Regulations Proposed Regarding Roth Contributions to Qualified Plans. Beginning in 2006, certain qualified plans (i.e., profit-sharing, stock bonus, pre-ERISA money purchase or rural cooperative plans) may permit an employee who makes elective contributions under a qualified cash or deferred arrangement to designate some or all of those contributions as Roth contributions. Unlike pre-tax elective contributions, Roth contributions are currently includable in income but excludable from income upon distribution. On March 2, 2005, the Internal Revenue Service released proposed regulations providing guidance on the requirements for designated Roth contributions to qualified cash or deferred arrangements under § 401(k) of the Internal Revenue Code. Not surprisingly, the proposed regulations would require that contributions be designated irrevocably as Roth contributions and that these contributions be maintained in a separate account. Also, Roth contributions would be subject to the same nonforfeitability and distribution restrictions that apply to pre-tax elective contributions, and would be accounted for under ADP testing in the same manner as pre-tax contributions. There are some designated Roth contribution rules that are not fully addressed in the proposed regulations, but the preamble to the regulations suggest those rules still must be reflected in a plan’s terms. For instance, if a plan allows an employee to elect the character of a distribution (i.e., whether the distribution will be made from the designated Roth contribution account or other accounts), the extent to which the plan permits such an election must be set forth in the terms of the plan. Likewise, a plan must provide that designated Roth contributions may be rolled over only to another plan maintaining a designated Roth contribution account or to a Roth IRA. As proposed, the regulations would apply to plan years beginning after 2005. See 70 Fed. Reg. 10,062 (March 2, 2005)

Proposed Rules for Terminating Abandoned Individual Account Plans. Frequently, events like bankruptcies, mergers, or acquisitions result in the abandonment of individual account pension plans (e.g., 401(k) plans) sponsored by the affected companies—this can be particularly true in the case of small employers. As a result, custodians and institutional trustees (e.g., banks, insurers, and mutual fund companies) are left holding the assets of these abandoned plans without having any authority to terminate the plans or to make benefit distributions. And participants and beneficiaries are left with no ability to access the benefits they have earned. The Employee Benefits Security Administration (EBSA), in a move applauded by many, has proposed rules to facilitate a voluntary, safe, and efficient process for winding up the affairs of abandoned individual account plans. If finalized and adopted, the regulations would establish standards for determining when a plan is abandoned, set out simplified procedures for winding up the affairs of the plan and distributing benefits to participants and beneficiaries, and provide guidance on who may actually wind up the abandoned plan. See 70 Fed. Reg. 12,046 (March 10, 2005)

A Noteworthy 5500 Change for Retirement Plans: New Schedule SSA Reporting Requirements. As sponsors of qualified retirement plans ready themselves to prepare and file their 2004 Forms 5500, there is a significant change to the Schedule SSA reporting requirement that will need plan sponsors’ attention. The Schedule SSA has been used, and will continue to be used, to report and identify participants who separate from the plan sponsor with deferred vested benefit rights. Beginning with the 2004 Form 5500, however, the Schedule SSA instructions state participants who were previously reported on Schedule SSA and are no longer entitled to those deferred vested benefits (i.e., because the participant has begun receiving benefits, or has received a total distribution, or has been transferred to another plan) must be reported again on Schedule SSA. The new Schedule SSA instructions offer no indication as to whether plan sponsors must retroactively report pre-2004 distributions, but this change clearly will require plan sponsors and their record keepers to track and report yet another aspect of plan operations. See 2004 Instructions for Schedule SSA, Form 5500

EBSA Clarifies Position on Reporting of Commissions and Fees. The Employee Retirement Income Security Act of 1974 (ERISA) requires insurance companies that provide health and welfare benefit insurance coverage to furnish information to ERISA plan administrators on commissions and fees paid to brokers, agents, and other persons for disclosure on Schedule A (Insurance Information) of the Form 5500 Annual Return/Report of Employee Benefit Plan. However, because of a concern that some in the insurance industry have developed a pattern and practice of underreporting these commission and fee payments based on incorrect interpretations of existing guidance, EBSA recently released an advisory opinion clarifying its position. Employers should be mindful of this guidance and ensure that the insurance vendors with whom they do business are faithful to its terms. EBSA’s clarifications include:

it is an impermissible reading of the Schedule A instructions to conclude that payments to a broker or agent are required to be reported only when they would be considered a “sales commission” on an individual policy or contract;
non-monetary forms of compensation (e.g., prizes, trips, cruises, gifts or gift certificates, club memberships, vehicle leases, and stock awards) must be reported if the entitlement to, or the amount of, the compensation is based in some fashion on policies or contracts placed with ERISA plans; and
the fact that fees and commissions are paid from a separate bonus fund, and not directly from the insurance company’s general assets, is not a sufficient basis for not reporting the fees and commissions.

Readers can review the entire advisory opinion on EBSA’s Web site at http://www.dol.gov/ebsa/regs/aos/ao2005-02a.html.

PBGC Releases Rules on Electronic Filing Requirements. On March 8, 2005, the Pension Benefit Guaranty Corporation (PBGC) released both a final rule and a proposed rule concerning electronic filing requirements. Effective April 8, 2005, the final rule:

requires electronic filing of certain identifying, financial, and actuarial information in a standardized format;
requires the submission of certain additional information the PBGC needs to carry out its role of protecting participant and premium-payer interests;
modifies the rules for determining whether aggregate unfunded vested benefits exceed $50 million for reporting for information years ending on or after December 31, 2005; and
removes the requirement that a power of attorney accompany any filing made by a person other than a filer.

The proposed rule seeks to eliminate paper premium forms and to require electronic filing of annual premium information submissions for large plans (i.e., those with 500 or more participants) for plan years beginning after 2005 and for all plans for plan years beginning after 2006. Case-by-case exemptions from this requirement would be granted in appropriate circumstances for filers that demonstrated good cause for exemption. The submission of information specially requested by the PBGC in connection with a premium compliance review would not be affected by this change, nor would there be a requirement for payment to be made electronically. See 70 Fed. Reg. 11,540, 11,592 (March 9, 2005)

DOL Publishes USERRA Poster. As we reported in our January 2005 Employee Benefits Developments, the Veterans’ Benefits Improvement Act of 2004 requires employers, beginning March 10, 2005, to provide employees entering military service a notice of employee and employer rights, benefits and obligations under the Uniformed Services Employment and Reemployment Rights Act (USERRA). The notice requirement can be satisfied by posting a notice in those workplace locations where the employer customarily posts notices for employees. On March 10, 2005, the Department of Labor (DOL) published a model notice that employers can use to satisfy this notice obligation. The DOL’s model notice is available at: http://www.dol.gov/vets/programs/userra/poster.pdf. Employers who have not already obtained and posted a copy of the notice should do so as soon as possible.

CASES

Providing Inaccurate Benefit Information Can Be a Breach of Fiduciary Duty. Danny Schaffer began working for Westinghouse Electric Corp. in 1970. In 1989, he transferred to a Westinghouse subsidiary in Georgia. Schaffer alleges that both before he agreed to the transfer and after the transfer was completed, management personnel informed him that his service for purposes of his pension accruals in the subsidiary pension plan would include his years at both Westinghouse and the subsidiary. From 1990 through 2000, Schaffer received annual benefits statements from the subsidiary’s pension plan indicating that the amount of his pension would be based on his combined years of service performed for Westinghouse and the subsidiary. In 2001, however, the subsidiary informed Schaffer his annual benefits statements were inaccurate—his years at Westinghouse should have counted for pension eligibility only and not for purposes of calculating the amount of his pension. Schaffer sued the subsidiary, claiming that the terms of the pension plan obligated the subsidiary to count his Westinghouse service when calculating his benefit. Schaffer also asked for “appropriate equitable relief” under ERISA for breach of the subsidiary’s fiduciary duty to provide him with accurate information about pension benefits. The federal trial court and appellate court agreed the subsidiary’s plan could not be read to require Schaffer’s Westinghouse service be counted in calculating the amount of his pension from the subsidiary. The federal trial court and appellate court also agreed that the subsidiary breached its fiduciary duty to provide accurate information. Unlike the trial court, however, the appellate court concluded an equitable remedy does exist for that breach of fiduciary duty. Accordingly, the federal appellate court remanded the question of an appropriate equitable remedy to the trial court, and asked the trial court to consider whether the pension Schaffer would have received had he remained a Westinghouse employee would have been greater than the combined value of his Westinghouse and subsidiary pensions. Schaffer v. Westinghouse Savannah River Company, 4th Cir., 2005

Court Upholds “Lifetime” Benefits Language in Health Plan. A recent case out of the U.S. Court of Appeals for the Seventh Circuit reminds us that an employer may have a limited ability to change or eliminate retiree medical benefits where the health plan language promises (even if it does so ambiguously) “lifetime” retiree benefits and the plan lacks a reservation of rights clause allowing the employer the right to modify or terminate those benefits. In Bland v. Fiatallis North America Inc., retirees and surviving spouses sued Fiatallis North America Inc. and others when the health and welfare plans under which they were covered were modified to increase the retiree’s share of medical and dental premiums, and to change certain coverage levels. The retirees claimed Fiatallis improperly reduced “vested” retiree medical benefits by greatly increasing the cost to retirees. The federal trial court granted a summary judgment motion in favor of Fiatallis. The federal appellate court reversed. Noting the plan does not have to use the word “vest” or some variant of that word, the court held the use of “lifetime” language in three plan documents rendered the plan documents at least ambiguous as to the “vesting” of retiree benefits. The federal appellate court found it significant that there is no express reservation of rights clause in any of the plan documents, and held the use of the term “lifetime” in this case is “durational, meaning ‘for life.’” The case was remanded to the trial court for further consideration. Bland v. Fiatallis North America Inc., 7th Cir. 2005

Elvis Checks Into Heartbreak Hotel After Disability Claim Is Denied. Now don’t be cruel. Elvis Kobs, a car dealership business manager, was covered by his employer’s short-term and long-term disability plan. While removing Christmas ornaments, he fell off his roof (“Blue Christmas”, indeed), and subsequently received short-term disability benefits but was denied long-term benefits on the grounds that he was not totally disabled under the plan. After suffering rejections at both the administrative and district court levels, Elvis found a new place to dwell at the U.S. Court of Appeals for the Seventh Circuit. The Seventh Circuit held the claims administrator, United Wisconsin Insurance Company, did not act arbitrarily or capriciously in denying Kobs long-term disability benefits. While Kobs's own physician stated Kobs was physically disabled, the federal appellate court ruled ERISA does not require plan administrators to accord special deference to the opinions of treating physicians, thereby vindicating the contrary opinions of two orthopedic surgeons who concluded Kobs was not disabled. Beyond Kobs’s alleged physical disabilities, the federal appellate court expressed suspicious minds about his alleged mental impairments. In fact, the court noted one of the physicians posited that Kobs might be "sandbagging" during the psychological tests, as he did so poorly on the tests that it appeared he was exaggerating his impairment. In the end, it was sufficient that United Wisconsin had gathered and reviewed the pertinent medical information, hired a number of physicians to evaluate Kobs and review his medical files, and made an informed decision about Kobs's long-term disability application that coincided with the bulk of the medical evidence. Kobs v. United Wisconsin Insurance Co., 7th Cir. 2005

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