Automatic Rollover Rules Modified and Finalized. In Employee Benefits Developments, February 23 to March 5, 2004, we reported on the Department of Labor’s (DOL’s) publication of proposed regulations providing guidance under which plan fiduciaries may satisfy their fiduciary responsibilities in connection with an automatic rollover to an individual retirement plan. On September 28, the DOL published its final rules on safe harbor rollovers.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) enacted new automatic rollover rules that will require mandatory cash-outs exceeding $1,000 to be rolled over automatically to an individual retirement plan. The recipient may elect a cash distribution instead of the automatic rollover. However, if the recipient does nothing, an automatic rollover will be required. The DOL’s final rule establishes a safe harbor pursuant to which a pension plan fiduciary will be deemed to have satisfied his or her fiduciary responsibilities in connection with automatic rollovers of those mandatory distributions. The final regulation is effective March 28, 2005.

Modifications. In the final regulation, the DOL extends the safe harbor to rollovers of mandatory distributions of $1,000 or less. The final rules also modify the proposed rules that would have limited investment product fees and expenses to income earned by the individual retirement plan, and instead adopts a comparability standard under which fees and expenses may not exceed the fees and expenses charged by the individual retirement plan provider for comparable individual retirement plans established for reasons other than the receipt of a rollover distribution.

Final Class Exemption. In connection with the issuance of the final safe harbor rollover rules, the DOL also published a final class exemption permitting banks and other financial institutions to designate themselves as the individual retirement plan trustee. The exemption is effective for mandatory distributions made after March 27, 2005. (69 Fed. Reg. 57,964; 69 Fed. Reg. 58,017 (September 28, 2004))

Department of Labor Proposes USERRA Rules. Congress enacted the Uniformed Services Employment and Reemployment Rights Act of 1994 (better known by its acronym, USERRA) to protect employees who leave their jobs to serve in the military. On September 20, the DOL’s Veterans’ Employment and Training Service proposed rules that would implement many of USERRA’s provisions. These include

the prohibition of discriminatory acts against past and present members of the uniformed services, as well as applicants to the uniformed services;
five criteria that are a necessary precondition to reemployment;
the employers and employment positions that are covered by USERRA;
the right to reemployment following service of up to five years in the uniformed services, whether in a single period or cumulatively, and nine exceptions where reemployment is not required;
the status of the employee’s general non-seniority based rights and benefits while he or she is absent from an employment position due to military service; and
USERRA’s health plan provisions that are similar, but not identical, to the continuation of health coverage provisions under COBRA (i.e., the Consolidated Omnibus Budget Reconciliation Act of 1985).

You can review the rules, including 19 pages of commentary, on the Federal Register web site at www.access.gpo.gov/su_docs/fedreg/a040920c.html. (69 Fed. Reg. 56,265 (September 20, 2004))

Possible Overhaul of Qualified Plan Amendment Procedures? The Internal Revenue Service (IRS) has issued a proposed Revenue Procedure that would significantly modify the method by which qualified retirement plans apply for updated determination letters. For individually designed plans, the new rules would create a staggered five-year remedial amendment cycle based on the last digit of the plan sponsor’s taxpayer employer identification number. The last day of the first year in the five-year cycle would be January 31, 2007. For pre-approved plans (i.e., master and prototype and volume submitter plans), a six-year amendment cycle would be adopted. For these pre-approved plans, the first submission period would end January 31, 2006. It is expected that adopting employers would have two years from approval to adopt the master and prototype or volume submitter document. IRS Announcement 2004-71, 2004 I.R.B. 40

IRS Will Pursue Claim on Retirement Benefits Outside of Bankruptcy. The IRS Office of Chief Counsel issued a notice indicating a change in its litigating position regarding claims against a debtor/participant’s retirement benefit in bankruptcy. This followed from the ruling of the U.S. Court of Appeals for the Ninth Circuit in United States Internal Revenue Service v. Snyder (9th Cir. 2003) where the court held the IRS did not hold a secured claim with respect to the debtor’s interest in a pension plan because the interest was excluded from the bankruptcy estate. The federal bankruptcy law (Bankruptcy Code § 541(c)(2)) excludes from the bankruptcy estate a debtor’s interest in a trust that is subject to restrictions enforceable under applicable non-bankruptcy law, such as the Employee Retirement Income Security Act of 1974 (ERISA) and its anti-alienation provisions. The Chief Counsel notice states that in cases where the debtor’s interest in a pension plan is excluded from property of the estate, the IRS will no longer argue for the inclusion of its secured claim against the debtor’s interest in the plan. However, the IRS’s lien against the debtor’s interest in the plan is not extinguished by the bankruptcy proceeding and will continue to exist outside of the bankruptcy proceeding. IRS Chief Counsel Notice, CC-2004-033, 2004

Service Reaffirms When Plan Contribution is on Account of Preceding Tax Year. The Internal Revenue Code (IRC) provides that a qualified plan sponsor is deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of that taxable year and is made before a return for the taxable year is legally required. Where the tax year and plan year differ, questions may arise as to when a payment is “on account of” the preceding taxable year. In 1990 and 2002, the IRS issued rulings in which it held that elective and matching contributions to an IRC § 401(k) plan are not deductible by the employer for a taxable year if attributable to compensation earned by participants after the end of that taxable year. On September 24, the IRS issued a coordinated issue paper, revising its 2002 ruling. Under the facts presented, a plan sponsor has a calendar plan year and a taxable year ending June 30. Prior to the end of taxable year, the sponsor adopts a board resolution establishing a minimum plan contribution for the plan year, thereby creating a corporate liability for that contribution. Some of the contribution is made prior to July 1, the balance is made after June 30. On these facts, the IRS ruled the portion of the contribution made after the close of the corporation’s taxable year is not deductible for that taxable year because it is attributable to compensation earned by plan participants after the end of the taxable year. (Rev. Rul. 2002-46 Update)

Guidance Published on Termination Distributions for Missing Defined Contribution Plan Participants. All plan assets must be distributed as soon as administratively feasible after the date of a plan termination to effectively complete a plan termination under IRC requirements. What happens though when the sponsor of a terminating plan cannot locate a participant? When a defined benefit plan is being terminated, there are procedures for turning a missing participant’s accrued benefit over to the Pension Benefit Guaranty Corporation (PBGC) for safekeeping. But, until now, there has not been good guidance on how a terminating defined contribution plan sponsor should proceed when a participant is missing. On September 30, the DOL published Field Assistance Bulletin 2004-02 in which the DOL describes the steps a plan fiduciary must take to locate a missing participant or beneficiary before the plan fiduciary concludes the participant cannot be found. A plan fiduciary cannot distribute a missing participant’s benefits unless each of the prescribed methods (i.e., a certified mailing, a check of related plan records, checking with a designated beneficiary, and use of a letter forwarding service) proves ineffective in locating the missing participant. Other search options are suggested. If the participant truly is missing, the Field Assistance Bulletin addresses the fiduciary considerations that are relevant to various distribution options available to plan fiduciaries with respect to missing participants of terminated defined contribution plans. Those options include distributing missing participant benefits into individual retirement plans, establishing an interest-bearing federally-insured bank account in the name of a missing participant or transferring missing participants’ account balances to state unclaimed property funds. A copy of the Field Assistance Bulletin is available online at http://www.dol.gov/ebsa/regs/fab_2004-2.html.

PBGC Publishes Guidance on Participant Notices for Underfunded Plans. The PBGC published Technical Update 04-4 which provides guidance as to how interest rate changes made by recent legislation will affect an underfunded pension plan’s obligation to issue a 2004 funding status notice to participants. Plan administrators of certain underfunded plans must notify participants and beneficiaries annually of the plan’s funding status and the limits of the PBGC’s guarantee. A detailed description of the rules governing the requirement to issue a 2004 Participant Notice is available at http://www.pbgc.gov/laws/techupdates/tu04-04.htm.

Cases

Clarification of Sliding Scale Approach to Benefit Denials. The U.S. Court of Appeals for the Tenth Circuit held plan administrators who have an inherent conflict of interest must demonstrate that their decision to deny benefits is supported by substantial evidence. Shirley Fought participated in a long-term disability benefit plan issued by UNUM Life Insurance Co. of America (UNUM). A provision in the plan provided that any disabilities caused by, contributed by, or resulting from any pre-existing conditions were not covered. Without seeking any independent review of her pre-existing condition and its causal relation to her infection, UNUM denied Fought coverage under the plan contending that Fought’s heart condition was a pre-existing condition that caused, contributed to, or resulted in the infection under which she was claiming a disability. Generally, if the plan has correct language, a decision by a fiduciary will be overturned by a court only if the decision was arbitrary and capricious. The appeals court, articulating a new standard of judicial review, held that fiduciaries who have an inherent conflict of interest, such as a plan administrator who also acts as the plan insurer, are required to establish by “substantial evidence” that the denial of benefits was not arbitrary and capricious. Under this standard of review, the appeals court held UNUM failed to establish with substantial evidence that its denial of benefits was not arbitrary or capricious because UNUM was unable to prove that Fought’s pre-existing coronary disease was causally related to her infection and its disability effects. (Fought v. UNUM Life Insurance Co. of America, 10th Cir. 2004)

Nowhere to Run to, Baby, Nowhere to Hide: Fiduciary Breach Parade Continues. Enron may not routinely find itself as front page news any longer, but the stream of court actions continues against publicly-traded corporations, including their directors, that offer company stock as a qualified plan investment option. For example, a class action suit was filed against Motorola, Inc. (Motorola) (in its capacity as sponsor of the Motorola, Inc. IRC § 401(k) Profit Sharing Plan), certain Motorola officers, members of Motorola’s board of directors, the Profit Sharing Committee that served as the plan’s plan administrator and individual members of the Committee. The plaintiffs’ class alleges the defendants breached their fiduciary duties to the plan and its participants by:

negligently permitting the plan to purchase and hold shares of Motorola's common stock when it was imprudent to do so;
negligently misrepresenting and failing to disclose material facts concerning the management of plan assets to the plan and the participants; and
failing to appoint appropriate fiduciaries, to properly monitor those fiduciaries, or to provide sufficient information to enable the fiduciaries to fulfill their obligations under ERISA.

Meanwhile, in the U.S. District Court of Kansas, plaintiff participants in three different IRC § 401(k) plans have sued Sprint Corporation (Sprint), the various committees that administered the plans, Sprint employees who served as members of the committees, individual members of Sprint’s board of directors and the trustee of the plans. The case centers upon allegations that the defendants breached their fiduciary duties by allowing the plans to remain invested in Sprint stock while harboring public and nonpublic knowledge that the stock’s value had eroded. (Howell v. Motorola Inc. (N. D. Ill. 2004); In re Sprint Corporation ERISA Litigation (D. Kan. 2004))

This newsletter is a periodic publication of Hodgson Russ LLP and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your own situation and any specific legal questions you may have.