were simply stumped when posed with defining the original start date of the plan.  I have found this question alone can be the primary reason a "written plan" was not finalized for some 403(b) plans.  

Once we get past the "chicken and egg" conversation, the conversation progresses to somewhat of a dart board effect.  Well, a reasonable guess would be to date the plan as of 01-01-2009, but your investments would possibly age prior to that date.  Another reasonable guess is the oldest date on the first investment contract or account holding current assets.  There is a solid argument for this approach, but it can result in a bit of an art, rather than a science. 

Sometimes the right answer is very much tied to your facts and circumstances, within reason.  If you can identify the date of the first contribution or funding to your 403(b) plan, begin there and work forward.  Read on for additional challenges that have surfaced while capturing the "written plan"...

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When the insurance industry began seriously developing the "living benefits" under annuity products for the retail marketplace a few years back, I dubbed them as "not your grandpa's annuity." This is because they were attempting to address the concerns that the market had about traditional annuities, which are seen as irrevocable, inaccessible, invisible and inflexible. ( I have blogged on this a few times in the past.  Click on the "401(k) Annuitization" link at the right sidebar to see the posts).

It is encouraging to see the discussion now seriously moving to the provision of these types of products from retirement plans.  

Much of this new discussion is focused only something called "guaranteed minimum withdrawal benefits," or "GMWBs." Under these sorts of arrangements, a systemic monthly withdrawal is made from the participant's account under the annuity, which will be guaranteed for the participant's lifetime-even when the account balance runs out.  This is a popular program in the non-plan marketplace, and (at the appropriate price) can be well suited as a distribution option under a 401(k) plan.

GMWBs are not the entire story, however, as there is a whole range of "living benefits" beyond GMWBs which may be appropriate for distribution under a 401(k) plan. This list includes things like:

• variable annuitization, which provides lifetime income while giving the policyholder some level of equity or "equity-like" participation;
• guaranteed minimum account value programs (GMAB), which lock in investment gains over a period of time;
• guaranteed minimum income benefits (GMIB), which insure the purchase of a minimum income stream beginning at a certain time, regardless of underlying equity performance; and
• a guaranteed lifetime withdrawal benefit (GLWB), which insures the ability to withdrawal benefits at a minimum level for a lifetime.

The legal issues in providing these benefits are all very similar, and are addressed in my newly updated article for BNA Pension & Benefits Daily, "Annuitizing From § 401(a) Defined Contribution Plans: A Technical Overview."  For those with far too much time on their hands, and wanting to read a more extensive discussion on the topic, I am reposting the Tax Management Memorandum on "Income Guarantees in Defined Contribution Plans." 

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