Blogging Employee Benefits

April 23, 2006

Abandoned Individual Account Plans

Filed under: 401(k), DOL, Termination (Plan) — Fuguerre @ 9:52 am

Qualified termination administrators may wind up the affairs of abandoned individual account plans under final regulations and a class exemption published by the Department of Labor. [71 FR 20819 (regulations); 71 FR 20855 (class exemption); 06-717-NAT (press release); Fact Sheet; Abandoned Plan Program. See also the 11/8/2002 report of the ERISA Advisory Council's Working Group on Orphan Plans.] The regulations and class exemption are effective May 22, 2006.

  • Qualified Termination Administrator (QTA)- To qualify as a QTA, an institution must meet two conditions: (1) the institution must be eligible to serve as a trustee or issuer of an individual retirement plan; and (2) the institution must be holding the assets of the plan for which it will serve as QTA. See the Model Notice of Plan Abandonment and Intent to Serve as Qualified Termination Administrator.Only one institution should serve as a plan's QTA. If more than one institution holds assets of the plan, then the other institutions are expected to cooperate with the QTA.
  • Determination of Plan Abandonment– An individual account plan, such as a 401(k) plan, will generally be considered abandoned if no contributions to or distributions from the plan have been made for at least 12 consecutive months, and if the QTA has determined that the plan sponsor no longer exists, cannot be located, or is unable to maintain the plan.
  • Deemed Termination– An abandoned plan will be deemed terminated on the 90th day following the DOL's acknowledgement of receipt of the notice of plan abandonment. The plan termination will not go through or will be delayed if either the plan sponsor or the DOL objects to the proposed termination. The DOL may waive some or all of the 90-day period, in which case the plan is deemed terminated when the DOL provides notice of the waiver to the QTA.
  • Winding Up the Affairs of an Abandoned Plan– The regulations provide procedures for a QTA to conclude the affairs of an abandoned plan, including –
    • Notification to the DOL before and after winding up the affairs of and terminating the plan;
    • Locating and updating plan records;
    • Calculating amounts payable to plan participants and beneficiaries;
    • Notification to plan participants and beneficiaries regarding the plan termination and individuals' rights and options;
    • Distribution of amounts to participants and beneficiaries; and
    • Filing a summary terminal report.

    Reasonable expenses incurred in the plan's winding-up and termination may be paid from plan assets. The regulation includes provisions addressing the allocation of expenses and unallocated assets (e.g., forfeitures or amounts in a suspense account), including rules for situations where a plan document is unavailable or ambiguous. The QTA must notify the DOL of any known delinquent employer contributions, but is not required to collect delinquent contributions on the plan's behalf.

    The QTA is not required to amend the plan in order to proceed with the plan's winding-up and termination. Rather, the plan is deemed to have been amended to the extent necessary for the QTA to conduct its responsibilities.

  • Limited Liability– If the QTA conducts its duties in accordance with the regulations, then it will be deemed to satisfy its responsibilities under ERISA §404(a), except with respect to selection and monitoring of service providers. If service providers are selected and monitored prudently, then the QTA will not be held liable for service provider acts or omissions about which the QTA has no knowledge.
  • Plan Qualification– Although not directly within the scope of the DOL's own enforcement authority, the preamble to its regulations state that the IRS will not challenge the qualified status of any plan terminated under the regulation or initiate any adverse action against the QTA, the plan, or any participant or beneficiary, provided the QTA satisfies three conditions –
    • Survivor Annuity Requirements – The QTA must reasonably determine the extent to which the survivor annuity requirements apply to benefits payable under the plan and take reasonable steps to comply with those requirements if applicable.
    • Vesting – Each participant and beneficiary must have full nonforfeitable rights to accrued benefits as of the date of deemed termination, subject to income, expenses, gains and losses between that date and the date of distribution.
    • 402(f) Notice – Participants and beneficiaries must receive notice of their rights under IRC §402(f).
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April 19, 2006

DOL’s Voluntary Fiduciary Correction Program Updated

Filed under: Compliance, DOL, Fiduciary — Fuguerre @ 7:05 am

The Department of Labor's Employee Benefits Security Administration has expanded and streamlined its Voluntary Fiduciary Correction Program. [News Release 06-689-NAT; 71 FR 20261] Concurrently, EBSA has revised and extended PTE 2002-51 relating to certain transactions identified in the VFC Program. [71 FR 20135]

Both the VFC Program changes and the PTE 2002-51 amendments are effective May 19, 2006. During the month prior to that effective date, relief remains available under the original VFC Program or the April 2005 VFC Program, both of which will be superseded by the final VFC Program when it takes effect. The final VFC Program will not foreclose resolution of fiduciary violation by other means, such as settlement agreements with the Department of Labor.

The final VFC Program will retain the fundamentals of the original program, as revised in April 2005. New changes include –

  • Covered Transactions –
    • Illiquid Assets – Divestment will be permitted in the case of acquisition of an asset from a party in interest to which a statutory or administrative exemption applied.
    • Participant Loans – Corrections can include transactions for violations involving level amortization or default loans. Correction under the VFC Program will only require correction under the IRS' forthcoming EPCRS (still pending), followed by submission to EBSA of the EPCRS compliance statement and proof of payment of any required payments.
    • Settlor Expenses – Violations involving use of plan assets to pay certain expenses that should have been paid by the plan sponsor may be corrected under the VFC Program. Correction requires restoration of the principal amount plus the greater of lost earnings or restoration of profits.
  • Program Calculations – Multiple Recovery Dates – Corrections involving multiple transactions with different time periods may be corrected by performing the necessary calculations in steps using different recovery dates, using either the Online Calculator or a manual calculation.
  • Correction Methodology – Cash Settlement – A plan will be permitted to retain an asset purchased from a party in interest, settling the correction amount in cash, provided an independent fiduciary determines that the plan will realize a greater benefit from the cash settlement than through resale of the asset.

April 7, 2006

3-Day Limit Removed for Interest-Free Loans to Plans

Filed under: DOL, PTEs — Fuguerre @ 6:36 am

The Department of Labor has revised PTE 1980-26 to remove its 3-day limit on interest-free loans to employee benefit plans from a disqualified person or party in interest, such as an employer or union sponsor. [71 FR 17917] The class exemption, intended to permit the plan to deal with liquidity problems for ordinary operating expenses or purposes incidental to the ordinary operation of the plan, provides relief from prohibited transaction restrictions of ERISA §406 and related taxes under IRC §4975.

Under the amended PTE, an interest-free loan may be made to a plan for a period extending beyond 3 days, provided the remaining conditions of PTE 1980-26 are met. Loans made on or after 12/15/04 involving a purpose incidental to the ordinary operation of the plan must be made pursuant to a written loan agreement containing all of the loan's material terms if the term of the loan extends 60 days or more. For loans involving the payment of the plan's ordinary operating expenses, the written loan agreement requirement for loans extending 60 days or more applies prospectively for loans made on or after 4/7/06.

PTE 1980-26 has also been clarified to preclude relief for a loan to an ESOP to the extent that the loan relates to the ESOP's acquisition of employer securities.

February 22, 2006

2006 Saver Summit to Feature Cheney

Filed under: DOL, Retirement Policy — Fuguerre @ 7:27 am

The 2006 National Summit on Retirement Savings, “Saving for Your Golden Years: Trends, Challenges and Opportunities,” will bring a bevy of dignitaries to the podium that will feature keynote speaker Vice President Dick Cheney. Breakout groups will examine low income workers, small business employees, new entrants to the workforce, and workers nearing retirement. [News Release 06-326-NAT; 71 FR 9155]

February 3, 2006

DOL Investigating Potential Conflicts of Interest in Pension Consulting

Filed under: DOL — Fuguerre @ 2:35 pm

“I urge the Department of Labor to move swiftly to investigate and remove pension consultants who are jeopardizing workers’ retirement security through conflicts of interest, kickbacks, and self-interested fees,” Rep. Miller said.

The Department of Labor is investigating potential conflicts of interest in pension consulting, according to correspondence from the agency to Reps. Ed Markey and George Miller. [DOL Correspondence, Ann Combs, 2/1/06; Announcement on Rep. Markey’s Website, 2/3/06] DOL is also reviewing existing regulations relating to disclosure of fees by service providers to employee benefit plans, including those under revenue sharing arrangements.

At the same time, the DOL correspondence appeared to exercise a fair degree of effort to carefully limit the scope of its oversight exclusively to ERISA fiduciaries or parties in interest. Moreover, the DOL seemed to dodge a related request from the representatives to take action in the disputes surrounding pension plans that had been sponsored by United Airlines.

Behind the exchange between the representatives and the Labor Department is an on-going SEC staff investigation into potential conflicts of interest in pension consulting. [Staff Report Concerning Examinations of Select Pension Consultants, 5/16/05; Conflicts of Interest in Pension Consulting: An Update on the SEC’s Examinations, Lori Richards, 12/5/05] See Grenier’s Benefitsblog (1/23/06) for further reading on the issue.

January 22, 2006

Independent Financial Advice Can Bring Fiduciary Obligations

Filed under: DOL, Investment — Fuguerre @ 2:03 pm

Investment advice and asset management services provided by independent financial planners or advisors directly to participants of a participant-directed individual account plan are subject to ERISA fiduciary standards. However, other fiduciaries of the plan are not liable as fiduciaries for either the selection of the investment advisor or investment manager, nor for the results of decisions made by those other fiduciaries. [Advisory Opinion 2005-23A, 12/7/05] Thus, the established plan fiduciaries do not lose protection against liability under ERISA 404(c) for participant-directed accounts by making independent external investment advice and investment management available to participants, although those external advisors and managers themselves would be liable for any fiduciary violations arising from their own actions.

Also discussed in the same DOL advisory opinion –

  • A recomendation to a participant to roll over an account balance to an individual retirement account (IRA) in order to take advantage of investement options that are not available under the plan does not constitue investment advice as defined for purposes of ERISA. However, a plan officer or fiduciary who responds to plan participant queries about distributions or investment of withdrawn amounts is exercising discretionary authority in plan management, and must act prudently and solely in the interest of the participant. Moreover, if withdrawn plan assets are invested in an IRA managed by the fiducary who has given advice to the participant, then the fiduciary may be using plan assets in self-interst in violation of ERISA 406(b)(1).
  • An advisor who earns management or other investment fees with respect to an IRA is not engaging in a prohibited transaction by recommending that a participant withdraw plan assets to invest in the IRA, provided the advisor is not otherwise a plan fiduciary. However, as indicated above, such advice given by a plan fiduciary would be subject to ERISA’s fiduciary standards.

January 21, 2006

Divisions of Insurer’s Separate Account Are ERISA Separate Accounts

Filed under: DOL, Investment — Fuguerre @ 8:37 am

Realized and unrealized gains and losses attributable to each Division of an insurer’s pooled separate account are credited or charged to the assets invested within that Division, each of which has its own different investment objective or style. Accordingly, each Division is considered a “separate account” as defined by ERISA section 3(17), according to the Employee Benefits Security Administration. [Advisory Opinion 2005-22A, 12/7/05]

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