Important Update. On June 21, IRS announced the extension of the 8955-SSA deadline to January 17, 2011, for which no Form 58 extension will need to be filed. The announcement is here

 

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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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.   

 

 

 

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There are three key employer groups which utilize 403(b) plans: K-12; colleges and universities; and non-profit healthcare systems.  Of the three, its is healthcare that seems to be most impacted by the new aggregation rules introduced with the 2007 403(b) regulations.

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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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.   


 

 

 

 

 

 

A few weeks ago, I blogged on the important role that the Securities Compliance Officer may play in 408(b)(2) compliance. I touched on some of the securities rules which apply to retirement plans outside of the executive compensation context. Attached is a more htorough explanation of those rules, which can hopefully be useful as we attempt to wend our way through this changng regualtory landscape.  The article I wrote for the “Practical Compliance and Risk Management for the Securities Industry” March-April issue, is entitled “Securties Rules for Retirement Plans.”

 

 

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.   


 

T his has become my "annual Mother’s Day" posting, which hopefully helps describe the importance of what we do:

 

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.

  

 

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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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.   


 

 

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…….

 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. 

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"…

  

Continue Reading First things first… kind of like the chicken and the egg!

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." 

 

But, first, another note of introduction……

It is with great pleasure to announce that my friend and fellow pink-shirted compatriot (many of our industry colleagues may fondly remember THAT story!) Sandy Koeppel has decided to join us as Of Counsel, and to have some fun following his illustrious career at Prudential.  Together with myself, Phil Troyer and Conni Toth, we intend to continue to contribute helping make the U.S. retirement system – which we are all so passionate about – work better. Sandy brings a tremendous wealth of experience in guaranteed lifetime income from employer plans to the marketplace (I invite you to read his bio), and intends to continue to carry this torch. Between us all, we offer substantial knowledge of the design, marketing and distribution of these products.

Sandy, as he mentions below, has also formed Plan Income Consulting & Evaluation Services, LLC (PLICES), a consulting firm which has affiliated with this firm and which provides advisors, vendors and employers consulting services related to guaranteed income products.  

Drop Sandy a note at sek@rtothlaw.com.

Now, his first blog:

The shift from Defined Benefit to Defined Contribution plans as the primary workplace retirement vehicle has eroded the confidence and jeopardized the retirement security of a vast number of American workers and their families. The recently published EBRI 2011 Retirement Confidence Survey finds that confidence among workers in their ability to have a comfortable retirement has dropped to an all-time low. According to the EBRI survey,

"the percentage of workers not at all confident about having enough money for a comfortable retirement grew from 22 percent in 2010 to 27 percent, the highest level measured in the 21 years of the RCS. At the same time, the percentage very confident shrank to the low of 13 percent." The RCS further states that "56 percent of workers expect to receive benefits from a defined benefit plan in retirement, only 37 percent report that they and/or their spouse currently have such a benefit with a current or previous employer. Therefore, up to 19 percent of workers may be expecting to receive the benefit from a future employer—a scenario that is becoming increasingly unlikely, since private-sector employers, in particular, have been cutting back on their defined benefit offerings."

These findings along with other results of this survey are disturbing and demonstrate that American workers not only are uninformed but feel challenged, concerned, and threatened about potential declines in their future lifestyle in retirement.

 With the passage of the Pension Protection Act, Congress recognized the need to instill defined benefit-like outcomes into the defined contribution plan universe. The PPA enables plan sponsors to include in their DC plans features such as automatic enrollment, automatic contribution escalation and gain fiduciary protection by offering qualified default investment alternatives deploying professional money management. These important first steps do much to replicate for workers the defined benefit plan experience in the asset accumulation stage. However, up to now, most DC plans do not offer the critical and essential missing piece to assure retirement security: guaranteed lifetime income. There are many reasons for this failure. Chief among them include: legal uncertainty about the rules and standards that apply to the choice of providers; unsettled tax issues (e.g. applicability of qualified joint and survivor annuity rules) associated with new and innovative forms of guaranteed lifetime income; cost and administrative burdens; lack of demand among participants; lack of guidance from the Department of Labor delineating between advice and education for distribution planning and the availability of out-of-plan (retail) vs in-plan (institutional) guaranteed lifetime income solutions if it is desired.    

 

Continue Reading For Guaranteed Lifetime Income in DC Plans: (ITS) Time Has Come Today