EBSA Working Toward Guidance on 401(k) Plan Fee Disclosures

A request for information from the Employee Benefits Security Administration (EBSA) reminds us that the government is increasingly concerned about attaining transparency of 401(k) plan fees and expenses for plan participants. Fees and expenses can have a significant impact on retirement savings, and participants should be aware of the relevant fees and expenses before making investment decisions.

EBSA published the request for information for the purpose of soliciting views, suggestions, and comments from plan participants, plan sponsors, plan service providers, and others so that EBSA may determine the extent to which rules should be adopted or modified to ensure that participants and beneficiaries have the information they need to manage the investment of their retirement savings. The request seeks to obtain information concerning (1) what administrative and investment-related fee and expense information participants should consider; (2) the manner in which that information should be provided or made available to participants; and (3) who should be responsible for providing the information.

Interested parties now have an important opportunity to provide input that could help shape what information ultimately has to be given and how it must be delivered. Written or electronic responses should be submitted to EBSA on or before July 24, 2007. (Fed. Reg. Volume 72, Number 79, Page 20457-20460 (4/25/2007))

IRS Releases Final 415 Regulations

The Internal Revenue Service issued final regulations under Internal Revenue Code (Code) § 415. Code § 415 contains limitations on benefits and contributions under qualified plans and certain other retirement plans. These final regulations represent an extensive update and consolidation of regulations originally issued in 1981. The final rules generally follow the proposed regulations issued in 2005 [see June 2005 Employee Benefits Developments] with some modifications and some additional changes added by the Pension Protection Act of 2006 (PPA). The final regulations apply to limitation years beginning on or after July 1, 2007 (January 1, 2008 for plans with calendar year limitation years).

This article focuses on some of the highlights of the final regulations, including some of the changes to the proposed regulations and existing guidance.

• High Three-Year Compensation. The final regulations require compensation to remain within the Code § 401(a)(17) limits for each of the three years when determining the high three-year average compensation under Code § 415. The final regulations incorporate a PPA provision eliminating the active participation requirement when determining a participant’s high three years of service. Now all years of service an employee has with a plan sponsor may be taken into account, not just the years of service the employee participated in the plan.

• Restorative Payments. Restorative payments made to a defined contribution plan for losses incurred from a fiduciary breach are not included when calculating a participant’s annual addition.

• Plan Aggregation Rules. The final regulations make several changes to the employer aggregation rules. One new rule in this area states that when a 403(b) plan is aggregated with a 401(a) qualified plan, any amounts exceeding the 415 limit are attributed to the 403(b) plan and not the qualified plan.

• Definition of 415 Compensation. The time period has been expanded for the recognition of post-termination payments for unused bona fide sick and vacation leave that can be considered compensation under Code § 415. The proposed regulations provided that such payments could count toward 415 compensation only if the payments were made within two and one half months after the severance from employment. The final regulations modified this time frame by expanding the period to the later of two and one half months after severance from employment or the end of the limitation year that includes the date of severance from employment.

• Non-Qualified Plans. Plans may also allow payments received from a non-qualified plan to be included in 415 compensation, provided that such payment is includable in the employee’s gross income, occurs within the two and one half months after severance from employment or the end of the limitation year that includes the date of severance from employment, and the payment would have been made during this period even if the employee had not terminated employment. (T.D. 9319)

Final Regulations on Distributions From Roth 401(k)s Issued

The IRS has issued final regulations addressing the distribution and taxation rules applicable to designated Roth contributions in 401(k) and 403(b) plans. Designated Roth contributions are after-tax contributions that would receive favorable tax-free treatment of distributions if certain requirements are met.
Some highlights of the final regulations are as follows:

• Qualified distributions receive favorable tax treatment. A qualified distribution is a distribution made after five taxable years of participation and which is made either (i) after the date the employee attains age 59½, (ii) after the employee’s death, or (iii) is attributable to the employee becoming disabled. In the case of a distribution to an alternate payee, the age, death, or disability of the employee are the relevant criteria to be a qualified distribution. One exception is the case of a rollover by an alternate payee or surviving spouse to a designated Roth account of the alternate payee’s or surviving spouse’s employer plan; then the age, death, or disability of the alternate payee or surviving spouse is the relevant criterion.

• The five taxable year period begins on the first day of the employee’s taxable year for which the employee first had designated Roth contributions made to the plan and ends when five consecutive taxable years have been completed. If a direct rollover of a designated Roth account is made to another plan, the five year period for the recipient plan begins on the first date of the taxable year in which the employee had designated Roth distributions to the distributing plan, if earlier.

• For designated Roth contributions made by a re-employed veteran, the five taxable year period begins with the taxable year to which the contributions relate. The re-employed veteran may designate which year the contributions are made for other purposes, such as entitlement to a matching contribution. Absent such a designation, the first year of the five year period is the first year in which the veteran’s qualified military service begins or the first taxable year in which the designated Roth contributions could have been made under the plan, if later.

• With respect to a rollover of designated Roth contributions from a 401(k) or a 403(b) plan to a Roth IRA, the five year period begins with the first taxable year for which the individual made a contribution to any Roth IRA. The period in which the funds were held in the Roth 401(k) or 403(b) do not count toward the five year requirement for the Roth IRA.

Plans offering designated Roth contributions should carefully review the final regulations to help assist participants in understanding whether a specific distribution will be a qualified distribution. (T.D. 9324)

Guidance Issued on Application of 409A to Split-Dollar Life Insurance Arrangements

Following the release of the final regulations to Code § 409A, a separate notice governing the application of the new rules to split-dollar life insurance arrangements was issued. Split-dollar life insurance arrangements that provide only death benefits, that provide only benefits that vested before 2005, or that satisfy the Code § 409A requirements for short-term deferrals are excluded from coverage under Code § 409A. Notice 2007-34 provides important guidance for determining the circumstances under which and the extent to which certain other split- dollar arrangements are subject to Code § 409A. The notice addresses the modification of split-dollar life insurance arrangements with respect to taxation under the regulations to Code § 61.

Arrangements entered into after September 17, 2003 are taxed under Treasury Regulation § 1.61-22. Those arrangements entered into on or before September 17, 2003 are grandfathered under prior taxation rules, unless the arrangements are materially modified after that date. The notice provides guidance for safely modifying these grandfathered arrangements so that they either comply with or are exempt from Code § 409A without the changes being treated as material modifications for purposes of losing grandfather status under the old tax rules.

CASES

Plan Administrator Upheld Despite SPD

In numerous instances in these reports, cases have been described where language in a summary plan description (SPD) has successfully supported a participant claim even though the formal plan document may be contrary to the participant’s claim. The lesson in these cases is that an SPD must be carefully drafted in a way that is consistent with the plan document and does not suggest or describe any benefit, right, or feature that is not contained in the plan.

The Court of Appeals for the Eight Circuit has upheld the denial of a claim by a participant in the Alcoa Retirement Plan that was based on imprecise SPD language. The Alcoa Retirement Plan contained a subsidized early retirement benefit for participants who were permanently laid off and who met other plan criteria. The affected participants worked at a facility that was sold by Alcoa, and they were offered continuing employment with the successor. The plan document made it clear that the benefit in question would not be available to a participant who was offered continuing employment with Alcoa “or a successor employer.” The SPD did not include the “successor employer” language, although it referred to a permanent layoff.

Because the participants were not offered continuing employment with Alcoa, they claimed they were eligible for the subsidized benefit described in the SPD. The 8th Circuit rejected this argument. While the plan administrator prevailed, a more precise SPD may have helped avoid litigation in the first place. Jessup v. Alcoa, Inc. (8th Cir. 2007)

More on SPDs

In a “small” case out of the Court of Appeals for the Ninth Circuit, another court opinion is based on conflicts between a plan document and an SPD. In this case the court was presented with a clear plan document and an ambiguous SPD. Based on prior case law, the court stated that it would support a participant entitlement to a benefit described in a clear and unambiguous SPD, even though the benefit is not contained in the plan’s formal document. This case, however, involved a plan administrator’s discretionary decision made in the context of a clear plan provision but an ambiguous description in the SPD.

The court concluded that in this circumstance, a reasonable decision by the plan administrator, based on a clear plan provision, would be upheld. While the plan would have been better served with a more accurate description, the decision at least stands for the proposition that an ambiguous SPD is not always interpreted in favor of the participant’s claims. Weiss v. Northern California Retail Clerks Unions and Food Employers Joint Pension Plan (9th Cir. 2007)

This newsletter is a periodic publication of Hodgson Russ LLP. Its contents are intended for general informational purposes only and should not be construed as legal advice or legal opinion on any specific facts or circumstances. Information contained in the newsletter may be inappropriate to your particular facts or situation. Please consult an attorney for specific advice applicable to your situation. Hodgson Russ is not responsible for inadvertent errors in this publication.