Plans May Charge Former Employees with Administration Expenses Without Charging Current Employees. The Internal Revenue Sevice (IRS) ruled a defined contribution plan may distinguish between current and former employees by charging a pro rata share of the plan’s reasonable administrative expenses to the accounts of former employees, even if the plan sponsor pays the expenses allocable to the accounts of current employees. If the value of a former employee’s plan accounts exceeds a minimum amount, the plan must provide that the benefit cannot be immediately distributable without the consent of the individual. However, the Internal Revenue Code (IRC) requires that consent to a distribution is not valid if a significant detriment is imposed on a participant who does not consent to the distribution. The IRS ruled allocation of reasonable plan expenses to the individual account of a former employee is not a significant detriment, because comparable fees would exist in the marketplace for a similar investment outside the plan. The Department of Labor (DOL) also has ruled these types of expenses may be charged only to former employees. (Rev. Rul. 2004-10, Jan. 29, 2004.)

IRS/DOL Rulings, Opinions, Etc.

In-Service Distributions of Rollover Contributions Allowed. The IRS has clarified if a qualified retirement plan separately accounts for amounts contributed to the plan that are attributable to rollover contributions, the plan may allow participants to receive distributions of the rollover amounts at any time. The rollover contributions are not subject to any distribution timing restraints to which other types of contributions under the qualified plan may be subject. Although rollover amounts are not subject to timing restrictions, they are subject to IRC § 401(a)(9) minimum distribution requirements, survivor annuity requirements (if applicable to the plan generally), and the 10% penalty on early distributions under IRC § 72(t). (Rev. Rul. 2004-12, Jan. 29, 2004.)

When is a Safe Harbor 401(k) Plan Exempt from Top Heavy Rules? In Revenue Ruling 2004-13, the IRS provides some examples as to when safe harbor 401(k) plans are exempt from the special rules that apply to top heavy plans. In general, if a 401(k) plan is top heavy for a plan year (that is, if more than 60% of the aggregate value of the accounts under the plan are attributable to “key employees” of the company), the plan must satisfy certain vesting and minimum contribution requirements under IRC § 416. Under this IRC section, however, a plan will not be considered a “top heavy” plan if it consists solely of a “safe harbor” 401(k) feature and “safe harbor” matching contributions (i.e., IRS design-based safe harbors for satisfying the nondiscrimination tests applicable to 401(k) contributions and matching and certain other contributions). The examples provided in the revenue ruling illustrate that the IRS, in determining whether the top heavy rules apply, looks to the actual contributions made for a plan year, not what the plan document allows. In one example, a plan had a safe harbor 401(k) feature and provided the plan sponsor could make discretionary nonelective contributions. In the year in question, the only contributions made to the plan were 401(k) safe harbor contributions. The IRS ruled the plan would be exempt from the top heavy rules for that year. In another example, the plan had the same provisions but the plan sponsor made a discretionary contribution. Because that type of contribution was not a “safe harbor” contribution, the plan would be subject to the top heavy rules for that plan year and, thus, would have to be tested to see if it is top heavy. (Rev. Rul. 2004-13, Jan. 29, 2004.)

Guidance on Coverage Rules for Qualified Plans in Mergers and Acquisitions. The IRS issued guidance for applying the minimum coverage transition rule under IRC § 410(b). The coverage rules require a plan to meet one of two coverage tests: the “ratio percentage” or the “average benefits” test. There is a special rule under IRC § 410(b) that gives plan sponsors a “free pass” on the minimum coverage requirements for a period after certain corporate acquisitions and dispositions. If a plan sponsor becomes, or ceases to be, a member of a controlled group (or affiliated service group), the minimum coverage rules will be treated as having been met during a transition period for any plan covering employees of any members of these groups if (a) the coverage requirements were met immediately prior to the acquisition or disposition, and (b) there is no significant change in the plan or its coverage during the transition period (other than due to the acquisition or disposition). The transition period begins on the date of the corporate change and ends on the last day of the first plan year beginning after the date of the change. The rule allows the plan sponsor time to consider what coverage or other plan changes need to be made for the plans to satisfy the minimum coverage requirements after an acquisition or disposition.

In the revenue ruling, the IRS considered a hypothetical situation in which a wholly-owned subsidiary sponsored a defined benefit plan and a 401(k) plan for its employees. Both plans had calendar year plan years. The parent company sold all the shares of the subsidiary (Company S) to an unrelated company (Company Y) on June 22, 2004. After the sale, Company S continued to maintain both plans. It made no changes to the 401(k) plan but significantly changed the defined benefit plan’s benefit formula on April 1, 2005. The IRS ruled the defined benefit plan would be treated as having passed the coverage tests from the date of the sale only until April 1, 2005, when it changed the benefit structure. The fact that the plan was significantly changed during the transition period does not make the plan ineligible for the special rule; it curtails the transition period under the special rule. After March 31, 2005, the plan would have to satisfy the coverage requirements without the benefit of the transition rule. At that point, the plan would have to satisfy the coverage rules taking into account all the employees of Company Y’s controlled group. The 401(k) plan would be treated as satisfying the minimum coverage rules from the date of the sale through December 31, 2005. (Rev. Rul. 2004-11, Jan. 29, 2004.)

Cases

Look Before You Lease. ConAgra, a diversified food and agricultural products company, operated a catfish processing plant for many years. In 1991 it changed its business approach for this unit by entering into a joint venture with an unrelated entity to run the catfish business. ConAgra’s share of the joint venture was owned by a subsidiary corporation, Country Skillet. In 1996, ConAgra sold its County Skillet stock to three individuals. During the joint venture period, and after the sale of the County Skillet stock, the business was carried on by ConAgra employees who were “leased” to the joint venture to work at the plant. The leasing agreement required the lessee to reimburse ConAgra for employee compensation and the “cost of benefits.” The benefits included a defined benefit plan. When the leasing arrangement terminated, ConAgra sought to collect additional money to pay for the pension plan, above what had been contributed annually to meet the plan’s minimum funding requirements over the years. The contract was vague on this point, and a better job in drafting the leasing agreement could have avoided the dispute. After losing in the federal trial court on the theory that the agreement required a reimbursement only of funding costs actually paid, ConAgra prevailed on appeal to win a decision requiring payment of the calculated pension costs under Financial Accounting Standard No. 87, used for financial accounting to determine pension costs annually. (ConAgra Inc. v. Country Skillet Co., 5th Cir.,
No. 03-60246, Jan. 29, 2004.)

The Scope of Presidential Pardons. In a split decision citing Supreme Court cases from the 19th and early 20th centuries, the federal Court of Appeals for the Seventh Circuit upheld the denial of a reinstated pension for a Chicago police officer. Officer Joseph Yasak was convicted in 1991 of perjury in testimony given to a grand jury. His police pension was forfeited as a result, and Yasak requested and received a refund of his own contributions to the police pension fund. Yasak was pardoned by President Clinton in 2001. The attempt to reinstate his pension questioned the scope of the Presidential pardon and had the judges reading Supreme Court cases from the 1860s and 1870s. The two-to-one majority concluded Yasak’s voluntary withdrawal of his contributions, which had the clear effect of canceling his pension rights under state law, could not be reversed by the pardon. (Yasak v. Retirement Board of the Policemen’s Annuity and Benefit Fund of Chicago, 7th Cir., No. 03-1733, Feb. 4, 2004.)

State Law Statute of Limitations Applied to Actuarial Malpractice. Plan trustees or other fiduciaries who believe their actuary or other professional advisors have not performed up to minimum standards should check state law statutes of limitation promptly if a lawsuit is contemplated. The Court of Appeals for the Sixth Circuit applied Michigan’s three-year statute of limitations to a claim for professional malpractice brought by plan trustees against an actuary and affirmed the dismissal of a suit that was not timely filed. The trustees brought their claim more than three years after the alleged malpractice occurred, but attempted to find a longer time period for filing their suit by alleging a breach of fiduciary duty and other theories. Despite the federal nature of pension plans and their administration, the federal appellate court found this claim for actuarial malpractice would have been timely only if it had met the Michigan state law three-year statute for negligence. (Winterhalter v. Watson Waytt & Co., 6th Cir., No. 02-1795, Jan. 23, 2004.)