1. Perceived pressure – for example, financial difficulties at home, financial difficulties at the company, goals to make  certain earnings figures, etc.
2. Rationalization – for example, I’ll pay back the company once I can, I’m not being paid for the perceived value I provide, etc.
3. Perceived opportunity – weak internal controls, no management oversight or segregation of duties, etc.

• Commit to incorporating a 403(b) plan into the organization’s retirement plan objective; 
• Determine how the new plan correlates with the existing retirement program; 
• Develop a strategy to create a single 403(b) plan; 
• Develop a request for proposals to find the most suitable vendor to support your overall objective; and 
• Create a coordinated communication plan to bring the 403(b) into the overall organizational retirement objective. 

Consider creating a “combined” retirement benefit statement incorporating your former retirement plan and the new ERISA 403(b) savings plan. This will offer participants complete information about the prior plan as well as the one taking its place. Additionally, do not overlook significant compliance issues when moving from a non-ERISA plan to an ERISA plan:

• Adopt a new plan document (a plan document is already required under current regulations, even for a non-ERISA plan); 
• Understand and plan for an annual audit if the organization has more than 100 employees—this can be coordinated with audits for the current retirement plan; 
• File an annual return (Form 5500)—this can also be coordinated with existing filings; and 
• Create a process for fiduciary management and oversight. 

The borrowing rates may be good—1% to 2% above the prime rate—but even though you’re paying the loan back and replenishing your 401(k), you’re losing out on earnings. How much will a loan cost you in the long run? A $10,000 loan paid back over five years could mean you’re forgoing more than $3,500 in potential earnings, TIAA-CREF calculates. That’s assuming the borrower is 40 years old, with 25 years left until retirement, and that it’s a five-year loan with 6% loan interest; and that there would have been an 8% return on funds over the next 25 years if the loan had not been taken.

Here are 5 warnings if you’re considering a workplace retirement plan loan.

Calculate the cost of a loan. Before you take a loan, run this TIAA-CREF calculator to see how much it will cost you in retirement security. You can borrow up to $50,000 of your vested balance or 50% of it, whichever is less. Typically you have to pay back the loan within five years. If you don’t pay it back, it’s considered a distribution and you’ll owe income tax and the 10% early withdrawal penalty if you’re under 59 and a half.

Don’t become a serial borrower. Nearly one-third (29%) of employees with workplace retirement plans have taken loans from their retirement plan, and of those who took out a loan, 43% have taken out two or more loans. Nearly half (47%) of those who took out a loan borrowed more than 20% of their savings, and 9% borrowed more than half of their savings, the TIAA-CREF survey found.

Keep up regular contributions. If you do take out a retirement plan loan, it’s important to make new contributions to your plan while you’re paying back the loan. In the survey, 48% of women kept the same contribution rate while paying back the loan, compared to only 39% of men. Millennials (81% of them) were the most likely to decrease their contribution amount during the payback period.

Retirement nest egg v. summer vacation. While the majority of those surveyed took out loans to pay off debt or for emergencies, some employees are raiding their retirement accounts for reasons like home renovations. Even more troubling: 15% of those surveyed said they took out loans to pay for special events like a wedding or family vacation.

Research other options. Before you tap into your retirement account, consider other options depending on your needs: student loans, a home equity line of credit (HELOC) for home renovations, a loan or withdrawal from a permanent life insurance policy. If you have a Roth IRA, you can withdraw your original contributions at any age, free of federal taxes and penalties (but you can’t put the money you take out back in).

Source: Forbes.com

While those employers sponsoring volume submitter or prototype plan documents previously were entitled and encouraged to secure individual determination letters by filing a Form 5307 Application for Determination, that option has been all but eliminated. This is based on changes which, though announced by the IRS late in 2011, did not have widespread impact until this new restatement period. 

Adopters of prototype plans must rely upon the opinion letters issued to the underlying prototype plan sponsors and may not seek an individual determination letter. Adopters of volume submitter plans may seek an individual determination letter but only if changes have been made to the pre-approved language. There is a catch, however, in that if the changes are deemed to more than minor, the plan will be considered to be an individually designed plan (subject to the five-year remedial amendment cycle) and will not be eligible for the extended reliance afforded to pre-approved plans. 

We will be contacting all of our clients for whom we prepare plan documents over the course of the coming months to initiate the restatement process. While, for many plan sponsors, the restatement will serve solely to update the language for compliance purposes, it provides the perfect opportunity to revisit the plan design and make any elective changes that may be desired.

Source: Foxrothschild.com 

In spite of how effective auto features are, many sponsors are still holding back from adopting them due to misconceptions. Below are seven common misconceptions plan sponsors have about retirement plan auto features.

Misconception 1: Our employees will resent the perceived loss of control over more of their paycheck.
The concern about upsetting your employees is the most common objection to adding auto features to a retirement plan. But according to a Harris Poll® conducted in 2007, 98% of those currently automatically enrolled agreed with the statement, “You are glad your company offers automatic enrollment.” And in the same poll, 79% of those who opted out of automatic enrollment still agreed with the above statement.

Misconception 2: If too many new participants join the plan, the match will become too expensive.

Adding auto features to your plan may not be as expensive as you think. Most of your higher paid employees are already in the plan and contributing aggressively, so it’s mostly the lower-paid employees who will be auto-enrolled. As a result, the match will be based on percentages of those lower salaries only. Plus, if you start auto features just with new hires, the additional matches will be added gradually over time without causing too much of a shock to your budget.

Misconception 3: If we make everything automatic, employees won’t take responsibility for their own retirement planning.

Most workers want to start saving for retirement, but sometimes need a little help to overcome their own behavioral inertia . By adding auto features, you’re not taking responsibility away from your employees, you’re helping them to start moving in the direction they already want to go. According to the same Harris Poll® referenced earlier, 85% of workers said automatic enrollment helped them start saving earlier than they would have otherwise.

Misconception 4: The extra work and expense to our company doesn’t help our bottom line.

Auto features can actually help make your company more profitable, especially when we consider turnover. Turnover is very expensive, particularly when it involves key executives.

One of the benefits executives appreciate most is the ability to contribute as much as possible to a tax-advantaged retirement plan. Unfortunately, they are often frustrated and irritated by having contributions returned to them at the end of the year because not enough non-highly-compensated workers are participating. Auto enrollment can increase the participation rate of low-to-moderate income employees from 20% up to 80%.

More participation from your rank and file employees means higher limits on contributions for your key executives – just another reason for them to stay with you and not look for greener pastures elsewhere.

Misconception 5: It will be a nightmare trying to administer all these new small accounts when employees leave the company.

The Department of Labor recognizes that keeping track of all your previous employees and administering the accounts created for them through auto-enrollment would be very labor intensive. That’s why the regulations released in 2004 allow automatic distributions and rollovers. If an account balance is under $1,000, the account can be automatically cashed out and the funds sent to the participant. If the balance is between $1,000 and $5,000, the money can be automatically rolled over to a default IRA custodian.

Misconception 6: Establishing a default investment for new auto-enrolled accounts increases our fiduciary liability.

Increased risk of fiduciary liability was a legitimate concern in the past, but not since the enacting of the Pension Protection Act of 2006 (PPA). The PPA says participants “will be deemed to have exercised control over assets in his or her account if, in the absence of investment directions from the participant, the plan invests in a qualified default investment alternative.”

As long as the default investment passes certain qualifying conditions, the liability for the choice of that investment remains with the participant, not the plan sponsor.

Misconception 7: Automatically enrolling employees won’t really have much impact on their retirement readiness.

It’s true that saving 1% toward retirement won’t have much of an impact on a person’s future retirement income, so why not start at a higher rate instead and add automatic annual increases? A recent study by The Principal shows that only 4% more employees opt out of auto-enrollment if the starting deferral rate is 6% instead of 3%9. Plus, if an employer match is included, nearly twice as many participants (61% as opposed to 32%) reach an overall savings rate of 11% or more.

It’s clear that employees overwhelmingly support both automatic enrollment and automatic escalation, and as a result companies are increasingly adding these features to their plans. Automatic features are a simple, cost-effective way to improve employee satisfaction, and adding these features to your retirement plan can make it easier for you to retain highly paid key executives by ensuring they can take full advantage of their tax-favored retirement contributions.

For more information about how automatic features might benefit your company or to add these features to your plan, please contact Pension Consultants at 417-889-4918.

Source: Pension-Consultants.com

This makes it well worth it for plan sponsors to understand and have internal controls. The concept is very familiar to the accounting profession, but not so much to the rest of us.  In general, internal controls refer to procedures that affect a plan’s operations, compliance with regulations and financial reporting.

The benefit to the plan and the plan sponsor of having internal controls are many.

They include:

• A less intensive IRS examination
• A more effectively run plan
• A system to detect problems earlier and correct them under generally forgiving IRS correction programs.

Accountants focus on five key areas (and so will the IRS) to determine whether those in charge of a plan have appropriate controls in place:

1. The Control Environment: This is essentially about the plan sponsor’s attitude, philosophy, integrity, commitment to competence, ethics, and the assignment or delegation of authority.
2. Risk Assessment Once: the agent understands the control environment, he or she will assess where the risks are and where to put his or her examination focus. Possible risk indicators are manual data entry, changes in personnel, installation of new information systems and other stressors such as corporate acquisitions and other events.
3. Information and Communication Systems: The agent will look at how information is recorded, processed and reported, how errors are corrected and the communication of that information among the various individuals who have responsibility for internal controls. Communication between those responsible for the overall governance of the plan and those responsible for its direct administration will be especially important.
4. Control Activities: This examination includes whether there policies and procedures in place, how transactions are authorized, frequency of checks and reviews of work, the safeguarding of assets, the reconciliation of individual participant accounts, and the verification of data.
5. Monitoring: The agent will want to know about the quality of the plan’s monitoring process. For example, what are its sources of its information and what is the basis for determining the reliability of information and data.

This is not your grandfather’s IRS plan examination.  Expect he IRS to thoroughly probe plans whose control structures are weak.

Source: Fiduciaryplangovernance.com

The newest offering of fiduciary duty under Section 3(16) of the Employee Retirement Income Security Act of 1974 includes a variety of tasks: choosing, evaluating and monitoring trustees, service providers, investments and the investment adviser to the plan. They also include evaluating the plan's fees and delegating responsibilities to other fiduciaries.

The 3(16) plan administrator fiduciary holds the keys to the retirement plan's day-to-day operation: He or she is responsible for timely reporting and disclosure of participant fees and Form 5500. This person also handles distributions of benefits and administers plan loans and qualified domestic relation orders.

This latest service offering is popping up in an era when plan sponsors have a heightened awareness of their fiduciary responsibilities and are looking to offload some of them so that they can get back to the day-to-day work of running their business. Plan sponsors already can work with certain financial advisers and investment management firms either to share fiduciary duty under Section 3(21) of ERISA or to hand over the investment management duties under Section 3(38).

“Over the last decade or so, plan sponsors have become more aware of the fiduciary liability and responsibilities, so we've seen more services where plan sponsors can outsource fiduciary responsibility to an entity who will monitor the investments or assist in choosing them,” said Rebecca Kaplan, fiduciary compliance consultant at The Angell Pension Group, a third-party administrator.

That interest has heated up.

“In the last 18 months, we've seen a significant increase in activity,” noted Jeff M. Atwell, senior vice president and manager of the trust retirement division at American National Bank of Texas, which provides fiduciary plan administrator services. “Plan sponsors are becoming more informed about their responsibilities, and this is falling in line with what they're doing to comply with other regulatory issues a business owner has to deal with today.”

But there are potential traps for plan sponsors when it comes to relying heavily on outsourcing those duties.

“When plan sponsors use these services, they start to believe they have no continued responsibility to choosing investments, which of course is a fallacy,” Ms. Kaplan said last month at the National Association of Plan Advisors 401(k) Summit in New Orleans.

And not all 3(16) fiduciary services are built equally.

Fiduciary “lite” for 3(16) includes taking transactional burdens off of the plan sponsor and acting as the quarterback. This means overseeing distributions, loans and any other activity that will alleviate the pressure on the employer's office manager, according to C. Frederick Reish, a partner at Drinker Biddle & Reath's employee benefits and executive compensation practice group.

Full-scope 3(16) fiduciary services include decision making, rather than merely lightening the administrative load — for instance, determining whether a domestic relation order is qualified. They also may ensure that elective deferrals are made in a timely manner and ensure that the plan retains its tax-qualified status with the IRS.

“Read the fine print,” Mr. Reish said, referring to the services outlined by a provider of these services. “If they're a 3(16) for less than seven or eight things, then they're 3(16) 'lite,'” he added. “3(16) for everything else would include a robust list of 20 to 30 duties.”

So far, the realm of 3(16) is looking more like the domain for third-party administrators, rather than financial advisers. But advisers working with retirement plans play a key role in screening potential candidates for these outsourced services.

“They can help with the oversight: What experience and expertise does the firm have? Do they know ERISA? What's their privacy policy?” noted Joe Frustaglio, vice president of private sector retirement plan sales for Nationwide Financial.

Other issues for the plan sponsor and adviser to ponder: What kind of insurance coverage does the 3(16) service provider have? Does the provider have a fidelity bond per Labor Department rules that insures 10% of plan assets up to a maximum of $500,000 or $1 million if there's company stock?

Bear in mind that this fidelity bond only covers theft of plan assets and nothing else — it's separate from fiduciary insurance that covers breach of fiduciary duty, said Gary Sutherland, chief executive of the North American Professional Liability Insurance Agency. TPAs may also assume that errors-and-omissions coverage will include the 3(16) services they provide, but most of these policies will exclude coverage pertaining to being a named fiduciary in a retirement plan.

The biggest lesson for advisers and plan sponsors: Outsourcing 3(16) duties or other fiduciary tasks don't let the plan sponsor off the hook if the provider of those fiduciary services misbehaves. There is no such thing as completely outsourcing fiduciary liability, and plan sponsors still have the responsibility of choosing and monitoring their service providers.

“The best thing for advisers to understand is that it's a fiduciary decision to choose that 3(16) provider and to monitor them,” said Ms. Kaplan. “They need to help the plan sponsor understand the responsibilities so that when they choose a 3(16) service provider, the employer knows which duties they've delegated and which duties they will continue to have.”

Source: Investmentnews.com

In the past few months, FINRA has discussed rollover IRAs in five publications. The most important of those being Regulatory Notice 13-45, which creates a fiduciary-like process for recommendations about distributions and IRA rollovers. (By the way, I believe FINRA’s Investor Alert on rollovers is helpful and should be given to prospective rollover customers.) Then, to put an exclamation point on that guidance, both FINRA and the SEC listed rollovers to IRAs as one of its 2014 Examination Priorities for broker-dealers.

Finally, it is commonly expected that the DOL will issue its proposed regulation on the definition later this year…and that the proposal will expand its prior guidance on “capturing” rollovers. Fiduciary status alone increases the scope of the DOL’s jurisdiction and implicates it’s prior guidance (see Advisory Opinion 2005-23A). As a result, a broader definition of fiduciary advice will subject more advisers and providers to that guidance. In addition, it is possible that the Department will try to label any recommendation to take distribution as fiduciary advice (by saying, e.g., that a recommendation to take a distribution is inherently also a recommendation to liquidate a participant’s 401(k) investments – similar to what FINRA has done).

To make this even more “interesting,” we are seeing SEC examinations of RIAs where the SEC is finding ERISA prohibited transactions and asserting compliance violations by RIAs. The question is, will that theme carry over into IRA rollovers?

These changes impact broker-dealers, RIAs and their representatives. Less obviously, they also impact the rollover services of recordkeepers.

Bottom line… the rules are changing. Much more attention must be given to practices and disclosures in the distribution and rollover process.

Source: fredreish.com

More significant, LIMRA says, is the fact that about two-thirds of those ages 55 to 75 with these orphan accounts had DC plan balances of $100,000 or more. That’s potentially problematic because traditional glide path strategies urge workers in this age range to take action to ramp down equity exposures to protect from market declines that could diminish assets needed in the near future—something that presumably doesn’t happen in most orphan accounts.

For plan sponsors and advisers, orphan accounts can add to the complexity of managing assets and may damage overall plan outcomes by failing to account for participants’ current age and financial situation in setting investment strategies, LIMRA explains.

The firm’s research shows men and women of all ages are equally likely to have a DC plan balance with a former employer (41% vs. 40%). The study finds Americans with household assets of at least $500,000 are more likely to have an orphan account (44%) than those with less than $500,000 (38%).   

Taking those facts into account, LIMRA urges advisers to develop a comprehensive written plan for managing all assets a worker has accumulated—including those dollars in retirement accounts at a former employer. Prior LIMRA research shows that pre-retirees and retirees are more confident in their retirement security when they have a written retirement plan in place and are more likely to take action on setting age-appropriate asset allocations.

In addition, LIMRA says advisers should help their clients account for all of their assets to ensure retirement portfolios are well-designed and invested based on a total picture of an individual’s financial needs and resources.

Further information on LIMRA is available here.

Source: PlanAdviser.com

The report, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012,” found that, at year-end 2012, 41% of 401(k) participants held target date funds, an increase from 39% in 2011 and 19% in 2006. In addition, 15% of the assets in the EBRI/ICI 401(k) database were invested in target date funds at year-end 2012, up from 13% in 2011 and 5% in 2006. The 2012 EBRI/ICI database includes statistical information on 24 million 401(k) plan participants, in 64,619 plans, holding $1.536 trillion in assets, covering nearly half of the universe of 401(k) participants.

Equity Investments
The report found that, at year-end 2012, 61% of 401(k) plan participants’ accounts were invested in equities—through equity funds, the equity portion of target date funds, the equity portion of non–target date balanced funds, and company stock.

Younger 401(k) plan participants had higher concentrations in equities compared with older participants. Participants in their sixties had less than half of their 401(k) assets invested in equities. “Fears that retirement savers would abandon equities in the wake of the financial crisis have not been borne out by the data,” said Sarah Holden, ICI senior director of retirement and investor research. “And, target date funds are playing an important role for 401(k) investors, particularly for younger participants, by maintaining age-appropriate concentrations in equities.”

Target date fund use varies across 401(k) participant age, the report found. Younger participants are more likely to hold target date funds and target date funds represent a much larger share of their 401(k) assets. At year-end 2012, 52% of 401(k) plan participants in their twenties had target date funds, and those funds made up 34% of their 401(k) assets. “More new or recent hires invested their 401(k) assets in balanced funds, including target date funds,” notes Jack VanDerhei, EBRI research director. “At year-end 2012, nearly 54% of the account balances of recently hired participants in their twenties was invested in balanced funds, compared with about 7% in 1998. A significant subset of that balanced fund category is invested in target date funds.”

The report notes that, at year-end 2012, 43% of the account balances of recently hired participants in their twenties were invested in target date funds, compared with 40% at year-end 2011.

401(k) Loan Activity
The ICI/EBRI report shows at year-end 2012 that 21% of all 401(k) participants who were eligible for loans had loans outstanding against their 401(k) accounts, unchanged from the prior three years (2009−2011), although slightly elevated compared to the period prior to the financial crisis (2006−2008).

Average 401(k) Account Balance
The average 401(k) participant account balance at year-end 2012, was $63,929 and the median account balance was $17,630, with wide variation reflecting the many variables in retirement saving, including participant age, tenure, salary, contribution behavior, rollovers from other plans, asset allocation, withdrawals, loan activity, and employer contribution rates.

The report found that older participants and those with longer tenure tend to have higher 401(k) balances at their current employers. For example, at year-end 2012, the average account balance among 401(k) plan participants in their sixties with more than 30 years of tenure was $224,287.

Source: Wolterskluwerlb.com

Click here to view the full image.

Source: Bloomberg

The talk of same-sex marriage becoming legal in the land of Lincoln makes Illinois the 15th or 16th state to allow for marriage equality. There is some degree of confusion over whether Illinois is the 15th or 16th state to get on this bandwagon because of the Rainbow State of Hawaii taking steps towards marriage equality at the same time as the state of Illinois.

Other talk on the subject of same-sex marriage involves the Supreme Court’s ruling on June 26, 2013 to strike down Section 3 of the Defense of Marriage Act (DOMA) as being ‘unconstitutional.’ This ruling made it clear that federal law cannot ban couples in same-sex marriages from receiving the same economic, tax, and employee ‘benefits’ as other legally married couples.

The Far Reaching Impact of this DOMA Ruling

How are businesses affected by this Federal DOMA ruling?

An employer does not have to have their business entity located in a state that permits same-sex marriage to be impacted by this Federal DOMA ruling. Nor can a retirement plan service provider in any state ignore this Federal DOMA ruling in their business operations.

Basically, any same-sex couple that went through the legal marriage process in one of the United States where they can be wedded would be able to claim marital status on any retirement plan paperwork (no matter where they currently reside), in the same manner as straight couples in traditional marriages.

What areas of retirement plan practice are impacted by this Federal DOMA ruling?

This Federal DOMA ruling has an impact on plan distributions, participant loans, beneficiary designations, QDROs, QJSA and QPSA rights, and the ‘attribution rules’ to determine business ownership; that can impact Highly Compensated Employee (HCE) and Key Employee status in plan compliance testing. In other words, there are certain rules and responsibilities that come with "equal rights.

Do we have to wait for changes in IRS or DOL regulations before changes occur in retirement plan practices?

No. In most retirement plan documents, ‘spouse’ is not specifically defined. Nor do most plan documents typically include language about the ‘Defense of Marriage Act (DOMA)’ blocking marital rights for people in same-sex marriages. This means we would not even have to amend the Plan documents (in most cases) to redefine the meaning of marriage.

Do we need to ask for additional documentation as evidence of same-sex couples being legally married?

No. Historically, we have trusted the marital status information provided by plan participants and that same level of trust should be extended to same-sex couples.

Are same-sex couples with domestic partner status covered under this expanded definition of "marriage?”

No, same-sex couples who may have previously filed paperwork to become domestic partners would have to get legally married in a State where it is permissible to go through the legal marriage process. Likewise for straight people who are currently registered as domestic partners. For those who think domestic partnerships are only a gay thing, in San Francisco, CA, there have been domestic partner filings by both gay and straight couples (for quite some time now).

The Supreme Court’s ruling to strike down Section 3 of the Defense of Marriage Act (DOMA) as being ‘unconstitutional’ has a definite impact on all types of retirement plan distributions:

• QDROs can be filed by same-sex spouses and there can be retroactive marriage benefits if/when the date of marriage precedes the date of the Supreme Court’s DOMA ruling.
• QDROs for spousal alternate payees provide for the option to rollover QDRO benefits to an IRA or to another qualified plan, to defer taxation.
• Required Minimum Distribution (RMD) calculations under IRC §401(a)(9) provide for a joint-life exception to the general single-life annuity rule. In order to utilize this joint-life exception for married participants, the spouse must be the sole beneficiary, and there must be a more than 10-year difference between the participant’s age and the age of the spouse.
• Spousal advantages relating to the required minimum distribution rules that apply in the event of a participant’s death before the participant would have been age 70-1/2. This can be advantageous for spousal beneficiaries when the timing of a deceased participant’s attainment of age 70-1/2 would have surpassed the timing of the start date for the 1-year life expectancy rule and/or the end date for the 5-year lump sum rule (pursuant to the regulations under §401(a)(9)).
• Safe harbor hardship conditions permit withdrawals to pay hardship expenses of certain family members, including spouses. This logic applies to medical expenses, educational expenses, and funeral expenses of a spouse.
• Severance distributions from plans with QJSA provisions require ‘spousal consent’ when the total vested benefit amount exceeds the QJSA threshold defined in the Plan document.
• By law, the QJSA threshold is intended to apply to vested benefits totaling to more than $5,000 (and this QJSA threshold has not changed in recent years). However, there was a certain degree of confusion when the automatic rollover regulations changed the cash out threshold from being applicable to distributions of vested benefits totaling o $5,000, or less down to $1,000, or less. Therefore, I have heard that a few plan document sponsors decided to offer an option to provide for a more liberal threshold for the QJSA provisions to apply to vested benefits totaling to more than $1,000.
• Spousal consent rights are now extended to same-sex spouses for Qualified Joint & Survivor (QJSA) benefits and Qualified Pre-Retirement Survivor Annuity (QPSA) benefits.
• While the aging of America has already increased the number of death benefit payments to plan participant’s beneficiaries in recent years, it is important to understand that the processing of death benefit distributions should not be taken lightly or thought of as ‘easy’ because there can actually be lawsuits against the plan and the plan sponsor if death benefits are paid out to the ‘wrong’ beneficiaries.

There are several layers of rules that can affect the question of "who is the plan participant’s beneficiary?"

1. Default beneficiary provisions are found in every plan document, to be relied upon if there is no beneficiary designation at the time of a participant’s death. First rights are usually granted to the participant’s spouse, then children. These default beneficiary rights are now extended to same-sex spouses. This impacts death benefit entitlements in retirement plans and shifts the status of same-sex spouses to be considered as having a spousal beneficiary’s rights to plan benefits in the event of the death of their participant spouse.
2. Same-sex spouses are no longer considered as non-spouse beneficiaries who were previously treated under the inherited IRA rules in the event of the death of their same-sex spouses – to be considered instead as spousal beneficiaries with spousal privileges that permit rollover IRAs to be established in their own names with death benefit proceeds.
3. Even when there is a properly executed Beneficiary Designation form that does not always guarantee that you can rely on it to settle the question of who is the right beneficiary. For example, if the employer or any of its employees has knowledge of a participant being ‘married,’ say for health insurance purposes, then even an innocent enough Beneficiary Designation of the participant’s children could violate the spousal rights under a plan with QJSA provisions or a plan adhering to the conditions for a QJSA exemption. In other words, this Beneficiary Designation may not be legitimate unless the ‘spouse’ had consented (with a witness by a notary public or plan representative) to the Beneficiary Designation naming children of the participant as the primary beneficiary. In fact, there are some Plan documents that say that marriage or divorce nullifies a previous beneficiary designation made by the plan participant.
4. There are ‘spousal rights’ to a married participant’s vested death benefits that can only be eliminated if there is an alternative Beneficiary Designation form with spousal consent (in writing, signed by the participant’s spouse with a witness endorsement by a notary public or a plan representative). Do you know what percentage of plan benefits are affected by spousal death benefit rights.

1. In a DC Plan without QJSA provisions, it is a requirement of the QJSA exemption to ensure that spousal beneficiaries have first rights to 100% of the participant’s death benefit proceeds – unless there is an alternative beneficiary designation form with spousal consent (in writing, signed by the participant’s spouse with a witness endorsement by a notary public or a plan representative).
2. In a plan with QJSA provisions, the percentage of the spousal beneficiary’s death benefit entitlement depends upon the QJSA percentage specified in the plan. The ‘standard QJSA’ required by law is a 50% QJSA. This means that a participant in a 50% QJSA plan does not need spousal consent to make a beneficiary designation that provides for the Primary beneficiary to be the Spouse @ 50%, providing the other 50% to Children or another party. However, spousal consent would be needed to take away the spousal rights to the first 50% of death benefit proceeds.
3. There are a few QJSA plans that provide for a more generous QJSA than the 50% QJSA required by law. This can result in spousal beneficiaries having first rights to a greater death benefit percentage than 50%. The QJSA percentages that might otherwise apply include: 66-2/3%, 75%, or 100%.
4.  Does the Qualified Optional Survivor Annuity (QOSA) percentage impact the determination of spousal beneficiary rights? No. The QOSA rules were not intended to up the stakes on the standard 50% QJSA percentage. Rather, the QOSA rules were meant to provide another optional form of benefit and expand the list of distribution options offered at the time of a participant’s benefit distribution.

In a sense, the easiest death benefit to process is one where the plan participant is married and there is a recent Beneficiary Designation form that shows the Spouse as the 100% beneficiary of the entire death benefit.
Why would this scenario be considered more straightforward than other beneficiary arrangements?

1. There are no potential conflicts with rules for spousal rights to death benefits when a married participant names their spouse as the exclusive beneficiary of their death benefit proceeds.
2. There are no potential conflicts with rules for default beneficiary provisions when a married participant names their spouse as the exclusive beneficiary of their death benefit proceeds.
3. The plan fiduciaries should not be worried about acting on the validity of the Beneficiary Designation naming the spouse as 100% beneficiary.
   
   Practice Tip: Now is a good time to encourage employers to get updated beneficiary designation forms signed by all plan participants since marital status may have changed for a number of plan participants, either due to weddings or due to divorces. Also, children or grandchildren may be added to a beneficiary designation.

Timing of this legislative change

While practitioners and retirement plan sponsors must think in terms of June 13, 2013 forward for working with employers to change employee communications and messaging about marital status, there are actually retroactive implications that could affect some same-sex spouses. This potential for a retroactive impact is due to the fact that Section 3 of DOMA was declared ‘unconstitutional,’ not just as of June 13, 2013, but for all time.

The fact that same-sex marriage are being rolled out on a state by state basis means that these marriages could have taken place further back in time in some states. Of the 15 or 16 states adopting marriage equality, the first of these State-law changes were made on May 17, 2004, when the state of Massachusetts legalized gay marriage.

Therefore, the ‘unconstitutional’ declaration made by the Supreme Court against ‘benefits inequality’ means that gay couples who were legally married between May 17, 2004 and the June 13, 2013 date of the Supreme Court’s DOMA ruling could make retroactive claims for marital benefits.

As background, the trial court found that the ABB plan committee violated several of its fiduciary duties. One of those was the duty to follow the terms of the IPS. In the IPS, the committee was obligated to follow certain procedures concerning the removal and replacement of a fund, including placing a fund on the watch list before removing it. The court found that the committee failed to follow the procedures in its IPS and, as a result, breached its fiduciary duties. That was unfortunate, since the committee could have amended the IPS to change the procedure. However, it failed to do so... perhaps because the committee had forgotten the terms of the IPS or perhaps because it believed its exercise of discretion would override the terms of the IPS.

So, is the IPS a friend or an enemy of plan committees? The answer is, depending on how it is done, it can be either.

Unfortunately, we see too many IPS’ that contain absolute and/or unnecessarily restrictive provisions. Those provisions can mandate a certain number of meetings, require a specified investment removal process, insist on a particular series of steps for some decisions, and so on. None of that is required by law… nor, in my opinion, by good judgment. Instead, an IPS should be a set of guidelines, and the plan committee members should be expected to exercise discretion and good judgment for the benefit of the participants.

Is there an alternative to the IPS being an "enemy?” Yes, of course.

If an IPS is properly drafted, it can serve as an educational tool for the committee and as a set of non-binding guidelines. In that way, the focus can be kept on the real job of the committee... to exercise its discretion. But the nonbinding guidelines in the IPS will be a helpful "map” for consistent and thoughtful decisions.

The moral to this story is that, if an IPS is going to be rigidly drafted as a series of requirements, then the committee should review the IPS before it acts and amend the IPS, if need be. On the other hand, and a better solution, the IPS could be better drafted. My experience is that, while the investment community is good at determining the criteria and other information to be included in an IPS, the investment community does not have the same risk management skills as attorneys. It is probably best if each does its "day job,” and the investment consultants focus on IPS’ as an investment tool, while the lawyers view them as risk management documents.

IMPORTANT NOTE: This case was heavily disputed and there may be disagreement about the facts. This article uses the facts as laid out in the court's opinion and, based on my experience in other cases, the actual facts can be different.

In 2012, the Department of Labor issued final regulations requiring the disclosure of fee and expense information to defined contribution plan participants and sponsors. The intent was to provide greater transparency and awareness to the costs of providing and participating in an employer-sponsored retirement plan. Across the retirement industry there is consensus that fee disclosure is important and government regulation was the most effective means of delivering widespread transparency. So where are we a year later?

Since July 2012, the LIMRA Secure Retirement Institute (SRI) has conducted a series of consumer surveys asking DC plan participants about their retirement plan fees. Our 2012 survey, conducted prior to the initial participant disclosure, showed that 50 percent of retirement plan participants do not know how much they pay in fees and expenses. One year later, a follow-up survey tells the same story. The disclosures have had little impact as there is no noticeable difference in participant knowledge of the fees they pay. Our 2013 findings show that half of participants do not currently know how much they pay in fees and expenses. Further, nearly 4 in 10 still believe that they do not pay any fees or expenses.

These findings do not diminish the fact that the fee disclosure requirements are good for an industry that historically lacked transparency. What the results tell us is that the disclosures must be accompanied by education and guidance. When asked about how much they pay in fees, only 12 percent of DC plan participants were able to estimate a percentage. Further demonstrating the minimal impact fee disclosures are having, one third of these participants believe they pay over 10 percent in total plan fees.

Previous SRI research found that one in five consumers contributing to DC plans or IRAs say they rarely or never read retirement plan disclosures. In fact, only 1 in 3 spends more than 5 minutes reading disclosures. This is not at result of inadequate disclosure but more a function of participants using fee information only when making investment changes or examining statements beyond a quick account balance check.

Despite confusion around fees, the industry has made considerable information available to participants for use in making investment and account management decisions. One year removed from the original disclosures, 64 percent of plan participants feel that the fees and expenses they pay are reasonable.

In reality, it will take time for the long-term impacts of fee disclosure regulations to emerge. Retirement plan service providers are making the effort, but participant inertia and industry complexities are making it difficult to initially see positive results.

So can the retirement industry continue to educate participants on how to save and what it costs to save? The foundation is now in place and the industry must help participants understand the role and value of their retirement plan benefit, including the fees they pay.

Source: LIMRA Secure Retirement Institute

Many DC plan participants are investors only because of their DC plan participation. That, coupled with the recent history of the markets and the effect of participants’ emotions on their investing behavior, makes managing volatility especially worthwhile for DC plans.

We’ve seen the S&P 500 Index rise some 10% higher than its previous peak in mid-2007—nearly 150% from the market bottom of early March 2009. But what most investors have felt are the jagged ups and downs over the past several years, not the overall upward movement. And what they fear most is a significant loss happening at a time when they can least afford it.

Today, there’s little confidence among American workers that they will attain a comfortable retirement. Although their confidence levels aren’t as bleak as they were in the midst of the financial crisis, two-thirds of workers that AllianceBernstein surveyed still doubt they’ll have a comfortable retirement.¹

It’s not surprising, then, that many retirement savers feel wary about investing in anything that poses more than modest risk. But with bond yields still so low, plan participants need the greater long-term growth potential of stocks to generate sufficient assets for a comfortable lifestyle in retirement.

That’s why DC plan sponsors have shown increasing interest in providing strategies to participants that help smooth the pattern of returns as they pursue long-term investment growth for their retirement savings.

There are a variety of methods and tools for managing volatility, but each generally seeks to reduce the risk associated with equity-related assets, in order to mitigate the likelihood of extreme losses and narrow the range of potential outcomes. Examples include dynamic asset allocation, hedge fund strategies, risk parity portfolios and tail hedge strategies, to name a few. The wide range of approaches makes tailoring solutions for different plans important, as what works for one plan may not be equally suitable for another plan.

To date, large plans have led the way with incorporating ways for participants to manage volatility, but the search has also picked up in midsized plans.

In our DC plan sponsor survey,² we specifically asked sponsors of plans with assets of less than $50 million their opinion about a hypothetical, enhanced risk-based asset-allocation (or lifestyle) portfolio. We told them that the strategy can aim to help mitigate the negative impact of extreme market volatility to participants’ balances by having a professional investment manager make adjustments to the portfolio’s asset allocation when certain market performance criteria are triggered. This type of investment would offer participants:

• the ability to select an investment option based on their personal tolerance for risk (conservative, moderate or aggressive) versus their age
• automatic asset-allocation adjustments by a professional investment manager in response to market conditions to help mitigate risk/loss
• competitive management fees.

The response was strong: 53% of sponsors from these plans found this enhanced risk-based strategy to be appealing or extremely appealing (only 8% of responses were not favorable). And 72% of these plan sponsors said they would consider adding such an option to their plans within the next three years.

Enhanced risk-based strategies are just one of many evolutions in DC plans today that are designed to help participants stick to their long-term savings strategies. In my next post, I’ll discuss what may be the best way to connect a large number of DC plan participants with the benefits of managing volatility.

¹AllianceBernstein’s web-based survey of more than 1,000 full-time employees, 18 years or older, who worked for companies that offered DC plans was conducted in February 2013.

²AllianceBernstein’s web-based survey of more than 1,000 DC plan sponsors was fielded in November 2011 and included a national sample providing balanced representation of plans ranging in size from less than $1 million to more than $500 million in plan assets.

Source: Alliancebernstein.com

Earlier this year, the DOL published "Target Date Retirement Funds — Tips for ERISA Plan Fiduciaries.” Here are a few key points:

• It is important that fiduciaries understand the asset allocations, glidepaths and expenses — and compare them to other TDFs. How many fiduciaries do that?
• In selecting a TDF suite, fiduciaries should consider their participant demographics and other factors, for example, participation in other plans (e.g., pension plans or ESOPs), salary levels, turnover rates, contribution rates and withdrawal patterns. In other words, there is no such thing as a "one-size-fits-all” TDF. How many fiduciaries do that?
• Plan sponsors are encouraged to consider "custom” TDFs. That would include managed accounts and asset allocation models. These vehicles have the advantage of being designed to consider the particular needs and demographics of the covered workforce.

The point of my questions is that there is a significant gap between what the DOL expects plan fiduciaries (e.g., plan committees) to do and what they are actually doing. As a general premise, these kinds of "gaps” are usually red flags, and those flags are signaling changes to plan sponsors.

Of course, the DOL says more than that — and explains it in more detail. This email is just an "appetizer.” Read the tips here.

1. Reasonable cost. Your plan doesn't have to be the lowest cost plan in your peer group, but it definitely shouldn't be the highest.
   
   
2. Participation – I’m in the plan! The best plans, as you might expect, typically have 80% to 90% of employees with account balances. 
   
   
3. Contributions – Not only am I in the plan, but I am contributing! Participation can also be measured based on the percentage of employees who are actually contributing. The best plans have a high percentage of employees making contributions (solidly in the 80% to 90% range) as well as a high percentage of employees who have account balances. 
   
   
4. New employees roll money into the plan, departing employees leave their balances. The best plans are the best for a reason. Many provide access to investment opportunities that just aren't available anywhere else. For example, a number of years ago I worked for a large life insurance company that offers a guaranteed rate fund in their 401(k) plan. Since the fund is subsidized by the company, it continues to pay over 6%, even in this low interest rate environment. What a deal!
   
   
5. Employees "get” the plan. The best 401(k) plans are well understood by their plan participants. If employees don’t understand the plan, they won’t contribute. 
   
   
6. The fund line-up has a home for everyone. I believe there are four types of retirement plan investors: the core funds investor who likes to be well-diversified over the entire fund line-up,  the index fund investor who wants to invest predominately or exclusively in index funds, the specialty investor who looks for unique investment opportunities in your plan to diversify his/her overall portfolio, and the accidental investor, who comprises the majority of your participants. If your retirement plan is attempting to serve a large number of employees (i.e., in the thousands) your investment menu needs to be broad enough for all of these investors to find a home.
   
   
7. Company leaders talk about the plan. All of the best plans, without exception, receive significant support from their company’s leadership team. These individuals not only talk about the plan at official corporate gatherings; they feature it as a recruiting and retention tool in their everyday conversations.

Contributing to a retirement plan is widely considered a no-brainer if the goal is to attain a meaningful retirement. But the decision on how to invest contributions within the plan can be daunting. Determining what type of contributions to make further complicates things. While tax-deferred contributions reduce taxable income in the year in which they are made, the taxes owed on those contributions as well as the investment earnings are deferred until a later time, possibly at retirement. Roth contributions don’t reduce current taxable income, but the tradeoff is no tax liability on the investment earnings when a distribution is taken (provided the individual is at least age 59½ and has held the account for at least five years).

The decision to contribute to a Roth 401(k) instead of deferring at a tax-deferred level is often based on an anticipation of changes to future tax rates. While this is a personal decision based on future income, several other factors should also be considered. The truth behind the decision is similar to other choices in life, more complicated than we’d like it. For example, the reduction in tax-deferred income can affect tax liability, possibly increasing refunds. If tax-deferred contributions increase a tax refund, how can the "newly found” money be taken advantage of? Depending on a person’s filing status, different advantages or disadvantages may exist.

None of us are fortune-tellers. It’s difficult to predict future income or tax brackets over a period of several years. It becomes even more complex when trying to anticipate things that are out of anyone’s control, such as politicians altering tax rates to address policy changes and deficits. Recent history underscores this fact with significant changes occurring at the top rate, ranging from 50% in 1982 to 38.5% in 1987, 28% in 1988, 31% in 1991, 39.6% in 1993, 35% in 2003, and settling at back at 39.6% starting in 2013 (with rates exceeding 90% at certain points in the last century). Accordingly, depending on when money is taken out of a retirement plan, the tax results can dramatically change over a period of years.

A diversified investment strategy has long been considered a way to optimize investment returns over time while reducing risk. A diversified tax strategy may be equally important. By utilizing tax-deferred and Roth savings options, tax liabilities may be mitigated, ultimately creating more flexibility to reduce individual tax burdens.

Source: Retirement Town Hall

As I review investment policy statements for participant-directed plans, I see a number of common deficiencies. This article is about one of those—the selection and monitoring of target date funds ("TDFs”).

In my experience, most IPS’ say little or nothing about the criteria to be applied to TDFs. For example, an IPS might be completely silent on the issue or may simply say that they will be selected and monitored. But, in neither case is there a robust set of criteria. That is problematic.

One reason is that TDFs are capturing an increasingly large percentage of 401(k) assets. As more plans automatically enroll, that percentage will continue to grow. I can imagine a day, in the not-so-distant future, where over half of the assets in 401(k) plans will be in TDFs. That leads to the unfortunate conclusion that, based on the current practices of many advisers and committees, over one-half of the assets in the plan will be in a suite of investments that has not been subjected to close scrutiny, while the other investments – that hold less than half of the assets -- will be subject to a rigorous evaluation process. That just doesn’t make sense. And, where a situation doesn’t make sense, it can lead to problems.

With that in mind, I recommend that you take a look at the evaluation criteria in DOL comments filed by the Investment Company Institute and the American Benefits Council. It is the most robust set of TDF criteria that I have seen. Click here to view the ABC/ICI comments.

The criteria in those comments set a much higher standard than the common practices of advisers and plan committees. However, I think those comments may suggest the future -- rather than reflecting the past.

For example, the comments suggest considering, among other things:

• The performance of each of the mutual funds inside the TDF,
• Appropriate benchmarks to evaluate TDF performance,
• Participant demographics, and
• Whether the plan sponsor also offers a pension plan.

Awareness of the basics of this investment philosophy and the ways it can affect returns is knowledge plan fiduciaries need to make investment decisions that best serve their plans’ objectives.

"Long-term fiduciaries should educate themselves on the fundamental arguments for and against [environmental, social and governance], and think critically about its meaning for the institutions they serve,” said a white paper titled "From SRI to ESG: The Changing World of Responsible Investing” the Commonfund Institute issued in September. The institute provides research and educational activities for an investment management firm that serves nonprofits, health-care organizations, educational endowments and foundations.

Terminology can sometimes get in the way of a clear understanding of this investment approach. There are three main categories of responsible investing, according to the report:

• Socially responsible investing, a portfolio construction process that attempts to avoid investments in certain stocks or industries through negative screening based on defined ethical guidelines;
• Impact investing, which involves investing in projects or companies with the express goal of effecting mission-related social or environmental change; and
• Environmental, social and governance investing, which involves integrating ESG factors into fundamental investment analysis to the extent that they are material to investment performance.

Common Concerns

Some common concerns for plans about responsible investing include the impact of ESG investing on performance, its interaction with fiduciary duty and potential liability and its application to different asset classes that may be offered to or held for participants. The Commonfund Institute report emphasizes a need for caution when discussing responsible investment alternatives with third-party fund managers: "Preliminary studies suggest that while integrating ESG issues into fundamental investment analysis procedures can improve investment performance, it is too early to draw comprehensive conclusions.”

The read the complete story on Thompson’s HR Compliance Expert, click here.

Source: Thompson.com.

Today it's frequently used as an inscription on clocks or artwork like the one pictured here.

But this being The Retirement Plan Blog, there is, of course, an ERISA connection. "Timing matters” is one theme that consistently runs throughout ERISA, and one of those matters is the October 1 deadline to set up a new Safe Harbor 401(k) plan.

Back in the day, calendar year taxpayers could wait until year end to set up a new plan. A plan document and an initial contribution to set up a trust account were the only requirements. The plan could be effective retroactive to January 1, and a tax deduction could be taken as long as the contribution was made before the tax return was due (including extension, e.g., September 15 of the following year).

This is not the case, however, for an employer wanting to set up a new Safe Harbor 401(k) plan. The Safe Harbor rules permit owners and other Highly Compensated Employees (HCEs) to maximize their contributions regardless of how much the Non-HCEs contribute.

Under 2013 tax rules, the maximum is $17,500 maximum plus an additional $5,500 for those over age 50, or a total of $23,000.

The Safe Harbor rules require that an employer make one of two types of contributions:

• 3% of compensation for all eligible employees, or
• Matching contribution of 100% of the first 3% of an employee’s contribution, and 50% of the next 2% of an employee’s contribution. Thus, if an employee contributes the full 5%, it will cost the employer 4%.

These Safe Harbor contributions can be allocated to owners and HCEs, as well.

In addition, an employer adopting a new 401(k) plan may qualify for the retirement plan tax credit as discussed in our FAQs.

Source: retirementplanblog.com

The 408(b)(2) regulation requires that its service, status and compensation disclosures be made to "responsible plan fiduciaries” or "RPFs.” In the rush to make the 408(b)(2) disclosures, most recordkeepers, broker-dealers and RIAs sent their disclosure documents to their primary contact at the plan sponsor. In at least some of those cases, the primary contact was not the RPF. As a result, we added language to our clients’ disclosures to the effect that, if the recipient was not the RPF, the written disclosure should immediately be forwarded to the RPF.

The regulation defines RPF as "a fiduciary with authority to cause the covered plan to enter into, or extend or renew, the contract or arrangement.” In other words, it is the person or committee who has the power to hire and fire the particular service provider, e.g., the broker-dealer, recordkeeper or RIA.

Because of the work involved in making mass disclosures, any inadvertent errors in properly identifying the RFPs may be excusable. However, going forward, it may not be. Because of that, all future agreements, account opening forms, and so on, with ERISA plans should specify that the person signing on behalf of the plan is the RPF. Furthermore, we recommend that service providers obtain the email address and other contact information for the RPFs (and that they contractually require plan fiduciaries to inform them of any changes of the RPFs).

We do that for two reasons. First, as covered service providers bring in new plan clients, the documents need to be executed by the RPFs and the disclosures need to be delivered to the RPFs. Second, the information is also needed for existing clients. Fiduciaries who have already received disclosures, they will need to be provided "change” disclosures in the future within 60 days of any changes. And, it is likely that more requirements will be imposed on service providers in the future and, therefore, providers will need to have an efficient and effective way of communicating with the RPFs.

Now is the time to put these new procedures in place.

The fifth session of "Inside the Beltway” is scheduled for September 12, 2013. In this series of free informational calls, Fred Reish will join Brad Campbell to discuss developments in Washington that impact our industry, including the DOL’s focus on abandoned plans, among other current issues. Click here to register.

The Office of Management and Budget (OMB) has posted that it received a proposed regulation from the Department of Labor. Unfortunately, it is not the much-anticipated proposed regulation on fiduciary advice. Instead, it is a regulation that addresses the development of a "Guide or Similar Requirement for Section 408(b)(2) Disclosures.”

Even though this is not the fiduciary advice regulation, it could have a material impact on the retirement plan community. We don’t know what the proposed regulation will say—and we won’t know for about three months (when the OMB approves and releases the proposed regulation). However, the DOL has previously given us an idea about their thinking.

When the DOL issued the final 408(b)(2) regulation on February 3, 2012, it included a Sample Guide to Initial Disclosures. The Sample Guide was not mandated, but instead was offered as an aide. The DOL explained, in the preamble to the final regulation: "Although the Department is not adopting such a requirement [for a guide] at this time, the Sample Guide published today may be useful, on a voluntary basis, to covered service providers as a format to assist responsible plan fiduciaries with the required disclosures.”

We have heard that, based on the DOL’s review of 408(b)(2) disclosures, the Department has concluded that plan fiduciaries may, in some cases, have difficulty understanding the required disclosures because of the lengthy, technical and/or multiple disclosure documents that are being distributed. As a result, we believe that the proposed regulation may require a guide (or table of contents) for the 408(b)(2) disclosures.

The Sample Guide provided for the disclosure of information at a detailed level. For example, the Guide had references to page and section numbers in specific documents. For example, under indirect compensation, the Guide provided a number of categories, including one entitled "Compensation ABC will receive from other parties that are not related to ABC (‘indirect compensation’).” The Guide then referred to "Master Service Agreement §3.3, p. 4, and Stable Value Offering Agmt §3.1, p. 4.”

If the DOL’s proposed regulation is similar to the Guide—which it may be, and if, for example, a broker-dealer makes disclosures by delivery of prospectuses, that would require references to each of the mutual fund prospectuses, together with the section and page numbers where the description of 12b-1 fees and other compensation appear. Based on our experience, most covered service providers are not providing disclosures that are that detailed or specific.

In other words, this could be a big change, which could result in additional administrative work and expense.

1. The contract or account was issued to a current or former employee before January 1, 2009;
2. The employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and in fact ceased making contributions to the contract or account for periods before January 1, 2009;
3. All of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer; and
4. The individual owner is fully vested in the contract or account".
    

Q: We have a calendar year 401k Safe Harbor Plan using the basic matching formula. They notified us the employer might be purchased through an asset sale in the next few months.

The purchasing employer will not be merging the existing plan into their current one.

If the plan terminates due to the asset sale mid year, how does that affect the safe harbor provisions of the plan?

A: It does not. Regulation section 1.401(k)-3(e)(4)(ii) provides that if a safe harbor "plan termination is in connection with a transaction described in section 410(b)(6)(C)", the safe harbor provisions continue to apply through the date of plan termination. Regulation section 1.410(b)-2(f) provides that "For purposes of section 410(b)(6)(C) and this paragraph (f), the terms "acquisition” and "disposition” refer to an asset or stock acquisition, merger, or other similar transaction...”.

Q: Client A has a traditional IRA and a Simple IRA. Less than 60 days ago client A took a distribution from the traditional IRA. At this time client A does not have the available cash to pay back the traditional IRA, but will within 60 days from now (which would be beyond the 60 days allowed for the current rollover/loan outstanding). Therefore, client A would like to take a distribution from his Simple IRA and use those funds to pay back his traditional IRA. Then in 60 days he will use the cash he will be receiving to pay back his Simple IRA. 

Is this all allowed and if a distribution is taken from the Simple IRA to pay back the traditional IRA can cash be rolled back into the same Simple IRA or would it have to be another IRA?

A: No, this is not allowed. An individual is only allowed one IRA to IRA rollover within a 12 month period. Under the scenario we are considering, there would be two IRA to IRA rollovers within a 12 month period. See section 408(d)(3)(B).


Q: Company A purchased Company B assets. Company B employees are now employed with Company A. The ownership in Company B plans will remain the same and there is no relation in ownership between Company A and Company B. Both companies have separate plans.

My question is can Company B's plan continue with only the remaining owners participating?

A: Yes. However for 2013 the terminated employees will be included in the 410(b) test if they have worked 500 hours for Company B in 2013 or if they benefit under the plan in 2013. If it is a 401(k) plan, they benefit for 2013 even if they did not defer anything.


Q: Do you include the outstanding loan balance as of the end of the year to calculate the RMD or do you ignore when calculating the RMD?

A: Include the outstanding loan balance as of the end of the year to calculate the RMD. The loan is a directed investment.


Q: Have an existing 401k plan (with a 12/31 pye) that one of their divisions created their own 401k plan effective as of 1/1/13. At the end of December 2012 the balances for the terminated employees of this division transferred out of the existing plan and into the new 401k plan, the remaining balances transferred in January 2013. When creating the 5500-SF for the original plan we listed the amount transferred to the new plan under Part III item 8j and listed the new plan name, EIN and plan number under Part VII item 13c(1). Because the new plan is not effective until 1/1/13 we did not do a 2012 5500-SF for this plan.

Does a 2012 5500-SF for the new plan need to be completed to show the transfer in of the assets that left the original plan? Or would the complete transfer be shown on the 2013 5500-SF since the plan is not effective until 1/1/13?

A: I assume the terminated participants who were entitled to distributions did not elect distribution prior to the transfer.

If the new plan is effective on 1/1/13, a transfer from the existing plan to the new plan could not have been made on 12/31/12. Either the transfer should be reflected on a 2013 Form 5500 for both plans, or the new plan is effective on 12/31/12 (and a 2012 Form 5500 is filed for the new plan). The initial Form 5500 for the new plan should reflect assets equal to zero as of the beginning of the plan year (whether it be 2012 or 2013).

TAG is a technical support service that offers answers to pension questions via e-mail. TAG subscribers have access to an extensive Web site with a full array of links to primary source materials, a database of over 4,000 FAQs asked by pension professionals, tools and much more. Subscribers also receive daily updates on breaking news in the industry. For more information about TAG, go to: http://www.tagdata.com. TAG is part of Wolters Kluwer Law & Business, which includes CCH, Aspen Publishers, and FTWilliam.com.

Recent articles brought to my attention the phrase "cat fishing” which means wishful thinking or realizing that something is not what you originally thought. Cat fishing reminded me of wishful thinking that has affected some private schools who sponsor a 403(b) plan under the TIAA-CREF plan document. Some of these organizations have been operating under the assumption that the plan document allows the exclusion of employees who work less than 20 hours a week from the plan’s deferral feature, when that is not the case.

A little history on 403(b) plan rules may help one to understand the situation I will be pointing out. 403(b) plans must follow a universal availability rule. This rule requires that if one person is offered an opportunity to defer, then all other employees should also be able to defer. Although this would suggest that all employees must be given a chance to defer, the 403(b) Regulations offer specific exclusions to this rule. These exclusions include part-time employees working less than 20 hours, those employees whose contributions would be $200 or less annually, and certain student workers, to name a few. However, the plan document must allow the universal availability exclusions permitted by the Regulations, and the TIAA-CREF document does not.

Operationally, some schools that have part-time employees, such as substitute teachers, coaches, and summer teachers who work less than 20 hours per week, have assumed that they can exclude them from the plan’s deferral feature because the Regulations allow such an exclusion. However, such wishful thinking has proven to be cat fishing. TIAA-CREF does not follow the model IRS plan document and does not include an exclusion option from the deferral feature for employees who work less than 20 hours per week.

The exclusions from the deferral opportunity allowed by the TIAA-CREF plan documents include only employees who are:

1. Eligible to participate in a Code Section 401(k) plan maintained by the employer in which employees may make elective deferrals,
2. Eligible to participate in another Code Section 403(b) plan maintained by the employer in which employees may make elective deferrals,
3. Non-resident aliens (within the meaning of Code Section 7701(b)(1)(B)) who received no earned income (within the meaning of Code Section 911(D)(2)) from the employer or which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)),
4. Students performing services described in Code Section 3121(b)(10) (generally, this refers to students who are enrolled and regularly attending classes offered by the employer where the employer is a school, college or university).

An "Other” exclusion line is not available on the adoption agreement to add another excluded category. Therein lies the problem. To exclude employees who work less than 20 hours per week, plan sponsors must amend the plan to do so.

For small plans that don’t require an audit, the discrepancy between the plan operations and the plan provisions could go unnoticed until there is an IRS or DOL audit.

To correct this specific error, the plan sponsor should contact a knowledgeable ERISA attorney to add an amendment to the plan document, prospectively, to exclude employees who normally work less than 20 hours per week.

To correct the incorrect exclusion of participants in previous years, the plan sponsor should consider preparing a submission to the IRS Voluntary Correction Program, including the following corrections:

1. Identify all employees who were operationally excluded, but should have been given a chance to contribute a deferral;
2. Once these employees are identified, the plan sponsor should compute or have a knowledgeable third party compute the missed deferral opportunity. Since the plan sponsor may never know what these participants would have deferred, the Employee Plan Compliance Resolution System (EPCRS) instructions for this defect allow an employer to calculate the missed deferral as the greater of (a) 3% or (b) the maximum deferral percentage eligible for match.
3. Additionally, for those employees who would have been eligible for a match (based on the years of service in the plan document being met) the missed match opportunity should be computed.
4. Lastly, missed earnings on the missed deferrals and employer contributions should be computed by using the DOL’s Lost Earnings calculator.
5. The employer must fund the correction from its own funds.

The moral of the story is that just because you believe a person or plan document should allow certain features you would like in your plan, it doesn’t always mean that it does. That is why it is important to understand the plan document, what it says, and what it means before actually administering the plan in your own way.

Read more here.

Many recordkeepers and bundled providers charge plans based on the number of participant accounts. Many others do not explicitly charge on a per-participant basis, but incorporate the number of accounts (and possibly the average account balances) into their pricing. It is likely that this practice will increase in the future . . . due to the new 404a-5 participant disclosures, which must be made to every eligible employee, as well as to every participant of an account balance.

With that in mind, advisers, recordkeepers and plan sponsors should consider mandatory distributions of small account balances (that is, $5,000 or less) to manage plan costs.

If a plan has the required provisions, and if the provisions have been appropriately communicated to eligible employees and beneficiaries through summary plan descriptions, plans can make distributions of account balances of $5,000 or less. If the participants don’t take those distributions, then the plans can directly roll the money over into IRAs for them. In either case, the effect of the mandatory distributions will be to improve the pricing for the plan . . . either because it reduces the number of accounts or, alternatively, because it increases the average account balance (due to the elimination of small accounts).

As you might expect, both the IRS and the DOL have issued guidance on how to do that. The combined effect of the guidance is that plan fiduciaries essentially have a safe harbor for making mandatory distributions of small accounts . . . if they follow the rules. Unfortunately, there are too many requirements for a short email like this. However, my partner, Bruce Ashton, and I have written a white paper that describes the requirements.

In writing that white paper, we took an approach that I think will be helpful to advisers and plan sponsors. The body of the white paper is a discussion of the benefits of mandatory distributions . . . in terms of plan pricing. Then, there are three appendices: the first two discuss the IRS and DOL guidance, respectively; and the third one covers adviser compensation related to a mandatory rollover program.

If this subject is interesting to you, you may want to look at the Inspira white paper. It is located at here.

This article aims to make three points: The major beneficiaries of 401(k) are middle-class workers, business owners must continue to be incented to offer these plans in the workplace, and Uncle Sam is a major beneficiary of the tax-deferred treatment of 401(k) deposits.

There’s surprisingly little agreement on how to define who is rich and who is middle class in America. A 2008 Congressional Research Service report summarized three surveys in which people were asked to sort themselves by socioeconomic class. Those participants with family incomes ranging from $40,000 to $250,000 considered themselves middle class. In their 2010 report Middle Class in America, the U.S. Commerce Department used income brackets of $50,800 and $122,800.

For this article, let’s define middle class as individuals with income of between $40,000 and $115,000. Let’s say that the top 2%, by income, are rich. That’s roughly the $250,000 income level. That leaves us with a swath of the population in between these two, earning $115,000 to $250,000, which we will call upper middle class.

Unless you are a member of Congress, you probably don’t have a generous lifetime pension coming your way. Your retirement income needs will be met primarily by Social Security and private savings. For many, this income will need to be supplemented by some form of work during "retirement.”

How much do you need to live comfortably in retirement? A frugal retiree might be able to get by on half of their pre-retirement income, but a common rule of thumb is that it takes about 75% of one’s pre-retirement income to maintain a similar standard of living during retirement.
How much replacement income will Social Security provide? The 2013 benefit levels, at full retirement age, are as follows: 90% replacement of the first $9,492 of annual income, 32% replacement of the next $47,724, and 15% of income above $57,216. The maximum annual benefit anyone can receive in 2013 is $30,396, and to earn that amount, one has to have been at the Social Security maximum earning level for many years.

Now let’s look at what gaps exist between the 75% income replacement target and the Social Security benefit each group is likely to receive. This gap is what the 401(k) is designed to fill.

Incomes below our middle-class cutoff: At the $40,000 level, Social Security replaces about 46% of pre-retirement income. A worker at the $20,000 level would see income replacement of about 60%. The gap between these replacement amounts and the 75% target level isn't insurmountable. Budget stretching and perhaps some part-time work may allow these individuals to maintain their pre-retirement lifestyle after they retire.

Middle class: If middle-class income starts at $40,000, the highest Social Security replacement ratio this group can hope for is 46%. At the top middle-class income level, $115,000, Social Security will replace just 24% of pre-retirement income. There’s no way to stretch 24% far enough to maintain a similar standard of living during the 20 to 30 years that retirement commonly lasts now-a-days. Members of the middle class will need to have substantial amounts of private savings to avoid falling onto the social safety net during their "golden” years. Systematic payroll deductions to 401(k) savings is the best hope this group has to avoiding falling into poverty during old age and becoming dependent upon the government for all their financial needs.

Upper middle class: The highest Social Security replacement rate this group can qualify for is 24% and at the $250,000 earning level, just 12% of income is replaced by Social Security. 401(k) savings could provide important retirement income for this group. But, the IRS characterizes those earning over $115,000 as "Highly Compensated Employees” and imposes extra restrictions on how much they are allowed to save.

Rich: Not to pity the rich, but Social Security will replace 12% or less of the pre-retirement income of this group. They have to rely almost exclusively on private saving. This is where the rich-person 401(k) tax dodge comes in. Actually, it doesn’t, because there isn’t one, thanks to the way the IRS wrote the 401(k) rules. As mentioned above, IRS rules impose extra restrictions on 401(k) savings of those earning over $115,000 annually, and any income above $255,000 is completely ineligible for 401(k) savings purposes.

Recapping: Workers earning above $115,000 face the biggest income replacement challenge in retirement. Social Security will replace no more than 24% of their pre-retirement income, and IRS regulations limit the amount they are allowed to save in a 401(k).

It is the middle-class workers, with roughly $40,000 to $115,000 of income that the current 401(k) system has the potential to benefit the most. However, those of us who work regularly with them know that middle-class workers can be marginal retirement savers.

They need the structure (payroll deduction savings) and tax incentive (pretax deposits to lessen the take-home pay impact) to tip them over the edge into joining their employer’s 401(k) plan. Without the structure and incentive, far fewer workers would engage in retirement saving.

Congress should note that business owners will be less inclined to offer these critical 401(k) savings plans to their workers if their own benefit is further restricted. Even a small employer incurs thousands of dollars of annual costs associated with the administration and oversight of a 401(k) plan, not to mention company contributions, the fiduciary risk, and bear market complaints around the water cooler.

Congress should also understand that 401(k) tax breaks are smart federal investments in two ways:

1. The tax isn't forgiven on pretax 401(k) deposits; it is postponed. Uncle Sam is no dope. By waiting, he gets a slice of a much larger pie. If a 401(k) earns 7% annually over time, then every 10 years, the taxable amount doubles. It is a great deal for the Treasury, which can finance its cash needs at about 3% in the meantime. Essentially, Uncle Sam has a lucrative business, making a fat interest spread off the money growing in 401(k)s. 
   
2.  The second investment aspect of 401(k) is that by providing a small incentive now, to encourage people to provide for their own retirement income needs, the Government can drastically reduce the number of old people that will be sucking the system dry in a few years. For perspective, an estimated $9 trillion has been saved to-date in 401(k) plans. If Uncle Sam had to step in and plug a retirement income hole of that size, our current federal budget deficit would look like child’s play by comparison. An ounce of prevention...

Summing it up, the current 401(k) system offers its biggest potential benefit to middle-class workers, who need the discipline and tax incentives to motivate them to save. Without adequate individual savings, millions of additional Americans will become wards of the state. Business owners’ personal benefit from 401(k) is already limited. Further restrictions may provoke them to cease offering these plans in their workplace.

Finally, the deferred taxation of 401(k) plans is a good business deal for the Treasury, as the growth rate of the deferred balances is greater than the Treasury’s cost of financing during the accumulation period. Messing with the current system will have severe negative consequences for America and Americans.

A call to action: 401(k)s may soon become the target of shortsighted members of Congress, who see them as a near-term revenue source. Removing the current tax incentives will cause large numbers of individuals to stop saving for the future, and may cause large numbers of employers to stop making these plans available to their employees.

The long-term consequence of these actions will be potentially devastating to America, with tens of millions of older Americans on public assistance and younger Americans being taxed heavily to cover those costs. If you are concerned about this, please contact your elected representatives and tell them not to mess around with the 401(k) system.

Source: Market Watch

One of those annual retirement plan housekeeping matters is for plan sponsors to review the adequacy of the plan's fidelity bond required by Department of Labor (DOL) regulations. Here is a summary of the fidelity bond rules.

Overview

ERISA generally requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan shall be bonded. The purpose is, of course, to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who "handle" plan funds or other property. These individuals are called "plan officials" and include anyone who has:

• Physical contact with cash, checks or other Plan property.
• Power to transfer or negotiate Plan property for a price.
• Power to disburse funds, sign checks or produce negotiable instruments from the Plan assets.
• Decision making authority over any individual described above.

The fidelity bond must be at no less than 10% of plan assets with a minimum of $1,000 and a maximum of $500,000. And like all aspects of ERISA, there are important exceptions. Here are two:

1. Maximum Amount. The new Pension Protection Act of 2006 increases the maximum bond amount to $1 million for retirement plans that hold employer stock or other employer securities. A retirement plan would not generally be considered to hold employer stock or other employer securities if these assets are part of a broadly diversified group of assets such as mutual funds. The new bonding provision is effective for plan years beginning on and after January 1, 2007.
2. Non-Qualifying Assets. If more than 5% of the plan assets are in limited partnerships, artwork, collectibles, mortgages, real estate or securities of "closely-held" companies and are held outside of regulated institutions such as a bank; an insurance company; a registered broker-dealer or other organization authorized to act as trustee for individual retirement accounts under Internal Revenue Code Section 408, the plan sponsors need to do one of two things: a) make certain that the bond amount is equal to 100% of the value of these "non-qualified" assets or b) arrange for an annual full-scope audit, where the CPA physically confirms the existence of the assets at the start and end of the plan year.

Consequences of Not Maintaining the Fidelity Bond

There can be serious consequences for not purchasing and maintaining a sufficient ERISA fidelity bond.

1. It can be a red flag to the DOL that they need to take a closer look at the plan.
2. In cases where a retirement plan has more than 5% in non-qualified assets, a serious underwriting risk may arise if the non-qualified assets are not properly listed on the bond application. This is because non-qualifying assets carry a higher level of risk for loss. If the non-qualified assets are not listed on the bond, the underwriter would have cause to deny coverage if there was a loss due to misuse or misappropriation by a plan fiduciary. Under those circumstances, the loss may be denied and the trustees could be liable for the losses to the plan.

This article is for general informational purposes and should not be considered tax or legal advice. Employers should always consult with their tax or legal advisors for the application of the ERISA rules to their specific situation.

I imagine that, by now, you have heard about the Court of Appeals decision in Tibble v. Edison. While the court decided a number of issues, the most important one is that fiduciaries have an obligation to select appropriate share classes for their plans. Closely related to that is the trial court’s admonition that fiduciaries must ask about the available share classes.

ERISA imposes both a fiduciary rule and a prohibition on spending more than reasonable amounts for operating a plan, including the investment costs. The Tibble decision was about the reasonable expense ratios for plan investments. However, rather than looking at the evaluation of mutual fund expenses in the traditional way (that is, comparing expense ratios to those of other funds), the trial court found, and the appellate court agreed, that plans must use their purchasing power to select the appropriate share class. The practical consequence is that advisers should make recommendations based on the share classes available and must educate plan sponsors about the available share classes, including their costs, and plan sponsors (typically acting through their plan committees) must understand that multiple share classes may be available and must investigate which are best for their plan and participants.

That could be a daunting task. Just consider that some mutual funds may have 10 or more share classes. That could include, for example, A, B, C, I, R-1, R-2 shares, and so on. This will place an additional burden on advisers . . . and, in that sense, may favor advisers who focus on retirement plans.

But, it is more complicated than that. Share classes for mutual funds and separate account "classes” for group annuity contracts may, for these purposes, be virtually identical. If that is true, advisers will need to educate plan sponsors on the classes available in group annuity contracts. Then, advisers will need to help plan sponsors select the appropriate separate account class for that particular plan. Since some insurance companies offer group annuity contracts with 10 or even 15 separate account classes, advisers will need to be more attentive to the alternatives that are available and will need to work with plan sponsors to understand the share and separate account classes (including the revenue sharing and compensation aspects) and to select the appropriate classes based on the size and needs of the particular plan.

In the future, we could see litigation where advisers did not educate plan sponsors on the availability of alternative classes and do not make appropriate recommendations.

Can the transferred assets be used to reduce future matching contributions? Can they be used to pay plan expenses?

A: No, and no.

Section 1.401(m)-1(a)(2)(iii) of the Regulations provides generally that employer contributions are not matching contributions if they are contributed before the cash or deferred election is made or before the employees' performance of services with respect to which the elective deferrals are made. So the transferred assets cannot be used to reduce future matching contributions.

Under IRC section 4980(d)(2)(C), the transferred amounts must either be "allocated under the plan to the accounts of participants in the plan year in which the transfer occurs, or...credited to a suspense account and allocated from such account to accounts of participants no less rapidly than ratably over the 7-plan-year period beginning with the year of the transfer." Therefore, these assets cannot be used to pay plan expenses.

Q: Plan uses a non-414(s) safe harbor definition of compensation. 414(s) test is performed resulting in an NHCE ratio of 88.1%. Participant has earned income of $300k. 401(a)(17) limit is $250k.

Is the 414(s) ratio (88.1% in the example above) applied to the total earned income: $300k x 88.1% = $264,300, which is then limited to $250,000 for plan purposes? Or is it applied to the 401(a)(17) limit: $250k x 88.1% = $220,250?

For reference, the 1.414(s) regulations don’t stipulate that the earned income should be limited; rather, the special rules indicate total earned income is considered. There is no reference to first limiting the earned income to the 401(a)(17) maximum:

(g) Special rules—

(1) Self-employed individuals—

(i) General rule. If an alternative definition of compensation under paragraph (c)(3), (d), (e), or (f) of this section is used to satisfy an applicable provision, an equivalent alternative compensation amount must be determined for any self-employed individual who is in the group of employees for whom paragraph (b) of this section requires a single definition of compensation to be used. This equivalent alternative compensation amount is determined by multiplying the self-employed individual's total earned income (as defined in section 401 (c)(2)) for the determination period by the percentage of total compensation (as defined in paragraph (d)(3)(ii) of this section) included under the alternative definition for the employer's nonhighly compensated common-law employees as a group (determined in a manner consistent with the rules in paragraph (d)(3)(iii) of this section and, if applicable, paragraph (d)(3)(vi) of this section). Thus, for purposes of this determination, highly compensated common-law employees must be disregarded. This equivalent alternative compensation amount will be treated as the self-employed individual's compensation under the alternative definition of compensation for the determination period.

A: It is applied to the 401(a)(17) limit.

§1.401(a)(17)-1 - Limitation on annual compensation

(c) Limit on compensation for nondiscrimination rules

(1) General rule.—

The annual compensation limit applies for purposes of applying the nondiscrimination rules under sections 401(a)(4), 401(a)(5), 401(l), 401(k)(3), 401(m)(2), 403(b)(12), 404(a)(2) and 410(b)(2). The annual compensation limit also applies in determining whether an alternative method of determining compensation impermissibly discriminates under section 414(s)(3). Thus, for example, the annual compensation limit applies when determining a self-employed individual's total earned income that is used to determine the equivalent alternative compensation amount under §1.414(s)-1(g)(1). This paragraph (c) provides rules for applying the annual compensation limit for these purposes. For purposes of this paragraph (c), compensation means the compensation used in applying the applicable nondiscrimination rule.

Q: Sole Proprietor established a SEP for herself for 2009. In 2012 Sole Proprietorship joined a partnership (and is therefore a partner, not a sole proprietorship).

Does she have to set up a SEP sponsored by the Partnership now in order to make contributions or can she continue to deposit funds to her current SEP?

If she needs a new SEP, can she rollover her old one to simplify her life?

A: If she wants to make contributions to a SEP, the SEP must be sponsored by the partnership. That means all eligible employees of the partnership (including the other partners) must receive SEP contributions. This is the case even if the partnership has no other employees.

She can roll over her current SEP balance into the new (partnership) SEP.

Q: Companies A, B, and C became a brother-sister controlled group as of 1/1/2012. Each company has employees and offers a different product/service to customers. Company A sponsors a 401(k) plan. Beginning 1/1/2014 (after the 410(b)(6)(c) transition period), in order for Company A to be treated as a QSLOB and test its plan accordingly under the rules applicable to QSLOBs, is it required that company B and C MUST be QSLOBs as well?

A: Yes. If an employer uses the QSLOB rules, all employees of the employer must be in a QSLOB. A controlled group is the employer, whether a parent-subsidiary or brother-sister.

Section 1.414(r)-1(b)(1) provides that "...once an employer has determined its qualified separate lines of business..., no portion of the employer may remain that is not included in a qualified separate line of business. In addition, once the employer has determined the employees of its qualified separate lines of business, every employee must be treated as an employee of a qualified separate line of business, and no employee may be treated as an employee of more than one qualified separate line of business”.

Q: Client/owner has a TEFRA 242(b) election in place under a DB plan. The DB plan is terminating in 2013 and client/owner will receive a full distribution.

Is a minimum (401(a)(9) distribution required for 2013, or can the full amount of the distribution be rolled over to an IRA?

A: Assuming the distribution is in accordance with the participant’s 242(b) election, the full amount of the distribution be rolled over to an IRA.

Section 1.401(a)(9)-8 of the Final Regulations provides guidance with respect to TEFRA section 242(b)(2) elections. Q&A-13 under section 1.401(a)(9)-8 provides that although the distribution requirements added by TEFRA were retroactively repealed by TRA of 1984, the transitional election rule in TEFRA section 242(b)(2) was preserved. Thus, a plan may make distributions in accordance with such an election without adversely affecting its Code section 401(a) qualified status.

Section 1.402(c)-2, Question and Answer 3, of the Income Tax Regulations provides, in relevant part, that except as specifically provided in Q&A-4(b) of this section, any amount distributed to an employee...from a qualified plan is an eligible rollover distribution. Q&A-4(b) does not contain an exclusion for distributions made in accordance with a valid section 242(b)(2) of TEFRA election.

TAG is a technical support service that offers answers to pension questions via e-mail. TAG subscribers have access to an extensive Web site with a full array of links to primary source materials, a database of over 4,000 FAQs asked by pension professionals, tools and much more. Subscribers also receive daily updates on breaking news in the industry. For more information about TAG, go to: http://www.tagdata.com. TAG is part of Wolters Kluwer Law & Business, which includes CCH, Aspen Publishers, and FTWilliam.com.

Q: What does it mean to hold an APA/APR designation from NIPA?

A: NIPA’s best-in-class designations are an integral part of NIPA’s commitment to advancing the unique value of TPAs. To hold our profession to the highest possible standards, NIPA offers two comprehensive designations: the Accredited Pension Administrator (APA) for administrators and consultants, and the Accredited Pension Representative (APR) for financial advisors and professionals.

First and foremost, NIPA’s designations are practical and relevant. Our designations ensure TPAs have the knowledge and skills needed to effectively handle the day-to-day administration of their clients’ plans. NIPA’s APA and APR designations provide employees with the required competence and ability that immediately translates into being able to do their daily job.

Second, NIPA’s designations are a cost-effective way to distinguish yourself in the marketplace and stand apart from your peers. Earning a NIPA designation will not only give you a sense of personal accomplishment, but it will demonstrate your professional competency and commitment to the industry. This opportunity to strengthen your personal and professional value is earned by successfully completing four courses and exams for the APA designation, and two courses and exams for the APR designation. And, a NIPA designation is cost effective in comparison to than other industry designation programs.

Third, NIPA’s designations are convenient to obtain. Courses are self-study, allowing you to progress at your own pace. Exams are administered online, making it easier and more convenient to schedule and complete. Plus, two of the APA/APR exams are "open-book” and may be taken from home or work.

Q: Are continuing education credits available through the APA/APR program?

A: Earning a NIPA designation not only provides you with an opportunity to strengthen your personal and professional value, but you can also earn continuing education credits (CECs) by going through the APA/APR program.

You can earn 10 CECs by successfully completing the first course of each designation, and 20 CECs for each of the subsequent courses. The APA/APR program covers key topics ranging from plan fundamentals to advanced subjects, including but not limited to plan types, determining eligibility, allocating contributions, applying vesting, compliance testing, processing distributions and loans, reporting and disclosures, documents and amendments, fiduciary responsibility, prohibited transactions, correcting plan errors, and plan terminations.

Q: How can obtaining NIPA’s APA or APR designations contribute to the growth of a TPA firm?

A: Complex statutory mandates make it more and more challenging to maintain high professional standards. NIPA is committed to providing TPA business owners, their firms and staff with the tools and resources to not only meet those challenges, but also improve bottom-line results. Through NIPA’s APA and APR designations, staff will gain the education necessary to stay ahead of the curve, ensuring they have the knowledge and skills required to meet the demands of their job. Having qualified staff with an APA or APR designation reflects the TPA firm’s commitment to providing quality service, increases the firm’s professional credibility, makes the firm more marketable and sets the firm apart from the competition – all of which contribute to the growth of the TPA firm.

Download the flyer for more information.

My previous blog, Compensation: The Missing Link – Part 1, stressed the importance of ascertaining a solid link between the definition of compensation in the plan document and the one used operationally. An understanding of the components that make up eligible compensation and utilizing those components in practice, as defined in the plan document, is crucial to calculating the correct deferrals, match and profit sharing contributions. Understanding the definition of compensation also includes other important factors including the timing and nature of payments within different service periods.

Difficulties can occur based on the timing of payments. For example, does compensation earned by December 31 for a calendar year employer, but paid in the months following the year count as eligible compensation? In general, Treasury Regulation Section 1.415(c)-2(e) states that compensation:

"…must be paid or made available to an employee (or, if earlier, includible in the gross income of the employee) within the limitation year.”

Also, compensation:

"…must be paid or treated as paid to the employee prior to the employee’s severance from employment…”

Generally, this means that the payments included in a person’s W-2 are the payments considered in a calendar plan year. Payroll tax reports are the relevant measurements. We recommend to our audit clients and their third-party administrators to create a spreadsheet that reconciles gross wages per the W-3 (or K-1′s, if applicable) to the definition of eligible wages per the plan documents. Plan sponsors who have different definitions of compensation for different plan features should complete a separate spreadsheet for each plan feature.

Additional issues can be created with compensation paid after an employee’s termination from employment. Compensation that is earned during the period that is paid after termination is included in compensation if:

• the payments are made by the later of 2 ½ months after termination or
• the end of the limitation year including the date of termination

Further, post-termination plan compensation may include amounts that are payable after severance but that would have been paid or usable had the participant continued in employment, such as accumulated unused sick, vacation or other leave.

Generally, amounts paid after severance of employment or solely because of severance are excluded from compensation.

It is important for plan sponsors to work closely with their third-party administrators to ensure that there are no missing links between the definition of compensation in the plan document and the one they use operationally.

Chris Ciminera is a member of Belfint, Lyons & Shuman, P.A.’s Employee Benefit Plan Audit Section where he specializes in auditing the financial statements of employee benefit plans for non-profit, for-profit and collectively bargained plans and in the preparation of the Form 5500. He enjoys not only auditing plans, but helping clients navigate the complex rules surrounding benefit plans. For more information regarding Belfint, Lyons & Shuman, P.A. visit www.belfint.com.

Compensation, you might think, should be easy to quantify. However, in a retirement plan, determining compensation can actually be quite complex. Not only can plan sponsors easily make mistakes in the calculation, but highly trained and experienced third-party administrators and auditors can get tripped up trying to decipher what the calculation should be to arrive at accurate plan compensation.

What, then, is eligible compensation? The answer is: "IT DEPENDS!”

The plan document defines compensation for each plan feature. As such, each plan document can have a different definition for eligible compensation used to determine elective deferrals, matching, and/or profit sharing contributions.

Many plans use the statutory definition of compensation in Treasury Regulation Section 1.415(c)-2 for all plan features. The general statutory definition in the Treasury Regulation Section specifically includes the following:

"…commissions paid to salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allocations under a nonaccountable plan…”

Listed later in the Treasury Regulation Section are items not to be included in compensation:

• profit sharing contributions,
• amounts realized from the exercise of a nonstatutory option,
• amounts realized from the sale, exchange, or other disposition of stock acquired under a statutory stock option,
• other amounts that receive special tax benefits such as premiums for group-term life insurance (only to the extent that the premiums are not includible in the gross income of the employee and are not salary reduction amounts described in Section 125), and any other similar items.

To achieve their specific goals, plan sponsors have the ability to exclude specific items in the definition of compensation such as fringe benefits, compensation exceeding a certain dollar amount, bonuses, commissions, overtime, etc., by making the relevant choices in the adoption agreement or through an individually designed plan document. Operationally, plan sponsors sometimes exclude items from plan compensation that the adoption agreement does not show as exclusions. In these cases, there is a missing link between the plan provisions and the plan operations. It is important for plan administrators and sponsors to compare the definition of compensation in the plan document to what is being used operationally. One of the top ten findings in IRS audits of qualified plans is that the plan administrator is using the wrong definition of compensation. Needless to say, it is also one of the most common findings during our audits of retirement plan financial statements.

An understanding of the components that make up eligible compensation and utilizing those components as defined in the plan document is crucial to calculating the correct employee and employer contributions. Our recommendation is for sponsors to create a spreadsheet that starts with gross compensation, a reconciliation to the wages on the W-3 plus K-1s as applicable, and an additional column for each separate exclusion, so that control totals can be compared with control totals on the original payroll documents. These reconciliations of control totals with original source documents will also ensure that the census data submitted to the third-party administrator is complete and accurate. Plan sponsors must continually reconcile the payroll data to the census data to the plan document to ensure there are no missing links between their plan documents and their plan operations.

Chris Ciminera is a member of Belfint, Lyons & Shuman, P.A.’s Employee Benefit Plan Audit Section where he specializes in auditing the financial statements of employee benefit plans for non-profit, for-profit and collectively bargained plans and in the preparation of the Form 5500. He enjoys not only auditing plans, but helping clients navigate the complex rules surrounding benefit plans. For more information regarding Belfint, Lyons & Shuman, P.A. visit www.belfint.com.

If client rolls over $270,000 to her IRA, is the determination of what is left of her pre-1987 amount calculated last-in, first-out ($30,000 left as pre-1987), first-in, first-out ($0 left as pre-1987), or is it prorated ($3,000 left as pre-1987)?

A: The amount of the pre-1987 balance remaining is zero.

Of the $270,000 that she wants to roll to her IRA, will she have to take a minimum distribution first before rolling it?

A: Yes.

If the RMD is $15,000 and she rolls $255,000 to an IRA, leaving $30,000 in the 403(b), would it be the grandfathered balance that would be left in the 403(b)?

A: No. Here's how this works: A minimum distribution is required for 2013. The amount of the required minimum cannot be rolled over. The 2013 minimum is based on $270,000 ($300,000-$30,000).

The amount distributed that exceeds the 2013 required minimum is first deemed to come from the pre-1987 balance. If the 2013 minimum is (for example) $15,000, and the plan distributes $45,000 in 2013, the entire pre-1987 balance of $30,000 is distributed.
If the RMD is $15,000 and she rolls $255,000 to an IRA, the $30,000 remaining in the 403(b) is not the grandfathered amount; the grandfathered amount is distributed as part of the $225,000. §1.403(b)-6(e)(6)(iii) provides that "any amount distributed in a calendar year from a contract in excess of the required minimum distribution ... is treated as paid from the pre-’87 account balance ..."

Q: Terminated vested participant turns 70 1/2 at 10/1/12. Minimum required distributions are due to start by 4/1/13. Monthly benefit is $100.

She is due $300 for 2012 (Oct-Dec). In March, we will cut a check for $600 and begin regular payments of $100 on 4/1/13. Is that correct, or is the very first $100 actually on 4/1?

A: The very first $100 is distributed on 4/1/13, and thereafter $100 must be distributed each month, until her entire benefit has been distributed. §1.401(a)(9)-6, A-1(c)(1) provides that "The first payment, which must be made on or before the employee's required beginning date, must be the payment which is required for one payment interval. The second payment need not be made until the end of the next payment interval even if that payment interval ends in the next calendar year.”

Q: Safe Harbor 401(k) with profit sharing had an eligible employee who switched to union mid-year. The plan excludes union and the profit sharing has a last day requirement.

Does he get the safe harbor for the compensation during the year before he switched to the union?

A: Yes.

Does he not receive PS because he was not eligible at the end of the year?

A: He receives the PS contribution based on compensation paid before he becomes a union employee. He is employed on the last day of the plan year.

Is he counted for coverage for the year?

A: Yes.

The profit sharing also has a 1,000 hours requirement. He didn't work 1,000 hours before switching to the union but he did have 1,000 for the full year. Does he still get the PS?

A: Absent a specific plan document provision to the contrary, no. §1.410(b)-6(d)(2)(i) provides that "An employee who performs hours of service during the plan year as both a collectively bargained employee and a noncollectively bargained employee is treated as a collectively bargained employee with respect to the hours of service performed as a collectively bargained employee and a noncollectively bargained employee with respect to the hours of service performed as a noncollectively bargained employee."

Q: A plan’s eligibility requirements are 1,000 hours and 12 months of service.

An employee does not complete the 1,000 hours in the 12-month period beginning on his hire date.

The eligibility computation period shifts to Plan year (calendar).

In the Plan year, the employee completes a 1,000 hours but does not complete 12 months starting from the 1st day of Plan year to end of Plan year (1/1 to 12/31).

Does the individual have to complete the 12 months during the Eligibility Computation period of 1/1 to 12/31?

A: No. The employee must complete 1,000 hours within the 12-month eligibility computation period. The 12-month period is a measurement period; the plan cannot require employment in each of the 12 months, or on the last day of the 12-month period. If the individual is not employed on the entry date next following the completion of the eligibility computation period, and is subsequently rehired without incurring a break in service, the employee becomes a participant upon the rehire date. See §2530.200b-1(b) and §1.410(a)-4(b)(1).

Q: We proposed a cross-tested Defined Benefit/401(k) plan for a medical group. The contributions were good for the doctor with reasonable employee costs.

Another TPA did a competing proposal bringing the owner's 12-year-old twin kids into the mix, giving them each a $5,000 salary with a $50 benefit in the pension plan, thus allowing him to pass 401(a)(26) just by covering the owner, spouse and two kids. The employee cost dropped by about $10k. Our firm has never allowed children this young in our plans, especially when it is obviously designed to alter the non-discrimination testing. What are your thoughts on this?

A: Let's see. First, it would have to be legal in the particular state for 12 year olds to be employed by a parent's business. The children would have to actually perform services for (in this case) the medical group, as employees. And the amount of compensation paid to the children would have to be reasonable for the services performed. If those requirements are satisfied, they can include the children in the plan. Otherwise, they cannot.

Q: We have a client who has her own one-person medical corp. and a defined benefit pension plan covering only her. In 2012, she joined a physician group that has employees, and we understand the transition rule for satisfying coverage under 410(b) applies through 12-31-13. Her DB plan was terminated on 12/31/2012.

The doctor wants to have a profit-sharing plan for 2013, where she will roll over her DB plan assets, so she can control her investments and have better bankruptcy protection than with an IRA, and we are in the process of setting that up.

If we freeze the profit sharing plan as of 12/31/13, does that avoid future failure issues under 410(b)? Are there any other issues we should be aware of for freezing the profit sharing plan after one year of operation?

A: Yes. The plan will not be in compliance with section 401(a). Specifically, the requirement that contributions to a profit sharing plan be "recurring and substantial."

TAG is a technical support service that offers answers to pension questions via e-mail. TAG subscribers have access to an extensive Web site with a full array of links to primary source materials, a database of over 4,000 FAQs asked by pension professionals, tools and much more. Subscribers also receive daily updates on breaking news in the industry. For more information about TAG, go to: http://www.tagdata.com. TAG is part of Wolters Kluwer Law & Business, which includes CCH, Aspen Publishers, and FTWilliam.com.

On July 30, the DOL reissued its Field Assistant Bulletin (FAB) concerning participant disclosures. The FAB was reissued because of the controversy about the DOL's position on individual brokerage accounts.

The new FAB deletes the old, and controversial, Q&A 30 and replaces it with a new Q&A 39.

While some of the controversial provisions were removed, some remain. For example, the DOL states:

"...in the case of a 401(k) or other individual account plan covered under the regulation, a plan fiduciary's failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raising questions under ERISA section 404(a)'s general statutory fiduciary duties of prudence and loyalty."

In other words, the DOL is saying that it has concerns about participant-directed plans that offer only brokerage accounts, mutual fund windows and similar vehicles. The DOL's concern is that many participants may not have the investment experience or knowledge needed to select from among hundreds or even thousands of investment choices (for example, in a brokerage account). In effect, the DOL is saying that it is reserving the right to challenge that arrangement.

That raises the obvious question: What should fiduciaries do about plans that are structured that way? That is not an easy question to answer. On the one hand, conservative fiduciaries should consider adding a line-up of core, or designated, investment alternatives. On the other hand, fiduciaries who are willing to take some risk may view this as an inappropriate effort from the DOL to create regulations through informal guidance, such as Field Assistant Bulletins.

Regardless of the outcome, every fiduciary of a plan that utilizes the structure should be educated on the issue.

In case you missed it, you may want to take a look at our Retirement Income Team newsletter from October 2012. This newsletter has several articles on legal and ERISA issues related to retirement income for participants in retirement plans.

Article first appeared on the Belfint, Lyons & Shuman, P.A. retirement plan audit blog at http://employeebenefitplanaudit.belfint.com/ Saaib is a CPA and obtained his Masters in Accounting from the University of Delaware. He specializes in auditing retirement plans that cover over 100 participants and auditing nonprofit organizations. For more information about our audit services, please visit our website at http://www.belfint.com/

When the Department of Labor issued Field Assistant Bulletin (FAB) 2012-02, the private sector was "shocked” by the DOL’s position on fiduciary responsibilities for brokerage windows in defined contribution plans, such as 401(k) plans. The DOL subsequently partially reversed part of its guidance. However, significant portions of that guidance remain, and it continues to be a DOL position that plan sponsors have fiduciary responsibilities for brokerage windows in retirement plans.

My partner, Bruce Ashton, and I recently wrote an article about brokerage windows for TD Ameritrade. As explained in the introduction to the article:

"The first topic of this article, and its principal focus, is the fiduciary process for deciding whether to offer a brokerage window and selecting the provider of the window. The second covers the requirements under the new participant disclosure rules. Finally, we consider the implications of the fiduciaries or a participant selecting an RIA to serve as an investment manager or advisor for a participant’s individual brokerage window.”

We think the article is a valuable contribution to understanding the fiduciary responsibility for brokerage accounts and retirement plans. You can obtain a copy here; once on the TDA home page, search for "brokerage window” in the search field on the upper right of the screen.

We hope the article is helpful to you.

Article provided by Fred Reish. Reish is a partner Drinker Biddle in Los Angeles. He works in the firm's Employee Benefits & Executive Compensation Practice Group and is chair of the Financial Services ERISA Team. He has specialized in employee benefits law since 1973 and works with both private and public sector entities and their plans and fiduciaries; representation of plans, employers and fiduciaries before the governing agencies (e.g., the IRS and the DOL); consulting with banks, trust companies, insurance companies and mutual fund management companies on 401(k) investment products and issues related to plan investments; and representation of broker-dealers and registered investment advisers on issues related to fiduciary status and compliance, prohibited transactions and internal procedures.

With Thanksgiving done, we look to the holidays and the new year. While many of us are busy shopping for loved ones, many businesses and individuals have their eye geared towards next year. As a retirement plan sponsor, you have the fiduciary responsibility to look over your plan and part of looking over the plan is preparing for the future. This article is about what end of year planning you as a plan sponsor should be doing in maintaining and improving your retirement plan for the coming new year.

Special deferral election of bonuses
Many businesses offer holiday bonuses, at least that’s what I hear. When I started working in the retirement plan business in 1998, Harvey Berman gave me $300 and I have never received a holiday bonus since. If you are a business that has given bonuses in the past or are considering giving one this Holiday Season, it may be a good idea to see whether your 401(k) plan allows for a special bonus deferral election. That special bonus deferral election would allow your plan participants to defer up to 100% of their bonus without impacting their current deferral election and not needing to wait until a change is allowed under your plan. This requires a plan amendment, so contact your third party administrator (TPA) or ERISA attorney for further information.

Getting ready for compliance
Whether you like it or not, after December 31, you will be contacted by your TPA for census information. In order to conduct their discrimination testing, your TPA will ask you for your employee census, which typically includes name, date of birth, date of hire, date of termination (if any), hours of service (if your plan counts it instead of elapsed time), and compensation. You will also be asked company information such as who are the owners or whether there are other companies that have the same ownership or are affiliated with you. While the month of December is not the busiest, it may be wise to get the ball rolling by getting that information accessible.

Review of ERISA bond and fiduciary liability insurance
They tell you to check your air filter when every season starts and to check you fire/ carbon monoxide alarms every six months to avoid a greater harm later. When it comes to being a retirement plan sponsor, the greater harm usually involves plan asset theft or litigation from aggrieved plan participants. As you should know, all retirement plans covered under ERISA must have an ERISA bond to protect assets from theft. Make sure you have one in place. If not, contact your property & casualty broker. Fiduciary liability insurance is actually optional; it offers plan fiduciaries protection in case of litigation because fiduciaries like individual plan trustee may be personally liable otherwise. So while it is an option, it is something that all plans covered by ERISA should have, just in case. Speaking as a lawyer who doesn’t litigate, litigation costs a heck of amount of money. Being sued doesn’t mean you did anything wrong and a lot of innocent plan sponsors have had to pay through the nose to defend them. I had a client who had $1 million in litigation expenses who won their case on summary judgment; thankfully they had a fiduciary liability policy that bore $900,000 of that amount. If you don’t have a current policy in place, check your property & casualty broker for details.

Compare plan to the health of the company
Look at the demographics of your plan participants in the past year, as well as your company’s financial well-being. If your corporate finances have drastically improved, you may have the financial wherewithal to start or increase employer contributions, perhaps contributions that may be skewed favorably to the highly compensated employees that run the business. If you want to make changes for this year, you have until December 31 to put an amendment in place. If you want to make the change for the following year, you have some time, but it may make some sense in getting that ball rolling with your TPA. The TPA will need to do a study to see what kind of formula they could design that will pass testing or whether it may make sense to achieve the contribution goals by setting up another plan. If business is contracting and you already allocate employer contributions, it may make sense to suspend or eliminate such contributions. Based on how the plan document is drafted as well as the retirement plan rules, these contributions might not be eliminated for the current plan year. If you have a tough time coming up with the contributions to the plan or you need to reduce that amount, contact your TPA or ERISA attorney immediately.

Review of Plan Expenses
You have a fiduciary responsibility to pay reasonable plan expenses. The end of the year maybe a good time to review the expenses charged to your plan. With fee disclosure regulations finally implemented, you should have received fee disclosures from your plan provider. If you haven’t, contact them immediately because you are on the hook for any disclosures not provided to you as well as to plan participants. If you did receive the disclosures sent to you, you need to review them and benchmark those fees (based on plans of similar size) by using a benchmarking service or by comparing fees to what other providers are charging by asking for price quotes from competing providers. While you don’t have to pick a plan provider who is the cheapest, you need to make sure that the fees being charged to the plan are reasonable in light of the services being provided to you.

Review of Plan Providers
One of my favorite Mayors of all time, New York’s Ed Koch always asked: "How am I Doing?” As a retirement plan sponsor, you need to know how your plan providers are doing. The reason you need to know because you are on the hook for their errors, it’s your fiduciary responsibility to make sure they are doing the job they should be doing. That’s why this time of the year maybe a great time to review the work of your providers to make sure they are doing the work promised. Do you have a financial advisor who never offers investment education to plan participants or hasn’t shown up in years to review plan investments? Do you have a TPA who has trouble with com¬compliance testing? Do you have an ERISA attorney who can’t spell 401(k)? Seriously, you need to have your plan providers reviewed for competence. You may want an independent retirement plan consultant or ERISA attorney to review plan providers if you don’t have the capacity to do it. Regard¬less of who will do it, it will eliminate any unfortunate "surprises” that you don’t need.

Article first appeared on JDSupra.com. Ary Rosenbaum is an ERISA/retirement plan attorney for his firm, The Rosenbaum Law Firm P.C.  Rosenbaum is a graduate of Stony Brook University (B.A., Political Science, 1994), American University Washington College of Law (J.D., 1997), and Boston University (L.LM, Taxation, 1998). He is licensed to practice in New York, Massachusetts and California.

The DOL’s 404a-5 regulation places a fiduciary obligation on plan sponsors—in their roles as ERISA plan administrators—to make certain disclosures to participants. In the rush to comply with the 408(b)(2) disclosures, some broker-dealers may have overlooked the participant disclosure guidance about brokerage accounts in Field Assistance Bulletin (FAB) 2012-02.

While the legal obligation is imposed on plan sponsors, the obligation will, as a practical matter, be on broker-dealers, since plan sponsors do not have the information or capability of making these disclosures. As a result, they will turn to their broker-dealers to satisfy the compliance requirements.

There are several questions and answers in the FAB about brokerage accounts, but for the moment, I want to focus on Q&A-13, which discusses the requirement for quarterly disclosures of dollar amounts to participants. Generally stated, the 404a-5 regulation requires that plan sponsors provide participants with statements of the dollar amounts of certain charges to their accounts during the preceding quarter. That requirement applies expenses to brokerage accounts, as well as for other costs. While most people think of the requirement in terms of a quarterly statement, the regulation permits compliance through interim statements, for example, confirmation statements or monthly statements. In addition to the dollar amount of the fees, the statement must also include a brief description of the services. The example given in Q&A-13 is: "The description of the services must clearly explain the charges (e.g., $19.99 brokerage trades, $25 brokerage account minimum balance fee, $13 brokerage account wire transfer fee, $44 front-end sales load.”

As a result, broker-dealers need to determine if and how they can satisfy these disclosure requirements. For example, some of my clients have told me that it will be difficult for them to disclose the front-end sales loads for mutual funds as a dollar amount. Stated slightly differently, those broker-dealers are not providing the information in that form at this time and it will take some work to be able to do it. Unfortunately, the quarterly statement requirement applies beginning November 14 of this year. As a result, broker-dealers need to be focusing on this issue.

Article provided by Fred Reish. Reish is a partner Drinker Biddle in Los Angeles. He works in the firm's Employee Benefits & Executive Compensation Practice Group and is chair of the Financial Services ERISA Team. He has specialized in employee benefits law since 1973 and works with both private and public sector entities and their plans and fiduciaries; representation of plans, employers and fiduciaries before the governing agencies (e.g., the IRS and the DOL); consulting with banks, trust companies, insurance companies and mutual fund management companies on 401(k) investment products and issues related to plan investments; and representation of broker-dealers and registered investment advisers on issues related to fiduciary status and compliance, prohibited transactions and internal procedures.

As previously discussed in K.I.S.S.: Keep it Simple and Straight Forward with Safe Harbor Plan Designs, the IRS requires that safe harbor 401(k) plans, prior to the beginning of each plan year, provide eligible employees with a notice that discloses all relevant details of the safe harbor match or nonelective contribution (the "Safe Harbor Notice” or the "Notice”). The purpose of this notice is to inform the employees of the matching or nonelective contribution.

The safe harbor notice must be provided to eligible employees no later than 30 days prior to the start of the plan year, but no more than 90 days. For plans with a plan year starting January 1, the deadline for providing the notice is quickly approaching – December 1. The safe harbor notice must also be issued to each newly eligible participant throughout the year.

The safe harbor notice must include the following descriptions:

• The plan(s) included in the safe harbor provision
• The formula used to compute the safe harbor match or safe harbor nonelective contribution
• Any other possible contributions that may be provided
• The eligible compensation on which the contributions are based
• The method for participants to make elections
• The applicable withdrawal and vesting provisions

The notice must be written out and provided to all participants free of charge as either a hard copy or electronic copy. The notice must be easily accessible and understandable by the participant. If the notice is distributed electronically, the plan is required to provide a hard copy if requested by participants.

If a written safe harbor notice is not provided to eligible participants, but instead, participants are informed verbally, the plan has not complied with the notice requirement. If the plan, for any reason, does not provide the participants with the safe harbor notice, corrective contributions by the plan sponsor are required if the participants’ decision to defer would have been different had the notice been provided. Please refer to the IRS Correction Programs for more detail on when to use the Self Correction Program (SCP), Voluntary Correction Program (VCP) and Audit Closing Agreement Program (Audit CAP) and other Fix-It Guides containing  guidance on how to fix common mistakes. Additionally, the IRS addressed this issue in its Retirement News for Employers newsletter, Fall 2008 edition. In all cases, it is important for the employer to review its administrative procedures to eliminate the likelihood that the error will recur.

Similar notices must be distributed to participants when the plan decides to abandon the safe harbor feature. The abandoning notice has the same requirements as the regular notice in regard to timing and distribution. The plan must provide details concerning the plan amendment to abandon the safe harbor formula and the effective date when these contributions will end. This notice allows time for participants to make desired changes to their deferrals before the amendment becomes effective.

For more detail please see our previous blogs, How to Stop a Safe Harbor Non-Elective Contribution and the possibility of distributing "Maybe” Notices for Safe Harbor Plans. Failing to provide a safe harbor notice can be expensive to a plan sponsor.  Corrective contributions to plan participants may be necessary. Additionally, DOL regulations impose penalties of up to $1,000 per day for failure to provide disclosures, such as Qualified Automatic Contribution Arrangement (QACA), which is a type of safe harbor plan. Needless to say, the best policy is to avoid penalties and correction programs.

Remember, if you have a safe harbor plan, don’t forget to distribute your safe harbor notices by December 1.

Stacey Snyder is a Staff Accountant in the Accounting and Auditing Department of  Belfint, Lyons & Shuman, P.A. As a member of the retirement plan audit group, she enjoys auditing single employer and Taft-Harley multiemployer benefit plans, including safe harbor plans, in addition to numerous other plan designs.  For more information about Belfint, Lyons & Shuman, P.A. visit www.belfint.com

A: Spousal consent is not required for RMDs. See 1.401(a)(9)-8, A-4.2.

Absent spousal consent, the plan may distribute in the form of a QJSA, and the consent requirements of sections 411(a)(11) and 417(e) are deemed to be satisfied if the plan has made reasonable efforts to obtain consent from the participant's spouse. Check the plan document for any specific provisions.

Q: John is in the real estate business. He buys buildings and holds them in an LLC.  Each building is owned by a separate LLC and John personally has a 3% to 60% ownership interest in each LLC. John also is the Managing member of each LLC.  Some of the LLCs have employees. In addition, John owns 100% of JMC, Inc. (John's Management Company).  JMC manages the buildings and has employees.

Client wants to set up a plan that covers only JMC, Inc.  Are the LLCs part of an Affiliated Service Group? Or put another way, does John need to also cover the employees in the LLCs?

A: Assuming that the LLCs are not all related (as defined under section 144(a)(3), below) to each other, John does not need to consider the employees in the LLCs.

Q: A 401(k) plan was taken over in 2008 from prior administrator. Eligibility in document is 3 months of service. Plan is tested on statutory basis. Realized now (2012) that employees who are part time were not offered the option to defer over the years. They were using other benefit guidelines in determining who was eligible for the plan then applied the 3 months. Plan had a match formula that was discretionary.

If the plan was administered with different legibility rules, is there any way the document can now be amended to cover what they were doing in practice?

A: If the plan incorrectly excluded eligible employees, correction by retroactive amendment is not available.

Q: If they need to correct, what rate do we use for the deferrals when it was tested statutorily?

A: I'm sorry; what does "tested statutorily" mean in this context? If you are referring to the ADP test, the employer must contribute an amount equal to the NHCE ADP times the participant's compensation times 50%. All of the eligible NHCEs in a given plan year must be included in determining the NHCE ADP for this purpose.

Q: For the match do we just use the compensation from the entire period up to the point they stopped the match?  

A: Yes. And you base the match on the NHCE ADP, not the 50% amount.

Q: Are there lost earnings on the deferrals? Lost earnings on the match?  

A: Yes, and yes.

Q: Is a 5330 needed for anything besides the lost earnings?

A: Form 5330 is not needed for lost earnings or anything else.  The employer contributions are not participant deferrals, so there is no prohibited transaction.

Q: Client (non-profit organization) has a 403(b) plan with a September 30 year end. They wanted to do a 5% flat discretionary contribution, annual calculation. They calculated this amount in December and deposited it without running it by me.It turns out that the contribution figures they deposited are wrong. They did NOT abide by the "comp while participant" and "monthly entry dates" rules of their plan.

I did a correction report for them, but they REFUSE to submit it to the provider. They say that it is "discriminatory" to take money back from some people and not others. I, on the other hand, have informed them that it is discriminatory to give money to people who didn't earn it.

A: This is not really a nondiscrimination issue.  Failure to follow the terms of the plan document is an operational failure.

Q: Because this is a 403(b) Plan (no owners, no HCEs), I can't tell them that they will "lose qualified status." What can I tell them?

A: That penalties may be assessed by the IRS?That the value of the 403(b) policies will become currently taxable to the affected participants.  In this case, all participants are affected.  See §1.403(b)-3(d)(1)(ii).

Q: Employer has a 3% non elective safe harbor 401(k) plan. No problem there. Then outside of the plan they give employees 1% in company stock for any deferral contributions they make from 4% to 6%. So, everyone gets 3% in the plan whether they defer or not and then people who defer more than 3% they receive employer stock outside of the plan.  

Not sure what to think here. . . on one hand the stock is not being contributed to the plan so, no big deal. But, on the other hand, they are influencing how much people defer based on this incentive they are giving outside of the plan.  Is there a problem with this arrangement?

A: Yes. Specifically:   §1.401(k)-1(e)(6)(i) provides that "A cash or deferred arrangement satisfies this paragraph (e) only if no other benefit is conditioned (directly or indirectly) upon the employee’s electing to make or not to make elective contributions under the arrangement."  

§1.401(k)-1(a)(5)(ii) provides that the deferrals are treated as non elective employer contributions for purposes of  sections 401(a), 404, 409, 411, 412, 415, 416, and 417.  

§1.401(k)-1(a)(5)(iii) provides that the 401(k) deferrals are currently taxable to the participants.

Q: I am getting conflicting answers from numerous different outlets on what is the permissible  way to correct a 402(g) failure. Can you please tell me the proper way to correct this type of failure, for both in the current year, and previous year?

A: The correction methodology depends on whether the excess occurred in a plan (or plans) sponsored by the same employer or controlled group, or if there is an excess because the participant deferred into 2 plans of unrelated employers, but there is not an excess in either plan.  

The section 402(g) limit applies to an individual. A 402(g) excess can exist if the participant defers more than the maximum amount ($17,000 for 2012) into 2 (or more) plans of unrelated employers, even if the deferral made to each plan does not exceed the limit.  

Section 401(a)(30) requires a 401(k) plan to provide that the amount of a participant's deferrals "under such plan and all other plans, contracts, or arrangements of an employer maintaining such plan may not exceed the amount of the limitation in effect under section 402(g)(1)(A)"  

So, an individual who defers (say) $15,000 into each of two 401(k) plans sponsored by unrelated employers violates section 402(g), but neither plan violates section 401(a)(30).  

Since neither plan violates section 401(a)(30), a corrective distribution is not required to prevent a plan qualification failure.  In this case, a plan may provide that a participant can request the plan to distribute the amount of the 402(g) excess. Such excess must be distributed by the April 15 following the calendar year in which the excess arose. Note that this is an optional plan provision; a plan is not required to make such corrective distribution.  

If the plan does not distribute the 402(g) excess by April 15 (pursuant to the participant's request), the excess cannot be distributed until there is a distributable event. In this case, the amount of the 402(g) excess is treated as any other pre-tax deferral for distribution purposes; it is eligible for rollover, and is a taxable distribution to the participant if not rolled over.  

Now, if the participant were to defer the same $30,000 into a single plan, we would have a 402(g) excess. We would also have a violation of section 401(a)(30). Because compliance with section 401(a)(30) is a qualification requirement, the plan must distribute the excess by April 15. If the excess is not distributed by April 15, the plan has a qualification failure. The regulations do not allow such excess to be distributed prior to a distributable event. However, because this is a qualification failure, a correction can be made under Rev Proc 2008-50. Specifically, the plan can distribute the excess after April 15, even if there is not a distributable event. Under this correction method, the distribution is taxable in the year distributed, and is not eligible for rollover.

TAG is a technical support service that offers answers to pension questions via e-mail. TAG subscribers have access to an extensive Web site with a full array of links to primary source materials, a database of over 4,000 FAQs asked by pension professionals, tools and much more. Subscribers also receive daily updates on breaking news in the industry. For more information about TAG, go to: http://www.tagdata.com. TAG is part of Wolters Kluwer Law & Business, which includes CCH, Aspen Publishers, and FTWilliam.com.

Describe the topic you will speak about during NIPA’s 2013BMC.

Our "day job" is to help individuals and organizations powerfully communicate their most important messages. I will speak about the monumental difference between communicating WHAT we do versus WHY we do what we do.  Additionally, I'll speak about the proper way to create and deliver our most important presentations.  

How do you think your presentation will help TPA business owners who attend the 2013BMC?

What does it mean to build a successful business?  The easy response, the one we all expect, is related to net profits, customer count and employee base. While all of these factors are absolutes and must be in place, a truly successful business is exemplified by the purpose it serves. My presentation is very revealing to even the most seasoned professional; this session will make you think about what you believe and how those beliefs impact every area of your business.  We rarely stop to ponder exactly what it is that we believe and how those beliefs affect our businesses.  I hope my session helps TPA business owners understand how to focus their beliefs to attract the best customers.

What do you think attendees will take away from each of your sessions?

Hopefully attendees will take away a whole bunch from my presentations, but, if I had to boil it down to a few things:

1. The manner in which we typically communicate is incredibly important, and often, we get it very wrong.
2. A road map to memorable communications exists; it's easy to follow and it makes a huge difference in all we do.
3. An new approach that can help attract clients and make business owners excited about their business.

What is a cool concept or trend you’ve seen recently within the industry that business owners should pay attention to?

We've been doing a lot of work on purpose driven communications. Basically, it's an idea that has been around forever but is just now starting to take hold in corporate culture.  This trend follows the concept of WHY over WHAT and HOW, it sounds simple, but it's definitely not easy!  Business owners should pay attention because the largest, most well respected brands are warming to this trend but are slow to adopt.  Business owners attending this conference are more nimble, more able to adjust and change ahead of the curve, a huge competitive advantage.

Learn more about NIPA's 2013BMC and register today!

In DOL Field Assistance Bulletin (FAB) 2012-02R, the Department of Labor explained the disclosures for individual brokerage accounts in participant-directed plans. I am concerned that many broker-dealers have not focused on these new "requirements". That is true for several reasons, including:

• So much money and energy have been devoted to complying with the plan disclosure requirements, that is, the 408(b)(2) disclosures.
  
• The 404a-5, or participant, disclosure requirements are imposed on plan sponsors, in their fiduciary capacity. Stating this slightly differently, the participant disclosures for brokerage accounts are not imposed on broker-dealers, but instead are placed on the shoulders of the plan sponsors. Since it is not a legal responsibility for broker-dealers, it has not received the same attention as the 408(b)(2) disclosures. However, as a practical matter, plan sponsors will turn to the broker-dealers and insist that they satisfy those disclosure requirements. That seems like a reasonable position, since the information is in the control of the broker-dealers.

The FAB provides detailed information about the requirements. To name a few, there is a requirement for a written description of the brokerage account; there must also be an explanation of any fees and expenses that are likely to be incurred in the brokerage account; and, participants must be provided with statements, at least quarterly, describing the fees and charges, both as dollar amounts and in a narrative form.

My sense is that few broker-dealers are prepared to offer assistance at that level of detail. However, I expect that will change now that the work on the 408(b)(2) disclosures is behind us.

Article provided by Fred Reish. Reish is a partner Drinker Biddle in Los Angeles. He works in the firm's Employee Benefits & Executive Compensation Practice Group and is chair of the Financial Services ERISA Team. He has specialized in employee benefits law since 1973 and works with both private and public sector entities and their plans and fiduciaries; representation of plans, employers and fiduciaries before the governing agencies (e.g., the IRS and the DOL); consulting with banks, trust companies, insurance companies and mutual fund management companies on 401(k) investment products and issues related to plan investments; and representation of broker-dealers and registered investment advisers on issues related to fiduciary status and compliance, prohibited transactions and internal procedures.

The IRS issued Revenue Procedure 2012-35 to update its letter-forwarding program forhumane purposes. The prior version, contained in Revenue Procedure 94-22, authorized theforwarding of letters from retirement plan administrators in an effort to locate missingparticipants or beneficiaries. The new procedure, which applies to letter-forwarding requestspostmarked on or after August 31, 2012, does not authorize the forwarding of letters fromretirement plan administrators to missing participants. Consequently, plan administrators willbe limited to using private locator services or the Social Security letter-forwarding program in
attempting to reach participants or beneficiaries that they cannot find.

Background

Under Revenue Procedure 94-22, the letter-forwarding program was made available to individuals,
corporations and organizations, and state and federal governmental agencies attempting to locate
missing individuals for a humane purpose. Humane purposes included family members seeking to
establish contact to reunite with a missing relative, a company or organization (such as a plan
administrator or the sponsor of a qualified retirement plan) holding assets that may be due a missing
individual, or a state or federal agency seeking assistance in locating a missing individual. Under the
prior procedure, the requester would submit a letter explaining why the letter needed to be forwarded
and provide both the Social Security number of the missing individual and a copy of the letter to be
forwarded. If the IRS located an address, the letter would be forwarded in an IRS envelope. The
recipient would be advised that the IRS did not divulge to the requester either the recipient’s address or
the fact that the letter was forwarded, and that the decision whether to respond is entirely that of the
recipient. There was no charge for forwarding 49 or fewer requests. For 50 or more requests, there
was a flat charge of $1,750, plus $0.01 per address search and $0.50 per letter forwarded.

IRS Withdraws Forwarding Service for Plans

In Revenue Procedure 2012-35, the IRS states that it will no longer forward letters from plan
administrators to missing participants because several alternative missing person locator services,
including the Internet, have become available since 1994 and because the IRS no longer views
reuniting individuals with financial assets to be a humane purpose.

Social Security and Other Options

Although the IRS will no longer be forwarding letters to missing participants, the Social Security
Administration continues to offer a letter-forwarding program for situations in which a missing person is
due "a sizeable amount of money,” among other reasons. Letters should be sent to the address in
Baltimore, Maryland noted at the website, along with a nonrefundable check for $25 per letter.

The Department of Labor (DOL) in Field Assistance Bulletin 2004-02 suggested a number of other
options for locating a missing participant or beneficiary before determining that such individual cannot
be found and disposing of his/her account balance when terminating a defined contribution plan. The
DOL suggests the following options as additional methods for searching for a missing participant or
beneficiary:

• Use certified mail
• Check the records of related plans to the extent not precluded by privacy requirements
• Check with the designated plan beneficiary
• Use a commercial locator service or a credit reporting agency

INSIGHT

As part of their effort to comply with required plan participant communications,many plan sponsors audit participant records on a regular basis to ensurecontact information -- such as addresses -- is current. This audit also helpsidentify participants who died, resulting in more accurate reporting of liabilitiesand a reduction in PBGC premium costs. Buck Consultants offers a Retirement
Plan Alive Audit specifically aimed at this type of review.

In Closing

Given the availability of a number of alternative resources, as a practical matter, the elimination of the
IRS’s letter-forwarding program should not adversely affect plan administration or operations.

This FYI is intended to provide general information. It does not offer legal advice or purport to treat all the issues surrounding any one topic. © 2012 Buck Consultants®, L.L.C. All Rights Reserved

Article provided by Fred Reish. Reish is a partner Drinker Biddle in Los Angeles. He works in the firm's Employee Benefits & Executive Compensation Practice Group and is chair of the Financial Services ERISA Team. He has specialized in employee benefits law since 1973 and works with both private and public sector entities and their plans and fiduciaries; representation of plans, employers and fiduciaries before the governing agencies (e.g., the IRS and the DOL); consulting with banks, trust companies, insurance companies and mutual fund management companies on 401(k) investment products and issues related to plan investments; and representation of broker-dealers and registered investment advisers on issues related to fiduciary status and compliance, prohibited transactions and internal procedures.