The Department was persuaded by commenters on the interim final rule to exclude all or that part of a Code section 403(b) plan (hereafter “403(b) plan”) that consists exclusively of “frozen” contracts or accounts, as described in the Department’s Field Assistance Bulletins addressing the limited application of the annual reporting requirements to such contracts or accounts.  Plan sponsors and fiduciaries likely would be unable to comply with this rule because they often have no dealings with the relevant plan service providers and are unable to obtain information about these contracts and accounts.  Accordingly, paragraph (c)(1)(ii) of the final rule now provides that, in the case of a Code section 403(b) plan subject to Title I of ERISA, the “covered plan” would not include annuity contracts and custodial accounts described in section 403(b) of the Code with respect to which the plan sponsor ceased to have any obligation to make contributions (including employee salary reduction contributions) and in fact ceased making contributions to such contracts or accounts for periods before January 1, 2009.  Further, the contract or account has to have been issued to a current or former employee before January 1, 2009; all the rights and benefits under the contract or account have to be legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer; and such individual owner has to be fully vested in the contract or account. 

Cloning 408(b)(2) or 404a-5 wasn't sufficient, nor was relying on those thick prospectuses that accompany variable 403(b) contracts. As valuable as the DOL disclosure schemes are in the employer-sponsored, institutional context, and as important as prospectuses are in protecting investor interests, they the lack simplicity -or obscure in volumes of other data- that which is particulalry important to the individual 403(b) participant. These plan particpants are not fiduciaires, and often do not have anyone to be able to collect and compare data on their behalf. They are sold investment products directly. So it really becomes a very simple issue for that school teacher or adminstrator: how much sales commissions is my investment generating; what services am I getting in return; is there a way for me to compare it all; and how can I reasonably access comparative data on the investemnts themselves?

There is the practical problem: whatever would be recommended also had to be doable by the 403(b) vendor providing the product, so disclosure was based upon information that was already being collected in some way by providers in the ERISA world. The committee also recognized the value of the comparatve format for investments under 404a-5 (and the significant investment being made in those dsclosures),  and took advantage of the benfits of that work by recommending their use here.

The Committee, with skillful drafting support and guidance from ASPPA's Deb Davis and with Craig Hoffman's ongoing involvement in our work,   put in serious time over the past 6 mohts to balance the useful with the doable. Along with Lisa and Melody, Aaron Friedman, Carol Gransee, Chris Guanciale,  Scott Betts  and Theresa Ward put together what I consider a pretty good piece of "engineering."  Having known engineers from from my days in Michigan, who have told me that successful engineering is really the art of successful compromise (as, they have said, you cannot have the fastest, strongest AND most fuel efficent vehicle in one; its always a balance between them all), this group can lay claim to a pretty good result.

We all recognize that this first effort was not perfiect, and pratcice will be a good teacher for us as we try to bring a new level of transaprency into play.  There is likely to be changes as we find out what we really did here. But its a pretty good start.

But there is a risk nowadays in even referencing these two grand ideas in today's political environment: instead of being viewed as the firm basis of how the vast majority of us quietly operate, they seem to have been outrageously hijacked by political extremists (such as of the libertarian/Ron Paul/ Tea Party sort-of which I am not so inclined) for some specific end.

In spite of all that, there is something well worth mentioning along these lines about the striking impact of the work we do, something we are not prone to see while working the fine minutiae of our chosen profession.

If we step back for a minute, we can see the extraordinary policy underlying 408(b)(2), the prohibited transaction rules and the exclusive benefit rules (which apply even to non-ERISA plans).  These rules seek to set aside and protect from others the individual wealth of those who accumulate benefits under these plans. It became pretty plain to me while reading Absolute Monarchs, by John Norwich (a history of the Catholic Popes, which really is a brief history of the absolute power of royalty as well as the church over individuals), where, historically, an individual's financial well being was wholly dependent on the whims of powers that be.

We now have something very odd in man's modern history. The value of the funds which are now protected for participants in retirement plans by the Code, ERISA or both approximates 85% of the value of publicly traded securities in the United States.  Though this seemingly huge amount is not yet adequate to establish broad retirement security, it is material enough to take note: these pooled funds are outside of the legal reach of the unaccountable "whims" of those who have something other than the best interests of the participants at heart.  Imagine that. A significant and growing portion of society's wealth is institutionally dedicated in funded pools to the individual's well being, which are difficult to access by an abusive use of power which has so often corrupted society-and jeopardized freedom and liberty-in the past. 

The only way this really works, however, is by things like 408(b)(2); by enforcement of the prohibited transaction rules; and by giving serious attention to the exclusive benefit rules. And all of this is dependent on what appears to be non-sensical minutiae upon which we daily work.

There is a reason I like doing what I do......

The first thing that comes to mind when looking at the regs for these purposes is the thing I noted in that previous blog: regardless of what you may think about 408b2 and the requirements now imposed by the rules, this reg has been craftfully drafted. The pieces fit together nicely, and complex issues with regard to investment products have been meaningfully addressed in as simple and direct manner as possible.There may be a few interpretaive issues that need to be resolved (which is to be expected), and 403(b) issues continue to be a serious challenge, but this is a fine piece of technical writing.

So it is with the "guaranteed account," "stable value fund" or "fixed account" within these group annuity contracts.  The 408(b)(2) pieces fit well together.

First, it may be helpful to read my piece on general accounts, and how they work. This can go a long way in understanding why 408b2 applies in the way it does. It is one of my favorites, because it includes a Dick Van Dyke clip from "Mary Poppins." That blog only generally addressed the 408b2 issue.

Next, the fiduciary needs to know whether or not the investment account is a contractual obligation of the insurer,  backed by the "general assets" of the insurer, or if it is part of a "separate account" (see my above noted blog on this). Confusion may arise from the variety of marketing names these funds may be called: the general account product will sometimes be called a "stable value fund" (typically because the crediting rate is set by use of an unrelated, third party index), which may be confused by a "stable value" mutual fund or collective trust interest which is offered under the annuity contract's variable investment separate accounts.

Once you know that fund is a fixed obligation of the insurer from its general account, you need to see what kind of Covered Service Provider (CSP) is the insurer.  It will not be considered an "A" type with regard to the fixed account, because it is not a fiduciary with regard to the management of the assets of the general account backing its contractual promise (a book could be written on this point, alone).  It may be a "B" type of CSP if, under the contract, the insurer is a "recordkeeper."  It will not typically be a "C"  type of CSP because, even though it is insurance, the insurer will not usually receive indirect compensation (as that term is defined by 408b2) related to that account (but keep in mind that these contracts may be part of an annuity where separate accounts are used-and thus indirect comp typically received-for which "C" status may occur). 

What needs to be disclosed?

-If the plan will only buy a group annuity contract with a fixed fund from the insurer, and the insurer will not provide any participant level recordkeeping services, then the insurer may not even be a CSP that will need to report under the new 408(b)(2) regs. The only complication will be the reporting of commissions. 

-If the insurer is a "B" CSP, then two things will need to be reported:  (i) a description of any compensation that will be charged directly against the account balance in connection with the acquisition, sale, transfer of, or withdrawal from the product, like surrender charges; and (ii)  description of any ongoing expenses such as mortality and expense charges or contract charges.

What will NOT need to be reported, however, is any "spread" between the crediting rate under the contract and the investment return on the insurers' general account, as the regs specifically exempt "operating expenses" from needing to be reported from a fixed account.

Didn't say it would be easy, but it all does fit together nicely.....

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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.    

Much of the Sarbanes Oxley Act n 2002 ("SOX") was designed to address many of the corporate abuses arising from the Enron, Tyco and Worldcom fiascoes, and it included enhanced protections for corporate whistleblowers.  Buried within this statute was Section 307, an obscure section which imposed duties upon lawyers who deal with publicly traded companies the duty to "report up" certain corporate malfeasance of which they became aware in their practice.  The challenge with these rules is they seem to clash, in many respects, with the state law rules governing the attorney client privilege. In house counsel have challenging enough circumstances, where their client is the corporation and not the officers who seek their counsel.  This awkward pressure merely increased with the passage of SOX. The stakes became higher, as well: failure to report properly would effectively result in a ban from ever representing a publicly traded client, whether in house or as outside counsel.

I wrote an analysis describing the impact of Part 205 on employee benefit lawyers for ALI-ABA in 2005. In that article, I struggled to describe sensible circumstances where benefit lawyers would be impacted, and where the reporting up obligation would be imposed. This is because the only corporate malfeasance required to be reported under SOX are those which would result in a material impact on the company's financials, and it seemed at the time that it would be one heckuva stretch to reach the materiality standard in our line of work.

BNYMellon really is an eye opener. For manufacturing companies, there really is rare opportunity for the employee benefit lawyer to trip Part 205 obligations, other than issues related to underfunded pension plans and executive stock programs.  BNYMellon, however, demonstrates that this is a very real possibility for attorneys representing financial service companies which do retirement business. Considering the fact the value of retirement plan holdings are some 85% of the value of publicly traded securities in the U.S., and where many companies' financial stake in the retirement business continues to grow, it occurs to me that the potential circumstances where SOX may be implicated will only become greater.

Part 205 requires the establishment of written procedures to insure compliance.   Though pure corporate, tax and M&A lawyers have always been well versed in such matters, financial service companies may want to check these procedures to make sure that retirement law staffs (including those in the business lines) are well within the loop.

For those curious on the nuts and bolts of the operations of Part 205 in the employee benefit practice (and there are quite a few), I invite you to read the ALI-ABA paper.

Every year end I tend to be reminded of this seemingly mundane work (though it is really anything but!) in private practice, as this tends to be the "busy" season when it comes to corporate actions related to plan amendments and other plan activity. Though it may be too late in the year to be useful this year, there are a few thoughts that come to mind which you may hopefully find relevant the next time a plan amendment crosses your desk:

1.  Boards do not manage companies. It is fundamental corporate law that corporate officers run companies, not the Board. Board members have the fiduciary obligation to the shareholders to oversee management; but they do not step into the role of management.  This means that whatever you are looking for the Board to do, it should be generally "big picture,"  such as adopting or terminating the retirement plan. When adopting the plan, try to make sure that a corporate officer has the ability to amend the plan. In larger corporations, this authority will often be subject to certain limits, such as where the benefit is increased.  

2.  Check the minutes.  If you are unsure of who has the authority to amend the plan, check the past Board minutes (if you can find them) to see who has that authority to amend.

3. Rely upon general authority.  If it is not clear who has the authority to amend, you may find guidance in the general authority granted to officers in the bylaws or enabling resolutions as to who may have the authority to amend a plan, absent a specific grant. If you find yourself needing to go in for a Board resolution, take that opportunity to delegate future amendment authority to an officer.

4. Keep details minimal. I recently saw a board resolution that not only adopted a QACA, but also directed the officers to provide required notices. This is patently unacceptable drafting. The officers should be directed, instead,  to take all necessary actions to execute the decision of the board.

5. That fiduciary thing. Make sure that whatever you are asking the Board to do does not constitute a fiduciary action unless you intend it to. One of the worst things you can do to Board members is to inadvertently cause them to have unwanted fiduciary status. Make sure that the authority to act on behalf of the plan is properly delegated to appropriate officers: in the absence of a clear delegation, one would not generally like the DOL or courts to make a de facto finding of inadvertent ERISA fiduciary status of a Bord member.

Related to this are a number of RMD amendments I have been seeing for 403(b) plans, which purport to amend 403(b) plans for the WRERA rule that allowed RMD waivers in 2009.  Some vendors are presenting these amendments to plan sponsors for their signature by year end, as the vendor may have taken it upon itself to generally waive these requirements for those 403(b) customers with individual contracts.

First, it is not clear that such an amendment is needed because, at least for now, you can still incorporate a lot of things by reference-and the inclusion of 401(a)(9) in a 403(b) document should suffice.

Secondly, though, is the bigger problem.  These these carrier provided amendments purport to amend the entire plan. If there are other vendors in the plan  which did NOT offer the RMD waiver, you actually have a plan document problem on your hands if you adopt this broad amendment.

So, be careful; and may your New Year be fruitful, fulfilling and meaningful. 

401(k) plans did not suffer that fate, and I really believe that this recession would have been many times worse had it not been for those defined contribution balances (including 403(b) plans) which acted as a reserve  for those who lost their jobs. I have not yet seen anyone research on those numbers, but the anecdotal evidence appears strong.

Much of the literature being published today talks of how the recession, and the related capital losses within  DC account balances,  speak strongly of the need to preserve that accumulation from future shocks by using those balances to purchase  guaranteed income products. I cannot disagree more strongly.  Many of you know from my writings that I am a strong supporter of guaranteed lifetime income but, I think instead, that the recession demonstrated the huge value of the DC account balance plan: it provided an invaluable cushion to many at a time they needed it most, which would have been otherwise unavailable in a DB type of arrangement. These plans had not  been so widely available during economic shocks in the past.

But there are, and continue to be, huge inequities related to government policies related to the handling of DC plans throughout the recession.

At a time when it was necessary to provide substantial assistance to large financial institutions in many-and now we found out, often hidden-ways (yes, I am a devotee of Gretchen Morgenson and her weekly column in the New York Times), those who were unemployed continued to pay a 10% penalty tax on their defaulted loans and DC distributions which were taken to keep them afloat. The operation of the 10% was, and is, especially cruel, as it is paid regardless of the application of the marginal rate or deductions. So, even if income was so little as to pay little or no tax, the 10% penalty still applied.

The practical effect is that the unemployed were funding, even if in the smallest part, the assistance to large financial orgs which received substantial government support (and, apparently, paid large bonuses from those funds to many of their still employed executives and traders). Regardless of political persuasion, most should have difficulty with this proposition.

Now, as the economy recovers, and hopefully employment returns, many in Congress speak of reducing the amount that can be put into DC plans. Any reduction will have at least two unintended effects which are little mentioned: it will substantially reduce the ability of re-employed participants to rebuild those depleted balance which helped sustain during the recession; and it will seriously impair the ability of all  to build that so-important-cushion for future financially crises.  I would make the case that the smartest thing Congress could do right now is to increase the DC limit, as least for an interim period, to allow balances to be rebuilt.

We do not hear about this much, as it is being suffered by those without a voice: the unemployed and underemployed; those who are being treated so cruelly by the system in which they had, at one time, been invested. But it is all very real, nonetheless.

TE/GE has spent considerable effort in 403(b) outreach over the past decade, even in face of much cynicism about the enhanced regulatory approach to these plans-developing an unusual amount of knowledge about the marketplace in the process. It clearly tapped into this expertise in developing the FAQs. They could not have been written without a number of highly knowledgeable regulators and auditors recognizing a challenge, and being committed to coming up with a workable solution. I have not, in the past, been shy at commenting on a number of different unfortunate choices staff has made when writing and implementing the 403(b) regulations. This time, however, staff impressed.

The following are the 403(b) questions from the FAQ. Even the most difficult part of them-the part about contracts which cease payments in 2008-arises from the requirements of the 8955 itself, but the IRS found a way to integrate it well. 

Does the Form 8955-SSA filed for 2009 by a 403(b) plan sponsor have to report participants who separated from service prior to 2008 with a deferred vested benefit under the plan?

Generally, no. Form 8955-SSA filed for 2009 generally only has to report participants who separated from service in 2008. Thus, participants with a 403(b) contract or account who separated from service prior to 2008 are not required to be reported on the Form 8955-SSA filed for 2009 (or for any subsequent year).However, a participant should be reported on the Form 8955-SSA filed for 2009 if that participant separated from service in a year before 2008 and began receiving payments under the contract or account, but the payments stopped in 2008 before all of the participant’s benefits were paid. See the Instructions for 2009 Form 8955-SSA. See also Question and Answer 2 for an exception that applies even in the case where payments stopped in 2008. 

Does a 403(b) plan sponsor have to report all participants who separated from service after 2007 with a deferred vested benefit under the plan?  

No. A plan sponsor is not required to report a separated participant if the participant’s deferred vested benefits are attributable to an annuity contract or custodial account that is not required to be treated as part of the section 403(b) plan assets for purposes of the reporting requirements of ERISA Title I, as set forth in DOL Field Assistance Bulletin (FAB) 2009-02. 

For this exception  to apply, (1) the contract or account would have to have been issued to a current or former employee before January 1, 2009, (2) the employer would have ceased having any obligation to make contributions (including employee salary reduction contributions), and in fact ceased making contributions to the contract or account before January 1, 2009, (3) all of the rights and benefits under the contract or account would be legally enforceable against the issuer or custodian by the participant without any involvement by the employer, and (4) the participant would have to be fully vested in the contract or account. For further information, please see DOL FAB 2009-02, www.dol.gov/ebsa.

There are a couple of important nuances in the application of these rules. I invite you to read Conni's analysis in the Thompson quarterly 403(b)/457newsletter, coming out shortly, where she explains them.

Once again, there are several choices TE/GE could have made when developing its position. It used its knowledge and experience to make some pretty good ones here.

“ERISA Accounts,” or “Fee Recapture Accounts,” or “ERISA Budgets” are growing in popularity, and are becoming a frequent feature in the 401(k) and 403(b) space. They take two forms: a “credit” with the plan vendor, where the vendor pays up to a certain, agreed-upon amount for plan administrative services as part of the vendor ”package;’ or the “funded” sort where the vendor actually makes a cash payment to the plan, usually based on some sort of revenue sharing schedule. These typically include 12b-1 fees generated from mutual funds, but may also include such things as surrender charge reimbursements or other negotiated items.

In 2007, the ERISA Advisory Council’s Working Group on Fiduciary Responsibilities and Revenue Sharing Practices issued a report which did a nice job on lying out a number of key issues related to this practice. It also recommended that the DOL issue guidance regarding the treatment of revenue sharing received by a plan, specifically regarding the allocation of revenue sharing received by a plan. The DOL has had its hands full in the past few years, so it is little wonder that it has yet to act on providing this guidance.

There all sorts of issues which come up related to these accounts, but the most pressing of them appears to be associated with the funded accounts: the structure of these accounts within the plan (are they like forfeiture accounts?); the method of the allocation of those funds to participant accounts once expenses have been paid; and the timing of those allocations. My previous blog just addressed the timing issue.

The structure of these funded accounts is actually interesting: recordkeepers aren’t generally accustomed to establishing an employer level account, and many recordkeeping systems are not well suited for this function.  The employer level accounts that do exist are typically forfeiture accounts, and the rules governing them can differ from the ERISA Account-which also means that there are a number of different reasons you want to somehow account for ERISA Account deposits differently than forfeitures. These Accounts probably need to be adopted by some formal action of the plan’s fiduciary, in accordance with the authority it is (hopefully) granted in the plan document, which also discuss how they will be used and eventually allocated. Absent that, the general fiduciary authority within the document will need to be relied upon.

With regard to how these funds may be allocated to participant accounts (particularly where there is an “excess” left after certain plan expenses have been paid. Remember, at least in the funded accounts, they cannot be used for settlor expenses. There are interesting prohibited transaction issues as well if the unfunded credits are used for settlor functions), there seems to be a growing sense that ERISA requires that there be some sort of “matching up” of these allocations with the assets which generated them. There is little doubt that this could be an acceptable method of allocation, and there is at least one vendor which I know of which, very nicely,  closely tracks this.

What seems to be getting lost in the discussion related to these allocations is the fundamental rule that participants only have a beneficial interest in the plan. They have no right to any asset, and they only have the right to direct the investment of their accounts because the employer has decided to let them do so instead of the fiduciary. Any funds generated by those investments are due to the plan, not necessarily to any particular participant. Whatever allocation method is chosen by the fiduciary need only be prudently made. It is telling that in Field Assistance Bulletin 2006-01, the DOL stated that (in addressing the allocation of class action settlement proceeds):

“…. a fiduciary’s decision must satisfy the “solely in the interest of participants” standard of section 404(a)(1) of ERISA. In this regard, a method of allocation would not fail to be “solely in the interest of participants” merely because the selected method may be seen as disadvantaging some affected participants or groups of participants. In deciding on an allocation method, the plan fiduciary may properly weigh the competing interests of various participants or classes of plan participants (e.g., affected versus current participants) and the effects of the allocation method on those participants provided a rational basis exists for the selected method and such method is reasonable, fair and objective.”

In short, though “tying back” the ERISA Account payment to the participant account which generates them will generally be considered prudent (though I can see circumstances where it would not be, such as if it were expensive to do so), and can be a good "market differentiator" for a vendor, I think it is a mistake to claim that this is the result demanded by ERISA.

For all these Accounts, there are also a number of interesting 408(b)(2), Schedule C and Schedule A issues with which plan sponsors and vendors must cope-and which I will not address here.

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We know that the IRS has taken a clear position on the timing of the “spend down” of a forfeiture account, and that funds in the forfeiture account must generally be allocated within the plan year that forfeiture is made (this rule, by the way, would not apply to 403(b) plans). But this is based on 401(a)(8) and the required treatment of forfeitures of contributions under 1.401-7(a)- and the ERISA Account deposit is not a forfeiture. We also know that the DOL has, at least on one occasion, deferred to the prudence standard (see, for example, FAB 2006-1) in managing these accounts.

We do know that a plan document needs to contain language outlining the management of the ERISA Account (and that the Account should be accounted for separately from the forfeiture account), unless the fiduciary is otherwise able to establish procedures under its general fiduciary authority. But what should be the standard under the Code that the plan should adopt?

I think the answer goes back to the “exempt purpose” rules which govern tax-exempt organizations. If I recall my research as a first year associate in Detroit with the good Rasul Raheem, Dr. Willard Holt, Richard Smart and Roland Bessette, under the tutelage of the fine Stan Kirk, the trust of a 401(a) plan is, after all, an exempt organization under 501(a), and the assets of a tax exempt organization are to be used in the fulfillment of the organization’s exempt purpose.  The exempt purpose of a 401(a) trust is, of course, to provide a pension or profit sharing benefit exclusively for employees or their beneficiaries. So, hanging on to the funds in this ERISA Account for too long and not using them for providing this benefit or supporting the operation of the plan would be a failure to use the assets of the "exempt organization" in furtherance of the trust’s exempt purpose. This, ultimately, really leaves you with that “reasonable” period that the DOL suggests to be the standard.

This may also mean that there may not be a standard for a non-ERISA 403(b) plans (as they are neither not subject to 401(a) or the fiduciary standards of ERISA). Any effort to impose a standard would have to be related somehow to the failure to purchase an annuity for an employee. But that may not even matter, for the tax exempt organization would not be otherwise taxed on that amount anyway, and it is not an event which would disqualify the plan.

With 403(b) plans in mind, by the way, make sure the 403(b) ERISA Account is invested in mutual funds or in an annuity account, not just to some holding account at a financial institution. See my blog on “The Trouble With 403(b) Cash.”

I knew that research I first did years ago when trying to figure out how a pension fund worked would eventually turn out to be useful sometime…….

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“Each such agency shall modify any such regulations identified by the review conducted under subsection (a) to remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as each respective agency shall determine as appropriate for such regulations.….”

This mandate, to my mind, is justified.   A number of practices of financial service companies (and, apparently, governments) are often geared to obtaining the favor of the (sometimes conflicted) rating agency, sometimes even acting as a substitute for their officers' better business judgment. There is pressure to defer to the ratings agency’s thoughts about the financial company’s business, even though the agency may well not fully understand the business of the companies they assess. Those rating agencies, and their opinions, are far short of infallible- and may often be seriously flawed.

This plays out in any interesting way in the development of a fiduciary standard for the purchase of lifetime income products for defined contribution plans. In developing any annuity fiduciary regulation, the DOL will likely be unable to reference rating agency standards (even when issuing prohibited transaction exemptions, it noted that it is “cognizant…. of the Congressional intent to reduce reliance on credit ratings and is considering alternative standards for use instead of, or in addition to, existing requirements for credit ratings in granted individual prohibited transaction exemptions").

I had blogged a few months back on the development of such an annuity standard, and had suggested extensive reference to the credit ratings. Thinking it through, however, I now realize I was just using a “lazy man’s” way out to make the standard sound more legitimate.  In reality, actual ratings may or may not be relevant as, somtimes, the higher rating is not necessarily the best for the plan or the participants. A classic circumstance is where the “cost” of getting the higher rating (by means, for example, of establishing higher reserves) on the annuity product results in a higher priced annuity-without necessarily any commensurate, and real, increase in “safety.”

So, let me recast my suggestions for a safe harbor. 

The DOL could require, as part of a safe harbor, that the insurance company which provides the annuity product being purchased by the plan should be prepared to describe to the fiduciary the following, in terms the fiduciary can understand:

-Provide an explanation of any assessment of its financial condition that independent third parties have provided to it, or have been disclosed to a regulatory authority (such as the state insurance department) without reference to any rating which as been assigned to it.

-Describe any material changes in its financial condition in the past five years and describe why. Have those changes affected the interest rate upon which annuity pricing is based? 

-Explain how the state guaranty association rule would apply to the company’s product being sold.

- Describe material outcomes of the most recent state insurance exams.

-Explain the level of reserves, and why they were chosen.

-Describe the risk profile of the investment portfolio that supports the annuity contracts.

In a vacuum, the answers to these questions may mean little to the fiduciary. However, when compared to the answers of a competing insurance company, they could take on a quite a bit of relevance.

The fiduciary would use the answers using these sort of standardized questions (and a few others), focusing on the close details that are indicative of financial strength (or trouble), to arrive at a prudent decision-especially when used to compare the answers of other insurers.  It could possibly have the effect of putting insurance more into the vernacular and make it an extremely useful safe harbor. It could act to help guide fiduciaries through some of the dense and often arcane material that is related to insurance, and to help sort out what is impotent’s to what really is important. 

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Guest Blog:  Linda Segal Blinn on 403(b)

Writing a blog on technical/legal/regulatory issues can be daunting. You want the information to be right, but you also want it to be understandable (and in as few words as possible) to the professional who wants to be able to use the information you are trying to provide.  This is why the writings of Linda Segal Blinn caught my attention. A well known professional in the 403(b) world, her technical writings are straightforward, accurate, understandable and make the point well. There are few technical writers who have this skill set.

Linda has graciously accepted my invitation to write something of importance for this blog,  even getting corporate approval to do so. Her following piece on 403(b) plan documents is very timely particularly given that the IRS is now auditing for compliance with the new plan document rules.

 Thank you Linda.  

“Planning to Amend”

by Linda Segal Blinn, JD

Vice President of Technical Services, ING

“Just do it” may work as an athletic slogan, but it doesn’t always work so well with plan documents.

 Certainly, “just do it” was the reminder to 403(b) sponsors in 2009.  In that year, the IRS’ 403(b) regulations became effective and, with it, the written plan requirement, regardless of an employer’s ERISA status.  As a result, with the limited exception of certain church plans, 501(c)(3) organizations and public schools were reminded – whether through IRS outreach efforts, industry associations, service providers and/or their own counsel – of the importance of adopting a 403(b) plan that folded in these IRS requirements no later than December 31, 2009.

 And so, by and large, sponsors have done what the IRS has asked of them by adopting a written 403(b) plan that reflects the IRS regulations.  In doing so, these employers also had choices to make – did they want to offer a Roth 403(b) feature?  What about loans, hardships, rollovers in, and the like?   Decisions were made, and employers were able to check off that they had timely adopted their 403(b) plan by the IRS’ regulatory due date.

 But a 403(b) plan document is not a “set it and forget it” kind of document.  Yes, it will need to be updated periodically to reflect new tax laws.  To that end, the IRS, industry associations, service providers and tax advisors will again reach out to these employers to remind them of new deadlines to do so.  However, lost in the flurry of paper as employers rushed to adopt their 403(b) plan documents is this important reminder: if an employer wants to tweak plan design, rather than regulatory provisions, the plan document must be amended for that as well.  

 I was reminded of this recently when reviewing a 403(b) plan document.  While the plan document stated that an IRS safe harbor definition would be used, it turned out that, in fact, the plan had just switched over to using a homegrown definition that was perfectly acceptable, given the employer’s objectives. 

 “Is that a problem?” was the predictable question when the discrepancy between plan in form and plan in operation was pointed out.  Well, yes and no.  Both the Internal Revenue Code and ERISA provide that an employer must operate its plan in accordance with the terms of that plan.  Yes, deviating from plan terms is technically not allowed and would make the plan defective.  But adopting a simple amendment to the plan would resolve the matter.  So, perhaps this is not so much a problem as a need for a minor repair.

 And this is where the word needs to get out to 403(b) sponsors. Choice is good and choosing the design features that best fit your plan’s needs is important.  But just as important is not losing sight that if you decide to revisit those choices, you will also need to make sure that you fold those changes into the 403(b) plan document to remain compliant with IRS and ERISA rules.  While “just do it” should create a healthy environment, “just renew it” may be an even better motto for avoiding a plan document defect.

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 (This material was created to provide accurate information on the subjects covered.  It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.  These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document.  The taxpayer should seek advice from an independent tax advisor.)

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Linda Segal Blinn is Vice President of ING's Technical Services. In this capacity, Blinn supervises the provision of legislative, regulatory, and compliance information to assist employers in operating their retirement plans.  Linda's expertise includes administering and designing defined contribution plans in conformance with the Internal Revenue Code and ERISA.

• More than one employer.
• Single plan under the Code.
• Non-collectively bargained.
• Application of minimum coverage, vesting,  participation, non-discrimination, and benefit accrual rules in a particular way.
• Entire plan must be able to be disqualified by one participating employer.

Spousal consent/J&S

As critical as I was on the conflicting PLRs  the IRS issued on the application of the spousal consent/J&S rules to annuities, there is helpful guidance in them. In both PLRs, the participant had elected to begin payments from the plan which were based on life expectancy, which included an election of guaranteed lifetime payments from the annuity once the account balance was exhausted or a stated age achieved. It would seem that, without those conditions, the J&S rules would not apply (for example, where there is not an actual guarantee of lifetime guarantee until actually elected, with the "normal form" of benefit being, as under the typical 401(k) plan, a cash out). What is left is to resolve is an extremely nerdish-but nevertheless important-issue of whether, why and at what point does the periodic payments from these annuities are considered to be "payments as annuity" or "payments not as an annuity" under Code Section 72.  Once this one point is resolved, doors open.

Fiduciary rules

Having been involved in this issue for far too long, I'm coming to the conclusion that we have been thinking far too broadly and far too globally on the development of a fiduciary safe harbor. One really cannot argue much with the current DOL safe harbor regulation at § 2550.404a–4 on the purchase of annuities; it makes a great deal of sense. But I believe what is holding up its usefulness is the lack of of "minutiae" in it.   Two of the five points in the safe harbor instruct the fiduciary to 

"Appropriately consider information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract; and appropriately conclude that, at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract."

The problem is that who can really accomplish this?  There really is very little information in  the marketplace which is readily available to the typical fiduciary upon which to make these determinations (though there are some fine attempts at sorting through this going on), and the preamble to the reg only suggests looking at ratings and state guaranty association rules.

So maybe, just maybe, if the DOL identifies for plan sponsors the key pieces of information for which a fiduciary should ask, perhaps as reps from insurers, if properly collected and reviewed, would act as the safe harbor we are looking for. They would be indicators of financial strength. Some reps from the insurer could be include things like the following (though I would expect several other items on the list):

-Explain your rating, including written assessments from the rating agencies; any changes in the past five years and why; and compare it to the interest rates upon which you base your annuity payments.  (Sometimes, the higher rating is not necessarily the best, as the cost of getting that rating results in a higher priced annuity-without necessarily any greater security).

-Explain how the state guaranty association rule would apply to your product being sold.

- Describe material outcomes of your most recent state insurance exams.

-Explain your level of reserves.

-Describe the risk profile of your investment portfolio which supports the annuity contracts.

The fiduciary would use the answers using these sort of standardized questions (and a few others), focusing on the close details which are indicative of financial strength (or trouble), to arrive at a prudent decision-especially when used to compare the answers of other insurers. It could possibly have the effect of putting insurance into the vernacular and make it an extremely useful safe harbor. It effectively uses the DOL's resources to guide fiduciaries, given all the dense and arcane material which is related to insurance, as to what really is important.  

My next blog will finish off with thoughts on the nonforfeiture and protected benefits issues.

So, the DOL's initial, and informal, position is that a non-benefits commonality is required for a 413c MEP-I believe in large part because of the long line of of well established MEWA rulings saying so. I think the answer should be otherwise, as supported by the IRS regulatory structure under 413c of what constitutes a single plan, which is substantially different than the MEWA rules (or lack thereof) upon which the DOL position seems to be based. I suspect there will be some parties making this case to the DOL, in a much better prepared manner, and I would expect, over time, a thoughtful response from the DOL once they have reviewed things. But this means before one sets up a new MEP, one should do it with knowledge that the DOL may eventually not agree with this position. But there are a number of very large plans n the market already, so even the DOL's nonacquiesence may not be the end of it. Even the GAO has taken an interest, and is doing initial research on whether these MEPS are a good tool to deepen retirement plan penetration in the small end of the marketplace.

Stay tuned, and step cautiously.  

The challenges continue for 403(b) plans, as the IRS and DOL continue to implement their plan level rules in the 403(b) space. The most recent: the IRS's Form 8955-SSA  and instructions for the 2009 plan year, released on June 18th. You will need Adobe X to open them.  It is due to be filed by August 1, with a 2 1/2 month extension permitted if you file a separate Form 5558.

The Form 8955-SSA replaces the old Schedule SSA to the Form 5500, where former employees with vested account balances remaining in the plan are reported.

Prior to 2009, ERISA 403(b) plans (the only 403(b) plans required to file a Form 5500) never had to file a Schedule SSA because the Form 5500 instructions never required them to do so. Curiously enough, it appears that the DOL may never really have had the authority under ERISA Section 110 to waive its filing in prior years because it is required under Code Section 6057(a), not under ERISA. Here's the language, by the way, from the 2008 5500 instructions:

"403(b) Arrangements: A pension plan or arrangement using a tax deferred annuity arrangement under Code section 403(b)(1) and/or a custodial account for regulated investment company stock under Code section 403(b)(7) as the sole funding vehicle for providing pension benefits need complete only Form 5500, Part I and Part II, lines 1 through 5, and 8 (enter pension feature code 2L, 2M, or both). Note: The administrator of an arrangement described above is not required to engage an independent qualified public accountant, attach an accountant’s opinion to the Form 5500, or attach any schedules to the Form 5500."

Now to the tough part.  For ERISA 403(b) plans for which no SSA has ever been filed, how far back does a 403(b) plan sponsor need to go in reporting past participants? Conni did quite a piece on this for our Thompson Publishing newsletter. She strongly makes the case, with which I concur (but, please, check with your own counsel), that Rev Proc 2007-71 is actually determinative here. Oversimplifyng it, under 2007-71, 403(b) contracts which were issued prior to 1/1/2005, and to which no contributions have been made after 12/31/2004 (but loans, 90-24 transfers and other such things may also come into play), are not considered part of the 403(b) plan.

If you use this as a starting point, it would appear that the plan sponsor may need to go back to the 2005, 2006, 2007, 2008 and 2009 plan years, list all terminating participants from those years, and provide that to their current and deselected vendors. Then they will need to find which of those former employees have a current account balance (as of plan year end 2009)-but only if they had made a deposit to those contracts after 2004. And only for those years in which the plan was an ERISA plan. There is a bit more to it as well, as you are really trying to see who you can exclude for 2007-71 purposes.

A caution: the IRS has not taken this positiion on this. What really would be helpful is if the IRS issued relief telling us we only need to report those who left employment after January 1, 2009. 

408(b)(2) also comes into play here.  I had blogged on the "Flushing Effect" of 408(b)(2), where deselected ERISA 403(b) vendors will be required to make disclosures to plan sponsors in order to keep the comp on these contracts. I suspect that a number of employers will be surprised by these disclosures, and be receiving notices on contracts they may not realize exist.  This, in turn, is likely to cause consternation about the data on the 5500 filings in the past-and the new 8955- which then may need to be amended.

Its not getting any easier.  

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Not-for-profit hospital systems are typically corporations organized under the non-profit corporation rules of the states in which they are domiciled. There is an important feature of these incorporation rules at which the 403(b) changes were aimed: these nonprofit healthcare organizations typically have no stock. Instead of stock ownership, the corporations are generally organized around "membership," or like concepts.

The practical effect of this lack of stock ownership is is that the controlled group rules under Code Sections 414(b),(c),(m) and (o) and 1563 would often not apply (Notice 89-23 only being a safe harbor), meaning the discrimination and coverage rules under 403(b)(12)(A)(i) for 403(b) employer contributions were often tested on an organization by organization (as opposed to controlled group) basis.

Treasury changed this all with the introduction of 1.414(c)-5. In effect, an "80%" control test was introduced, with certain permissive aggregation rules permitted, and with church controlled orgs being able to permissively disaggregate under certain circumstances. 

More than in any other 403(b) plan sponsor community, those in the healthcare system have undergone tremendous consolidation activity over the past 15 years, with hospitals (and other sorts of related entities) seeking to survive and be successful through acquisition and merger.  This activity has often resulted in healthcare systems owning quite an assortment of separate nonprofit and for-profit organizations-with the related odd collection of legacy 403(b) and 401(k) plans.

This merger activity, when combined with the new aggregation rules, has resulted in a very difficult hangover for a number of unsuspecting healthcare systems. First, the traditional rules governing discrimination and coverage apply in ways they didn't prior to 2009, and many of these legacy programs have never been tested under the new aggregation rules (its that inertia thing). Secondly, there are very specific rules which apply to coverage testing when you have 403(b)  plans and 401(k) plans within these new controlled groups, the application of which may make it difficult (and sometimes impossible) to maintain both kinds of plans-particularly when its a 501(c)(3) maintaining a 401(k) plan.

Even those orgs which have taken the lead in moving to consolidate platforms in order to deal with the new 403(b) regs are finding themselves now in some difficulty, where there is a dawning on just how the new aggregation rules apply.  

Of all the 403(b) hangovers we have experienced in the past few years, my guess is that this is the most unanticipated of them.

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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 sometimes helpful to step back and see the personal impact of the things we do.

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 Ford's 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, by the way, is still alive and doing well.