Millennials and Retirement

In today’s changing economic climate, younger generations are facing new obstacles in saving for retirement. In contrast to previous generations, Millennials are set to have fewer Social Security benefits, as well as less personal retirement savings from a 401(k) or other defined contribution plan, due today’s low returns market, and increasing medical costs. As a result of these obstacles, many Millennials worry about the security of their retirement future.

A recent study has shown that more than 60% of Millennials are unsure about when they will be able to retire, if they even get the chance at all. While 59% or millennials making $150k+ a year believe that will be financially secure enough to retire when they choose, only 19% of those making less than $35k a year feel this same level of security.

A large portion of this lack of retirement preparedness stems from an imminent decrease in pension and Social Security benefits. This lack of faith in government-sponsored benefits is understandable, considering that the Social Security Old-Age and Survivors Insurance (OASI) trust fund is set to run out in 2035, eight years before the first Millennials reach retirement age. Furthermore, the Disability Income (DI) and the Health Insurance (HI) trust funds are both set to run out in 2023, a full twenty years before the first Millennials reach retirement age.[1] While there is a good chance that these programs will be officially retained throughout Millennial retirement, they will all have to be restructured to make up for the lack of funds. This means that the program benefits will be decreased, while workforce taxes are increased over the coming years. This means not only fewer benefits in retirement, but also less pocketed income for today’s workforce, potentially forcing some to reduce their annual retirement contributions.

Also, despite the reduced government benefits, increasing healthcare costs, and low-returns market, close to half (46%) of Millennials have not yet started saving for retirement for various reasons, the largest of which is wanting to pay off current debts before starting retirement saving[2].

In contrast to this, in an effort to combat the current economic conditions, close to two-thirds (63%) of Millennials have actively sought out information to guide their financial decisions and retirement planning, in comparison to only 34% of Baby Boomers.[3] When seeking financial guidance, Millennials tend to ask for the most help with calculating their needed retirement savings (32%), finding strategies to help pay off their debt (32%), creating a retirement savings strategy (31%), and determining appropriate investments to boost their savings (28%).[4]

The Department of Labor’s RFI

The U.S. Department of Labor recently released a Request for Information (RFI) regarding its Fiduciary Rule. According to the Department, this RFI “seeks public input that could form the basis of new exemptions or changes/revisions to the rule and PTEs.” They are further asking advice on whether or not the original January 1, 2018 applicability date should be postponed, and in the event of delayed applicability, they have also asked for an estimated “time expected to be required” for viable, long-term solutions to the new fiduciary guidelines.

The RFI listed “clean shares” as one of the best, long-term solutions “to the problem of mitigating conflicts of interest with respect to mutual funds.” However, funds will need more time to develop clean shares than is allowed by the Jan. 1, 2018 deadline for full compliance, hence the need for a new estimated compliance timeline.

The Department also listed fee-based annuities as a viable option for Fiduciary Rule compliance. In light of these innovative solutions, the Department would further like to know if “it would be appropriate to adopt an additional more streamlined exemption or other rule change for advisers committed to taking new approaches like those [listed above].”

In addition to these general commentaries on the transition period thus far, the DOL also listed over a dozen questions, including:

  • “Would a delay in the January 1, 2018 applicability date of the provisions…reduce burdens on financial service providers and… [allow] more efficient implementation…What costs and benefits would be associated with such a delay?”
      • “What has the regulated community done to comply…? Are there market innovations that the Department should be aware of beyond those discussed herein that should be considered in making changes to the Rule?”
      • Questions relating to the cost and efficiency of clean shares, including “How long is it anticipated to take for mutual fund providers to develop clean shares and for distributing Financial Institutions to offer them…?”
      • Question 9 seeks information of other streamlined approaches to the Fiduciary Rule outside of clean shares, T-shares, and fee-based annuities
      • “Are there ways in which the Principal Transactions Exemption could be revised or expanded to better serve investor interests and provide market flexibility? If so, how?”
      • “…To what extent would the ongoing availability of PTE 84-24 for specified annuity products, such as fixed indexed annuities, give these products a competitive advantage vis-a-vis other products covered only by the BIC Exemption, such as mutual fund shares?”
  • “To the extent changes would be helpful, what are the changes and what are the issues best addressed by changes to the Rule or by providing additional relief through a prohibited transaction exemption?”

Responses to these questions are due soon; responses regarding a delay of the January 1, 2108 date must be submitted on or before 15 days after the RFI is officially published in the Federal Register. All other responses must be submitted on or before 30 days after the RFI’s release in the Federal Register.

Revenue Procedure 93-42

Revenue Procedure 93-42

Internal Revenue Service

1993-2 C.B. 540

 

26 CFR 601.201: Rulings and determination letters.

Rev. Proc. 93-42

SECTION 1. PURPOSE AND OVERVIEW

.01 This revenue procedure provides guidelines for substantiating com­pliance with the nondiscrimination rules. Specifically, the guidance applies for purposes of substantiating that a plan satisfies the following require­ments: nondiscrimination as to coverage under section 410(b) of the Internal Revenue Code, including the determination of whether an employer operates qualified separate lines of business (QSLOBs) under section 414(r); nondiscrimination in both the amount of contributions or benefits and the current availability of benefits, rights, and features under section 401(a)(4); and nondiscrimination with regard to an alternative definition of compensation under section 1.414(s)-1­(d)(3) of the Income Tax Regulations. These requirements are collectively re­ferred to as the “nondiscrimination requirements” for purposes of this revenue procedure. Where relevant, this revenue procedure applies to the testing of former employees as well as current employees. Unless specifically pro­vided otherwise, this revenue procedure does not apply to the special nondis­criminatory amounts tests under section 401(k)(3) or (m)(2).

 

.02 The guidance in this revenue procedure is designed to allow em­ployers to use alternative methods for substantiating compliance with the non­discrimination requirements. The Inter­nal Revenue Service will treat a plan as satisfying the nondiscrimination re­quirements where an employer shows compliance under these alternative methods because these methods are intended to demonstrate whether there is a high likelihood that the plan satisfies the nondiscrimination require­ments. The guidance in this revenue procedure should be interpreted in a reasonable manner consistent with this purpose.

 

.03 Section 2 of this revenue proce­dure provides standards for determining the quality of data that is appropriate for testing. Section 3 provides stand­ards for identifying the population of employees who must be taken into ac­count for testing. Section 4 provides special rules for determining the highly compensated employees (HCEs). Sec­tion 5 provides the standards under which an employer can rely on a prior year’s test. Section 6 provides special rules for testing multi-employer plans. Section 7 provides special rules for employers that operate QSLOBs.

 

SEC. 2. QUALITY OF DATA

 

.01 If an employer maintaining a plan does not have precise data avail­able at reasonable expense, then the employer may substantiate that the plan satisfies the nondiscrimination requirements using less than precise data if (1) the data being used is the best data available for the plan year at reason­able expense, and (2) the employer reasonably concludes that demonstrating compliance with the nondiscrimina­tion requirements using this data establishes a high likelihood that the plan would satisfy the nondiscrimina­tion requirements using precise data. Data that satisfies this section 2.01 is referred to in this revenue procedure as “substantiation quality data.”

 

.02 For a defined contribution plan, an employer usually obtains precise data for making allocations to accounts and will have this precise data avail­able for the plan year. Thus, to the extent that the data obtained for alloca­tions is relevant to testing for non­discrimination, the substantiation quality data that the employer will have for the plan year to test a defined contribution plan generally will be precise data. However, data as to allo­cations generally is not relevant for testing a defined contribution plan that satisfies section 401(a)(4) of the Code using a design-based safe harbor under section 1.401(a)(4)-2(b)(2) or 1.401(a)­(4)-8(b)(3) of the regulations. Thus, for example, in the case of such a design-based safe harbor plan, for purposes of demonstrating compliance with section 410(b), substantiation quality data need not include data obtained for alloca­tions. In addition, the mere fact that precise data is available for a defined contribution plan does not preclude, with respect to a defined benefit plan maintained by the same employer, the use of less than precise data that is otherwise substantiation quality data.

 

.03 For an employer demonstrating satisfaction of the average benefits percentage test, employee data gener­ally is needed for all plans of that employer. In this case, individual employee data for some plans may not be available at reasonable expense. For example, if a plan does not use com­pensation for purposes of determining accruals, the best available data for the employees who benefit solely under that plan may be the average compen­sation for all employees in the plan and, if the employer is imputing per­mitted disparity, the best available determination of covered compensation may be based on the average age of the employees. Similarly, the best available data with regard to service may be the average service for all employees in the plan. This average data is substantia­tion quality data only if the employer reasonably concludes that demonstrat­ing compliance using this data estab­lishes a high likelihood that the plan would satisfy the average benefits percentage test using precise data. However, this high likelihood standard would not be satisfied if the average service of the nonHCEs was greater than the average service of the HCEs.

 

.04 The following examples illus­trate principles in this section.

 

Example 1 . Employer A sponsors a defined benefit plan for the employees in Divisions X, Y, and Z, which are located in different geographic areas. Each division separately maintains its own payroll and personnel records. Under Employer A’s plan, the relevant components for determining the em­ployees’ accrual rates are compensa­tion, age, and service. The plan uses a definition of compensation that satisfies section 414(s) of the Code. Because of the cost of gathering and merging precise data for all employees in each division, Employer A determines that for 1995 the best data that is available at reasonable expense is the data that is gathered as of the 1995 valuation date and used for preparing the Schedule B of the 1995 Form 5500. The valuation data includes each participant’s rate of pay, date of birth, and date of hire. Using the valuation data and reasonable assumptions to construct each em­ployee’s compensation and service his­tory, Employer A’s plan passes the tests for determining whether the plan meets the nondiscrimination require­ments. Because Employer A reasonably expects this data to approximate the relevant compensation, age, and service components, Employer A reasonably concludes that there is a high likelihood that the plan also would satisfy the nondiscrimination requirements if it were tested using precise data.

 

Example 2 . The facts are the same as in Example 1 , except that the data gathered for Division Y is missing the date of hire for a group of Division Y employees that is a small percentage of the total employees in the plan. An estimate was made for these em­ployees’ years of service on the basis of the average number of years of service for other employees in Division Y of the same age. The estimation of the missing data does not preclude Employer A from reasonably conclud­ing that there is a high likelihood that the plan would satisfy the nondis­crimination requirements using precise data. If, however, Employer A were missing relevant data on one or more of the most highly compensated em­ployees in the plan, or on a group of employees subject to a benefit formula that generally was not available to the other employees, then Employer A would be required to undertake more scrutiny of the underlying information to support the reasonableness of its conclusion.

 

Example 3 . The facts are the same as in Example 1 , except that Employer A maintains two plans, Plan XY for employees in Divisions X and Y and Plan Z for employees in Division Z. Plan XY’s minimum age and service eligibility conditions are the attainment of age 21 and the completion of one year of service. Plan Z provides imme­diate entry upon attainment of age 21. Employer A is testing Plan Z using the option of section 1.410(b)-6(b)(3)(ii) of the regulations that permits the disag­gregated portion of the plan benefiting otherwise excludable employees to be tested separately. In separately testing the portion of Plan Z benefiting other­wise excludable employees, the regula­tions require that only the group of employees who have attained age 21 but have not yet completed one year of service be taken into account. Em­ployer A cannot identify, at reasonable expense, the group of employees in Divisions X and Y who have attained age 21 but have not yet completed one year of service. Thus, for purposes of applying the separate test to the portion of Plan Z benefiting otherwise exclud­able employees (i.e., those who have attained age 21 but have not yet com­pleted one year of service), Employer A treats as excludable the employees in Divisions X and Y who are excludable under Plan XY, even though some of those employees (i.e., the excludable employees under Plan XY who have attained age 21) are required by the regulations to be taken into account in separately testing this disaggregated portion of Plan Z. Using this data, the disaggregated portion of Plan Z passes the tests for determining whether it meets the nondiscrimination require­ments. Because the relative composi­tion (in terms of HCEs and nonHCEs) of the group of employees who have attained age 21 but have not yet completed one year of service is similar among the Divisions, Employer A reasonably concludes that there is a high likelihood that the disaggregated portion of Plan Z also would pass if the Division X and Y employees in this age and service range also were taken into account.

 

SEC. 3. SINGLE DAY “SNAPSHOT” TESTING

 

.01 An employer may substantiate that a plan complies with the non­discrimination requirements on the basis of the employer’s workforce on a single day during the plan year (snapshot day), provided that day is reasonably representative of the employer’s workforce and the plan’s coverage throughout the plan year. A snapshot day will not be treated as failing to be reasonably representative solely because of a significant change in the employer’s workforce caused by an extraordinary event, such as a merger or acquisition. The snapshot day for a plan generally must be consistent from year to year. A single snapshot day must be used for each plan being tested; for this purpose, plan is defined in section 1.401(a)(4)-12 of the regulations. Different plans main­tained by the same employer may use different snapshot days or the same snapshot day.

 

.02 Under this section 3, the em­ployees taken into account for purposes of substantiating compliance are solely the employees of the employer on the snapshot day (snapshot population) de­termined by applying sections 414(b), (c), (m), (n) and (o) of the Code as of the snapshot day. An employee’s status on the snapshot day is the status that is relevant for purposes of substantiating compliance for the year. For example, an employee who is a collectively bargained employee on the snapshot day is a collectively bargained employee for substantiating com­pliance. Similarly, an employee who is covered under a particular plan on the snapshot day is covered under that plan for substantiating compliance.

 

.03 A snapshot day is selected ac­cording to the following:

 

(1) The employer tests the amount of benefits or contributions and the current availability of benefits, rights, and features using substantiation quality data for the snapshot popula­tion. Generally, it will be practical for the employer to select a snapshot day that is the same day for which the employer has substantiation quality data. For example, if an employer determines that the valuation data for a defined benefit plan is substantiation quality data, it would be practical for the employer to select the valuation date as its snapshot day, provided that day is reasonably representative, so that in collecting its valuation data the employer simultaneously collects sub­stantiation quality data for all of the employees in the snapshot population.

 

(2) An employer need not, however, select a snapshot day that is the same day as of which substantiation quality data is available. For example, if an employer were using a January 1 snap­shot day for its defined benefit plan, the employer might also select January I as the snapshot day for its defined contribution plan, provided that day is reasonably representative. Under sec­tion 2, if the defined contribution plan is a safe harbor plan under section 1.401(a)(4)-2(b)(2) or 1.401(a)(4)-8(b)(3) of the regulations and need only determine the number of em­ployees who benefit under the plan, the employer’s data as of the snapshot day may constitute substantiation quality data. In other cases, the employer generally will not have substantiation quality data for a defined contribution plan until the end of the plan year, when the employer calculates allocation amounts. In the latter case, the snapshot population could be estab­lished as of the beginning of the year for the defined contribution plan, but whether the plan meets the non­discrimination requirements would be determined as of a date later than the snapshot day, when the substantiation quality data for the snapshot population is available to the employer.

 

.04 If a defined benefit plan has a minimum service requirement that would preclude eligible employees from actually accruing benefits for a plan year, the application of section 410(b) of the Code to the snapshot population may overstate the plan’s coverage under section 410(b). For example, where a defined benefit plan has a provision requiring that an employee have 1,000 hours of service to accrue benefits, and the snapshot day is early in the plan year, employees who terminate after the snapshot day may have been treated as benefiting who do not in fact benefit. Similarly, if the snapshot day is later in the plan year, employees who terminate prior to the snapshot day and who fail to bene­fit because of the service requirement will not be reflected. Therefore, if employees terminate in a defined bene­fit plan with a minimum service re­quirement and the substantiation quality data or snapshot population does not reflect the level of turnover, an adjust­ment must be made to the test that reasonably compensates for the dif­ference between relative turnover rates among eligible HCEs and nonHCEs. The employer must account for the effect of the minimum service require­ment by making an appropriate adjust­ment to the ratio percentage or non­discriminatory classification percentage of section 410(b) to reflect termina­tions. For this purpose, an adjustment of 5 percent ( i.e. , 70 percent becomes 73.5 percent) for a 1,000 hour rule will be treated as a safe harbor.

 

.05 Similarly, if a defined contribu­tion plan has a minimum service re­quirement, such as a provision that limits allocations solely to those employees who are employed on the last day of the plan year, the applica­tion of section 410(b) of the Code to the snapshot population may overstate the plan’s coverage. Where a defined contribution plan’s substantiation quality data does not include actual allocation amounts as of the end of the year, however, the effect of a minimum service requirement and the need for any corresponding adjustment will de­pend upon whether the snapshot popu­lation reflects the level of turnover of eligible employees. If a defined con­tribution plan with a “last day” or similar service requirement has a snapshot day in the first quarter of the plan year and the plan’s substantiation quality data includes actual allocation amounts, then the snapshot population will be treated as accurately reflecting the plan’s coverage. In other cases where the snapshot population does not reflect the level of turnover, an adjustment must be made as described above in section 3.04. In addition, an adjust­ment to section 410(6) of 10 percent for a “last day” rule ( i.e. , 70 percent becomes 77 percent) will be treated as a safe harbor. The safe harbor adjust­ment of 10 percent also applies if the plan has both a last day rule and another minimum service requirement ( e.g. , 1,000 hour rule).

 

.06 Under this section 3, it is intended that all plan provisions that are in effect during the plan year be tested on the basis of the snapshot population. In certain cases, however, a plan may include a provision that must be tested in that plan year but that primarily affects employees who were employed prior to the snapshot day and who are not in the snapshot population. For example, the snapshot population would not reasonably represent the employees for whom an early retire­ment window is available if the win­dow was opened during the year and significant numbers of employees re­tired under the window prior to the snapshot day. In such case, the effect of the early retirement window is tested on the basis of a snapshot population that is reasonably representative of the employer’s workforce when the win­dow opens, such as the prior year’s snapshot population if it is reasonably representative.

 

.07 If an employer is substantiating whether an alternative definition of compensation is nondiscriminatory, the employer tests the definition of com­pensation on the basis of substantiation quality data for the relevant employees in the snapshot population. Thus, for purposes of section 1.414(s)-1(d)(3) of the regulations, the employer compares the substantiation quality data for the definition of compensation being tested to the substantiation quality data for total compensation.

 

.08 Although this revenue procedure does not apply for purposes of satisfy­ing section 401(k)(3) or (m)(2) of the Code, plans with salary reduction, matching, or after-tax features may be tested under this section 3 to substanti­ate compliance with the other non­discrimination requirements (e. g., coverage or current availability of benefits, rights, and features).

 

SEC. 4. SIMPLIFIED IDENTIFICATION OF HIGHLY COMPENSATED EMPLOYEES

 

.01 An employer may determine which employees are HCEs under section 414(q) of the Code under the simplified method of this section 4 as an alternative to determining HCEs in accordance with section 1.414(q)-1T of the Temporary Income Tax Regula­tions. In applying this section 4, section 1.414(q)-1T applies to the extent that it is not inconsistent with the methods specifically provided below:

 

(1) An employee is an HCE under this section 4 if (a) the employee is a 5-percent owner; (b) the employee’s compensation for the plan year exceeds the section 414(q)(1)(B) amount (in­dexed to $96,368 for 1993); (c) the employee’s compensation exceeds the section 414(q)(1)(C) arnount for the plan year (indexed to $64,245 for 1993) and the employee is in the top-paid group of employees within the meaning of section 414(q)(4); or (d) the employee is an officer described in section 414(q)(1)(D).

 

(2) The compensation used to deter­mine whether an employee is an HCE under this section 4 is compensation that reasonably approximates the employee’s section 414(q)(7) compen­sation for the plan year.

 

(3) The lookback provisions of sec­tion 414(q) do not apply to determining HCEs under this section 4.

 

(4) An employer may use the sim­plified identification of HCEs under this section 4 for one plan even if the employer uses the calendar method for identifying HCEs described in section 1.414(q)-1T, Q&A-14 (b)(4) for an­other plan.

 

.02 An employer that applies this simplified method for determining HCEs may choose to apply this method on the basis of the employer’s work­force as of a snapshot day that is the same snapshot day that the employer is using for substantiating compliance with the nondiscrimination require­ments. In addition, the employer may use a snapshot day that satisfies the requirements of section 3.01 of this revenue procedure in determining HCEs even if the employer is not using a snapshot day to substantiate com­pliance with the nondiscrimination re­quirements. In applying this simplified method on a snapshot basis:

 

(1) The employer determines who is an HCE on the basis of the data as of the snapshot day, except as provided below in (3). For example, in determin­ing the number of employees in the top-paid group of employees, only employees in the snapshot population are taken into account. Similarly, in determining who is a 5-percent owner, only the ownership of the employer on the snapshot day is taken into account.

 

(2) If the determination of who is an HCE is made earlier than the last day of the plan year, the employee’s compensation that is used to determine an employee’s status must be projected for the plan year under a reasonable method established by the employer.

 

(3) There may be employees not employed on the snapshot day that are taken into account in testing and, thus, must be categorized as either HCEs or nonHCEs. This would occur, for exam­ple, where a plan must satisfy the “ADP” or the “ACP” test in section 401(k)(3) or (m)(2) of the Code or where the employer is not substantiat­ing that a plan satisfies the non­discrimination requirements on a snapshot day but is using a snapshot day to identify HCEs. In that case, the employer may use the option described in this section, subject to the following modifications. In addition to those employees who are determined to be highly compensated on the plan’s snap­shot day, as described above, the em­ployer must treat as an HCE any elig­ible employee for the plan year who:

 

(a) terminated prior to the snapshot day and was an HCE in the prior year;

 

(b) terminated prior to the snapshot day and (i) was a 5-percent owner, (ii) has compensation for the plan year greater than or equal to the projected compensation of any employee who is treated as an HCE on the snapshot day (except for employees who are HCEs solely because they are 5-percent owners or officers), or (iii) was an officer and has compensation greater than or equal to the projected compen­sation of any other officer who is an HCE on the snapshot day solely be­cause that person is an officer; or

 

(c) becomes employed subsequent to the snapshot day and (i) is a 5-percent owner, (ii) has compensation for the plan year greater than or equal to the projected compensation of any em­ployee who is treated as an HCE on the snapshot day (except for employees who are HCEs solely because they are 5-percent owners or officers), or (iii) is an officer and has compensation greater than or equal to the projected compen­sation of any other officer who is an HCE on the snapshot day solely be­cause that person is an officer.

 

.03 If a plan provides for a defini­tion of HCEs, an employer that uses the simplified identification of HCEs under this section must amend the plan to incorporate this simplified identifica­tion method, including the use of a snapshot day if applicable.

 

SEC. 5. THREE-YEAR TESTING CYCLE

 

An employer may rely for the two succeeding plan years on the tests substantiating that a plan complies with the nondiscrimination requirements for a plan year if the employer reasonably concludes that there are no significant changes subsequent to the test ( e.g ., significant changes in plan provisions, the employer’s workforce, or compen­sation practices). For this purpose, whether a change is significant depends upon the relative margin by which the plan has satisfied the nondiscrimination requirements in the most recent year in which the plan was tested and the likelihood that the change would elimi­nate that margin. If there is a signifi­cant change in one plan provision, the effect of which can be isolated from the effect of other provisions, the employer may continue to rely on the prior test during the interim two years, provided that the employer can demon­strate that the effect of the amended plan provision is nondiscriminatory. Employers using the three-year testing cycle for purposes of substantiating compliance generally must treat the year in which the final regulations under sections 401(a)(4) and 410(b) of the Code become effective with regard to the plan as a year of significant change requiring actual testing. How­ever, if a plan first complies with these regulations in a year prior to their effective date, then the employer may treat that year, rather than the year in which the regulations are first effective, as a year of significant change for purposes of beginning the three-year testing cycle.

 

SEC. 6. MULTIEMPLOYER PLANS

 

.01 This section provides additional rules for determining whether a multi­employer plan described in section 1.410(b)-9 of the regulations satisfies the nondiscrimination requirements. These rules are provided because the plan administrator of a multiemployer plan may not have direct access to the employer-specific data that is needed for nondiscrimination testing but that is not needed for determining employees’ benefits under the plan. These rules are in addition to the other rules of this revenue procedure, such as snapshot testing and the three-year testing cycle, which also apply to multiemployer plans.

 

.02 A multiemployer plan must sat­isfy the nondiscrimination requirements on the basis of each participating employer’s disaggregated population of employees who benefit under the plan and who are not treated as collectively bargained employees under section 1.410(b)-6(d)(2) of the regulations. Failure of a multiemployer plan to satisfy the nondiscrimination require­ments may result in disqualification of the plan for all participating employers. In a proper case, the Commissioner has the authority to retain the qualified status of a multiemployer plan for innocent employers. Pursuant to this revenue procedure, the Commissioner generally will exercise this authority where the plan administrator has fol­lowed procedures that are reasonably designed to obtain from each participat­ing employer appropriate information substantiating that the disaggregated portion of the plan with respect to that employer satisfies the nondiscrimina­tion requirements and it is reasonable for the plan administrator to rely on that information. Appropriate informa­tion need not be actual data, but it must be based on the employer’s substantia­tion quality data. For example, for a safe-harbor plan under section 1.401­(a)(4)-3(b), appropriate information could include the number of the employer’s nonexcludable HCEs and nonHCEs, including the number of HCEs who are benefiting under the plan, provided that it is reasonable for the plan administrator to rely on that information. Alternatively, for example, appropriate information could be an employer’s certification that the portion of the plan benefiting its disaggregated population of noncollectively bargained employees satisfies the nondiscrimina­tion requirements based on substantia­tion quality data, provided that it is reasonable for the plan administrator to rely on that certification.

 

.03 For purposes of substantiating compliance with the nondiscrimination requirements and the “ADP” test under section 401(k)(3) of the Code, the plan administrator may rely on appropriate information provided by a participating employer as to its HCEs and nonHCEs, provided that it is reasonable for the plan administrator to rely on that information. Appropriate information includes information as to the employer’s HCEs and nonHCEs determined using the simplified identi­fication of HCEs under section. 4 of this revenue procedure.

 

.04 In determining whether the plan administrator’s procedures satisfy the standard in .02 of this section, the Service will take into account that for the 1994 plan year, plan administrators may be in the process of revising cur­rent procedures to obtain the informa­tion necessary to substantiate compliance with the nondiscrimination requirements.

 

SEC. 7. QUALIFIED SEPARATE LINES OF BUSINESS

 

.01 This section provides special rules for demonstrating that an employer operates QSLOBs. Except as otherwise provided, the other provi­sions of this revenue procedure, such as substantiation quality data, snapshot testing, and simplified identification of HCEs also may be applied for purposes of section 414(r) of the Code, such as in determining whether the administra­tive scrutiny requirement of section 1.414(r)-1(b)(2)(iv)(D) of the regula­tions is satisfied.

 

.02 Application of the QSLOB rules depends in part on the level of services provided by an employee to the em­ployer’s different lines of business and the amount of an employee’s com­pensation. The provisions of section 2 of this revenue procedure regarding substantiation quality data also apply for these purposes. Thus, for example, in determining the level of services provided by an employee to a line of business, an employer may use any reasonable estimate, provided that the estimated data satisfies the require­ments for substantiation quality data.

 

.03 Snapshot testing is applied to the determination of QSLOBs according to the following:

 

(1) An employer that uses the provi­sions of section 3 of this revenue procedure regarding snapshot testing for purposes of section 410(b) of the Code also may use snapshot testing for purposes of designating its lines of business and determining whether its lines of business are QSLOBs. In this case, a snapshot day used for section 410(b) purposes is treated as a testing day under section 1.414(r)-11(b)(6) of the regulations. Thus, if the employer applies section 410(b) to all of its plans on a snapshot basis, the first snapshot day to occur in the testing year is treated as the first testing day under section 1.414(r)-11(b)(7).

 

(2) An employer that is not using the provisions of section 3 of this revenue procedure regarding snapshot testing for purposes of section 410(b) may use snapshot testing solely for purposes of designating its lines of business and determining whether its lines of business are QSLOBs. In this case, the first testing day as determined under section 1.414(r)-11(b)(7) must be used as the snapshot day.

 

(3) Although the QSLOB rules gen­erally may be applied on a snapshot basis, snapshot testing does not apply for purposes of the requirement under section 414(r)(2)(A) that a separate line of business have at least 50 employees.

 

(4) In applying the separate work­force and management tests of section 1.414(r)-3 on a snapshot basis, the employees taken into account are only those employees of the employer on the first testing day. Pursuant to section 1.414(r)-3(c)(5)(ii), the services provided by employees to the employer’s lines of business for the testing year are based on the employees’ actual services throughout the year. However, for purposes of applying the QSLOB rules on a snapshot basis, an estimate of the employee’s services for the year will be treated as substantiation quality data even if that estimate of the employee’s services for the year is based on the employer’s reasonable expectation for the period following the first testing day. The preceding sentence applies whether or not more precise data at reasonable expense is available subse­quent to the first testing day. Thus, for example, if an employer uses snapshot testing, the determination of whether an employee is a substantial-service employee with respect to a line of business is based on a reasonable expectation of the employee’s level of services throughout the testing year, rather than the employee’s actual level of services on the first testing day.

 

(5) If an employer determines that it operates separate lines of business on the basis of a snapshot day, there may be employees not employed on the snapshot day who are taken into account in testing for purposes of the nondiscrimination requirements (e.g., the plan is demonstrating satisfaction of the “ADP” test in section 401(k)(3)). Thus, those employees must be assigned to a QSLOB. In that case, when each of those employees is first taken into account, the employer may assign the employee on the basis of a reasonable expectation of the employee’s services throughout the year.

 

.04 The three-year testing cycle un­der section 5 of this revenue procedure applies to the determination of an employer’s QSLOBs for a testing year if the employer reasonably concludes that there are no significant changes to the employer’s business that affect its lines of business in the two succeeding testing years. If a significant change affects some but not all of the employer’s QSLOBs, the employer may continue to rely on the prior test with respect to the unaffected QSLOBs during the interim two years, provided that the lines of business affected by the change are QSLOBs after the change.

 

SEC. 8. EFFECTIVE DATE

 

This revenue procedure is effective for plan years beginning on or after January 1, 1994.

Sidecar Accounts

Before the retirement community shifted to a pretax 401(k) system in the 1980s, many companies offered a supplemental savings account (to be used for short-term emergencies) to complement the defined benefit (DB) plans of their employees. These supplemental savings accounts are nearly identical to what are known today as “sidecar accounts.” A sidecar account is essentially an additional savings account that is directly linked to an employee’s existing retirement account. Under the sidecar system, funds are set aside in a short-term savings account to be used in times of emergency, in an effort to prevent the harsh tax penalties associated with hardship withdrawals from an employee’s retirement plan. Under these accounts, money will be taken from an employee’s paycheck and set aside until certain “buffer” threshold is reached. After this “buffer” amount is reached, all future funds will go directly into the employee’s retirement account, just as they would normally. To ensure a consistent, adequate amount of emergency funds between the employee and his or her retirement account, the funds will be replenished each time a withdrawal is made.

Unlike with a DB account, a participant in a defined contribution (DC) plan has the option of using some or all of his/her funds for non-retirement related expenses, mainly in times of hardship. Because these emergency funds are more readily available, one in four DC plan participants will, at some point during his or her career, use some or all of his/her savings for non-retirement based needs. This is known as leakage. Because of the increasing amount of leakage from DC accounts, a survey was conducted by LIMA, which showed that 2/3 of workers in today’s market have some interest in setting up an automatic emergency savings account in addition to their retirement account. Furthermore, 89% of employers have shown interest in offering this product. There have been further studies conducted, revealing that if an account can be psychologically associated with future income and long-term assets, with less availability for withdrawal, account holders will be more successful in resisting the temptation of making a hardship withdrawal or cash out. They will thus be more likely to prevent retirement leakage. For all of these reasons, sidecar accounts are gaining ground as a viable solution to combat account leakage in today’s retirement community.

Although these accounts come with many benefits, there are many financial and regulatory concerns surrounding them. The first among these is: who should be responsible for delivering the account to customers? Due to their already-established payroll-based structure for retirement contributions, employers seem to be the most logical option for delivering these accounts. An employer would be able to package the 401(k) and sidecar accounts together and enroll workers in both simultaneously. As simple as it may sound, many employers may not be ready to take on the added responsibility and administrative costs associated with this new plan benefit.

So, if linking the two accounts is not a viable option for a company, there are still several other paths to choose from:

  • Individually sold accounts: While still a viable option, this path is rarely chosen because linking the sidecar account with the normal retirement account can be complicated. Secondly, it can be difficult to integrate the second account with the employer’s payroll system so that savings are automatically deducted from paychecks, just like they would be with normal retirement deferral percentages.
  • MyRA: This plan option was offered by the US Treasury Department and is set up in such a way that it could be split up into both long-term and sidecar accounts. Under this system employers could more easily fund their employees’ accounts through payroll deduction.
  • Secure Choice: These retirement programs are state-led, but privately managed, and automatically enroll workers into their own IRA. Oregon, a Secure Choice state, has expressed interest in offering this form of sidecar account as an option to retirement savers. These programs use Roth IRAs, meaning they can more easily be treated as hybrid accounts in order to serve both short-and long-term needs. A downside to this is that transfers from an IRA can take up to three business days, so they may not be the best option in times of sudden hardship where funds would be needed immediately.

These options offer a lot of food for thought when it comes to helping employees protect their retirement savings. But, once an account structure has been chosen, the next step is to decide whether or not to offer automatic enrollment. If this turns out to be the best option, there are several ways to go about it, but each has its own set of serious disadvantages.[1] In an effort to combat these issues, one might look to active choice as the most viable option. Especially since research has shown that forcing employees into an active choice can greatly increase participation (even if not quite to the same levels achieved by automatic enrollment).

 

 

We believe the time is right to move from theoretical discussions about sidecar accounts into concrete action and real-world testing. Indeed, many researchers and policymakers are answering the call, actively exploring the possibility of pilot testing sidecar models. As they grapple with next steps, we hope that this analysis can help illuminate the key design choices they will face and the main considerations that should inform their decisions. We acknowledge that a sidecar account, if designed poorly, could be yet another complicated, parallel savings structure in the sea of 401(k)s, 403(b)s, IRAs, HSAs, and 529s. But if done well, we strongly believe that a sidecar account could improve the financial well-being and security of Americans in both the short and long term — an outcome that is good not only for families, but for the economy overall.

The Aspen Institute: Financial Security Program

[1] Aspen Institute: Financial Security Program. Driving Retirement Innovation: Can Sidecar Accounts Meet Consumers’ Short and Long-Term Financial Needs? Pg. 7

Hardship Withdrawals from 401(k) and 403(b) Plans

On February 23, 2017, the Internal Revenue Service released its Substantiation Guidelines for Safe-Harbor Distributions from Section 401(k) Plans. And on March 7, 2017 they released a similar memorandum regarding section 403(b) plans. These two statements outlined the requirements for safe harbor hardships in an effort to better inform the public about which events allow a plan participant to qualify for such a distribution. They also outlined steps to follow for determining whether or not a participant is eligible for a hardship distribution. Under these regulations, section 403(b) plans are subject to the same rules as the 401(k) guidelines outlined below.

The IRS gives two main steps when determining whether or not a distribution request meets the “immediate and heavy” financial need requirement:

Step 1:

  • Determine whether the employer or third-party administrator, prior to making a distribution, obtains: (a) source documents (such as estimates, contracts, bills and statements from third parties); or (b) a summary (in paper, electronic format, or telephone records) of the information contained in source documents.
    • If a summary of information on source documents is used, determine whether the employer or third-party administrator provides the employee notifications required on Attachment I prior to making a hardship distribution.

Step 2:

  • If the employer or third-party administrator obtains source documents under Step 1(i)(a), review the documents to determine if they substantiate the hardship distribution.
  • If the employer or third-party administrator obtains a summary of information on source documents under Step 1(i)(b), review the summary to determine whether it contains the relevant items listed on Attachment I.
  • If the notification provided to employees in Step 1(ii) or the information reviewed in Step 2(ii) is incomplete or inconsistent on its face, you may ask for source documents from the employer or third-party administrator to substantiate that a hardship distribution is deemed to be on account of an immediate and heavy financial need.
  • If the summary of information reviewed in Step 2(ii) is complete and consistent but you find employees who have received more than 2 hardship distributions in a plan year, then, in the absence of an adequate explanation for the multiple distributions and with managerial approval, you may ask for source documents from the employer or third-party administrator to substantiate the distributions. Examples of an adequate explanation include follow-up medical or funeral expenses or tuition on a quarterly school calendar.
  • If a third-party administrator obtains a summary of information contained in source documents under Step 1(i)(b), determine whether the third-party administrator provides a report or other access to data to the employer, at least annually, describing the hardship distributions made during the plan year.

In an article, entitled Do’s and Don’ts of Hardship Distributions, the IRS gives further advice regarding what to do and what not to do when determining hardship eligibility. They first suggest reviewing the terms of hardship distribution outlined in the plan document, including:

  • Whether or not the plan allows for hardship distributions
  • The procedures the employee must follow to make the distribution request
  • The plan’s definition of what qualifies as a hardship
  • Any limits to the amount/type of funds eligible for hardship distribution

 

After taking all necessary precautions to make sure the plan allows for the type of withdrawal being requested, the employee must then make sure the distribution is on account of an “immediate and heavy financial need” as defined under § 1.401(k)-1(d)(3)(iii)(B) of the Income Tax Regulations. The distribution will be considered in compliance with these regulations if it is for one or more of the following:

  • Expenses for medical care deductible under section 213(d) for the employee or the employee’s spouse, children or dependents (as defined in section 152) or primary beneficiary under the plan;
      • Costs directly related to the purchase of a principal residence;
      • Payment of tuition, related educational fees, room and board expenses for up to the next 12 months of post-secondary education for the employee or the employee’s spouse, children or dependents (as defined in section 152) or primary beneficiary under the plan;
      • Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure of the mortgage on that residence;
      • Payments for burial or funeral expenses for the employee’s deceased parents, spouse, children or dependents (as defined in section 152) or primary beneficiary under the plan; or
      • Expenses for the repair of damages to the employee’s principal residence that would qualify for the casualty deduction under section 165,

and the employee has provided written representation that the need cannot be adequately addressed from other sources such as:

  • Through reimbursement or compensation by insurance or otherwise;
      • By liquidating the employee’s assets;
      • By ceasing elective deferrals or employee contributions under the plan; or
      • By other distributions or nontaxable loans from plans maintained by the employer or by another employer, or by borrowing from commercial sources on reasonable commercial terms in an amount sufficient to satisfy the need,

or if a need can’t be relieved by one of the actions listed above without increasing the amount of need. For example, a plan loan can’t reasonably relieve the need for funds to purchase a principal residence if the loan would disqualify the employee from obtaining other necessary financing.

 

Once it has been determined that the plan allows for hardship distributions, and the sources available for distribution have been determined, the following steps should be taken to begin the distribution process:

  • Obtain a statement/verification of the employee’s hardship as required by the plan document’s terms
      • Determine that the exact nature of the employee’s hardship qualifies for a distribution under the plan
      • Document (following plan’s guidelines) that the employee has exhausted all other options outside of the hardship distribution
      • Document the employee’s lack of other resources (spousal/minor children’s assets) if applicable
      • Make sure the distribution amount does not exceed amount required to satisfy the employee’s immediate financial need (may be adjusted to account for any taxes or penalties at time of distribution)
      • Make sure the amount of distribution does not exceed any limits under the plan, and consists only of eligible amounts
      • Let the employee know if receival of the distribution will suspend them from making contributions to the plan for at least six months

If your plan is not properly making hardship distributions, go here to correct any mistakes: https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-hardship-distributions-were-not-made-properly

 

The IRS also released a list of responses to some FAQs regarding hardship withdrawals, such as:

  • What is the maximum amount of elective contributions that can be distributed as a hardship distribution from a 401(k) plan?
      • Cannot be more than the amount of the employee’s total elective contributions, including designated Roth contributions, as of the date of distribution reduced by the amount of previous distributions of elective contributions
      • Generally does not include earnings, qualified non-elective contributions, or qualified matching contributions unless the plan specifically allows for certain grandfathered amounts to be included
      • If provided by the plan, other amounts such as regular matching contributions and discretionary profit-sharing contributions can also be distributed in times of hardship
    • What are the consequences of taking a hardship distribution of elective contributions from a 401(k) plan?
      • Hardship distributions are eligible to be included in gross income (unless they consist of designated Roth contributions) and may be subject to additional taxes on early distributions of elective contributions
      • Unlike loans, hardship distributions are not repaid to the plan, so they will result in a permanent reduction in the employee’s account balance under the plan
      • A hardship distribution cannot be rolled over into an IRA or other qualified plan (§ 402(c)(4))
      • Hardship distributions may be subject to the 10% early distribution tax on distributions made prior to reaching age 59 ½
    • Are hardship distributions allowed from an IRA?
      • There is generally no limit when an IRA owner may take a distribution from his/her IRA, but there may be unfavorable tax consequences including an additional tax on early distributions
      • Certain distributions from an IRA that are used for expenses similar to those that may be eligible for hardship distributions from a retirement plan are exempt from the additional tax on early distributions
      • Any distribution from an IRA for higher education expenses or to finance a first-time home purchase is exempt from the early distribution tax (§ 72(t)(2)(E),(F))

In its Substantiation Guidelines for Safe-Harbor Distributions from Section 401(k) Plans, the IRS also gave a more detailed outline of the types of documentation required for each hardship distribution:

  • Notifications the Employer/Administrator must provide to the employee:
        • Notification that the distribution is taxable, and additional taxes could apply
        • The distribution amount cannot be more than the amount required to solve the “immediate and heavy financial need”
        • Earnings on elective contributions from QNEC or QMAC accounts are not eligible for hardship distribution
        • The recipient must preserve all source documents and make them available at any time, upon request, to the employer or administrator
      • General information required for a hardship request:
        • Participant name
        • Total cost of the event causing hardship
        • Amount of distribution being requested
        • Certification (provided by participant) that all information provided is true and accurate
        • Specific information required on deemed hardships
      • Medical care:
        • Name of individual who incurred the medical expenses
        • Above’s relationship to the participant
        • The purpose of medical care provided
        • Name and address of service provider
        • Total cost of medical expenses not covered by insurance
      • Purchase of principal residence:
        • Will this be the participant’s principal residence?
        • Residence address
        • Purchase price
        • Types of costs/expenses covered by withdrawal (down-payment, closing costs, and/or title fees)
        • Name and address of lender
        • Purchase/sale agreement date
        • Date of closing
      • Educational payments:
        • Name of individual on whose behalf the payments are being made
        • Above individual’s relationship to the participant
        • Name and address of educational institution
        • Categories of payments involved
        • Period covered by the educational payments (beginning and end dates of up to 12 months)
      • Foreclosure/eviction from principal residence:
        • Is this the participant’s principal residence?
        • Residence address
        • Is this a foreclosure or eviction?
        • Name and address of party that issued foreclosure/eviction notice
        • Date of foreclosure/eviction notice
        • Payment due date in order to avoid foreclosure/eviction
      • Funeral and burial expenses:
        • Name of deceased
        • Relationship to participant
        • Date of death
        • Name and address of service provider (funeral home, cemetery, etc.)
      • Damage repairs to principal residence:
        • Is this the principal residence of the participant?
        • Address of residence that sustained damage
        • Description of cause of damage, including date of the casualty loss
        • Describe repairs required, including date(s) of repair (whether still in progress or already completed)

 

Lastly, in their 401(k) Plan Fix-It Guide: Hardship distributions weren’t made properly article, the IRS also gave some helpful pointers in determining whether or not a company’s hardship distribution program is being abused or poorly managed. The first warning sign is that too many hardship requests are being made by one group or division; the second is that requests for distributions from multiple employees appear identical, because each situation should have its own individual circumstances; the third and last warning that they offer is to beware of instances where only the highly compensated employees have hardship distributions, because this may be a sign that the rank-and-file employees have not been properly notified of the availability of hardship distributions under their plan.

 

 

 

 

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-hardship-distributions-were-not-made-properly

https://www.irs.gov/retirement-plans/dos-and-donts-of-hardship-distributions

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-hardship-distributions

The Cadillac Tax

Health insurance has always been a hot topic of conversation both in the political and financial worlds, and it’s easy to see why, especially in recent years. Health care costs continue to skyrocket, not just for individuals, but also for employer-sponsored health care plans. For example, 2017 has seen health care costs increase at 79% of respondents’ organizations, as well as an 11% increase in plan costs. Due to these increasing costs, employers have started to tend towards giving more compensation in the form of benefits, rather than cash. This is all good and well…until insurance contributions lose their tax-exempt status.

The Cadillac Tax, now set to take effect in 2020, is an excise tax of 40% that will be imposed on high-value benefits above certain thresholds (e.g. $10,200 for individual coverage and $27,500 for family coverage).

The soon-to-be-implemented tax is not the only health care problem employers are facing at the moment. Employers and HR reps have recently listed some potential challenges to complying with the ACA, such as the annual reporting requirements and the time investment that will be required to stay compliant under the complex new law. Furthermore, over 66% of organizations with a seasonal workforce have reported further issues with staying compliant with the ACA. These include:

  • Tracking and monitoring employee hours and status;
  • Understanding how the ACA applies to seasonal employees;
  • Inconsistent definition of a “seasonal employee”; and
  • Administering employer-sponsored plans for seasonal employees.

The key takeaway is that employees value employer provided benefits, specifically health insurance. Employers face a dilemma of controlling an employee’s total compensation while divvying up the resources to satisfy the individual desires of each employee. Doing so in the context of ERISA regulations can be daunting task but the outcomes are advantageous for the employer and employee.

Nevada’s New Fiduciary Standard

As discussed in a previous article, the Department of Labor’s Fiduciary rule, which went in to effect on June 9, could have its final applicability date pushed back beyond January 1, 2018 to allow firms more time to come up with more cost-efficient, long-term solutions. However, despite the urgings of some to delay the final applicability date, certain states are beginning to take measures to implement new regulations that will bring the guidelines of the transition period more in line with those of the full-applicability period. Heading this movement is Nevada, who, on March 20, introduced Senate Bill 383, which was signed in to law on June 2 and is set to take effect on July 1.

This bill will revise the Nevada Securities Act, and will grant the Nevada securities administrator greater authority in defining the fiduciary duty by defining certain acts as violations or exclusions from the duty. Furthermore, under this law, investors will now have the right to sue financial planners for any “economic loss and all costs of litigation and attorney’s fees” that may result from a financial planner neglecting to act as a fiduciary, or by violating the Nevada law in any way by “recommending the investment or service. ” This bill not only broadens the definition of a fiduciary, but also gives a set definition of a financial planner as someone who: “for compensation advises others upon the investment of money or upon provision for income to be needed in the future, or who holds himself or herself out as qualified to perform either of these functions.”

Nevada is making great strides in fortifying its financial law, as well as in its compliance with the DOL’s new Fiduciary Rule. Although there are still some groups that are demanding delayed full-implementation of the law, there are several other states, including New York and California, that are moving closer in the direction of Nevada and would like to receive full implementation sooner rather than later.

For further information on this law, go to: http://scholarfp.blogspot.com/2017/06/most-nevada-financial-planners-become.html

A Look at The New Fiduciary Rule’s First Month

The Department of Labor’s Fiduciary Rule went in to effect less than a month ago, and already new concerns surrounding it are arising. The first of these is the struggle of the SEC and DOL to come to an agreement on the technical definition of a “fiduciary.” For the law to go in full effect on its set January 1, 2018 applicability date, these organizations must come to a mutual decision on the definition of fiduciary and standard of care sometime before December 31. Coming to this agreement before the set date is turning out to be increasingly impossible. It is the opinion of Fred Reish of Drinker Biddle that “the DOL will extend the transition period, perhaps for as much as a year. That would allow time for the two agencies to work together in a thoughtful manner and at a reasonable pace.”[1] In the meantime, all the transition period regulations of the Fiduciary Rule will remain in place.

Although the full standards set by the regulation will not be in place until January 1, 2018 at the earliest, there are still some important things to remember in the meantime. Primarily, among these is a message to employers; even if you have entrusted your plan oversight to an insurance provider, payroll company, or other TPA, you could still be held liable by the DOL for any non-fiduciary actions. This is because some record-keepers and TPAs have claimed that they are not Fiduciaries, and that for a company’s plan to satisfy the Fiduciary Rule, plan owners must obtain a third-party fiduciary service provider to stay compliant with the new law. Doing so will simply add another layer of unnecessary fees. So, as a plan owner, it is important to understand the exact role your TPA is playing in the management of your plan, and to make sure that you are not being charged excessive fees. But, primarily, you should make sure that your TPA is, in fact, also acting as your plan fiduciary so that you will not personally be held liable by the DOL for not complying with the new fiduciary standard.

Although some groups (such as record-keepers and other TPAs) are trying avoiding the new fiduciary responsibility, other previously non-fiduciary employees could now be considered a fiduciary under the DOL’s new regulations. Largest among these are fund managers, who will now be considered fiduciaries with respect to activities that occur before an investment takes place due to the communications required for that investment to be made. Since these communications, in some circumstances, can rise to the level of a “recommendation” under the final DOL regulation, the fund manager will be considered a fiduciary in certain scenarios, and should act as such to prevent liability. To help fund managers avoid said liability, as well as help guide them in showing their good faith compliance with the final regulation, Winstead recently released an article laying out some helpful steps in plan compliance:

  • “Revise private placement memorandums and subscription documents to incorporate statements disclaiming the provision of investment advice to benefit plan investors;
  • Adopt universal policies regarding permissible marketing and promotional activities; and
  • Require written representations of independent fiduciaries to satisfy regulatory exemption.”[2]

 

[1] Reish, Fred. Interesting Angles on the DOL’s Fiduciary Rule #52. http://fredreish.com/interesting-angles-on-the-dols-fiduciary-rule-52/

[2] With the tip of a hat, a fund manager can be an ERISA fiduciary. http://www.winstead.com/Knowledge-Events/News-Alerts/228406/With-the-Tip-of-a-Hat-a-Fund-Manager-Can-Be-an-ERISA-Fiduciary

Is PBGC Coverage Required for Your Plan?

The Pension Benefit Guaranty Corporation was established on September 2, 1974 under President Gerald R. Ford with the signing of ERISA (the Employee Retirement Income Security Act). According to Ford, “Under this law, the men and women of our labor force will have much more clearly defined rights to pension funds and greater assurances that retirement dollars will be there when they are needed.” President Ford was correct; this program did much to help America’s retirees. However, it is not without flaw, and a recent IRS audit case has brought to light some new problems within the PBGC.

Before we get ahead of ourselves, let’s start by outlining exactly what the PBGC is and what it does: essentially this organization acts as an insurance policy for defined benefit pension plans offered by private-sector employers. However, there are some plans that the PBGC does not support. These include: “Professional service employers” that currently, and at no point in the plans history, have more than 25 active participants, church groups and federal, state or local governments.

It is easy to label churches and government organizations as being such, but it has recently proven to be difficult to determine what exactly it means to be a “professional service employer.” In her article Surprise! You Are (or Are Not) a Professional. And You Are (or Are Not) Covered by the PBGC, Ilene Ferenczy tells of a recent IRS audit where a financial advisor was deemed a professional, and therefore his plan was exempt from PBGC coverage. The financial advisor had been operating as if he was eligible for PBGC coverage because he had no reason to suspect otherwise. Since similar occupations such as computer network specialists, real estate brokers, and general contractors are not considered professionals, he felt safe in assuming that he wasn’t one either.  However, it seems that the formerly objective definition of “professional” under PBGC is becoming increasingly subjective, and this could pose many consequences down the line.

According to Ferenczy, this new confusion in definition has led many advisors who are not eligible for PBGC coverage to continue to operate their plans as if they are. She gives us a startling statistic: a search of DB plans with an occupational code of either insurance broker or investment advisor was run, and it found that of the 650 plans, 68% of them had been coded as being PBGC-covered. This means that they had been paying unnecessary premiums and incorrectly calculating their plan contributions. In the event of an audit, this could have detrimental consequences.

So, it is easy to see that plan sponsors need more predictability when it comes to determining whether or not they are covered under PBGC, and in light of this new information, it may be time that you double check with your actuary to make sure that your plan is indeed eligible for the PGBC coverage you’ve already been operating under.

For further information about PBGC coverage, go to: https://www.pbgc.gov/

To read about the recent audit case and its outcomes, go to: http://asppa-net.org/News/Article/ArticleID/8543

Supreme Court Helps to Clarify Definition of ERISA “Church Plans”

The Employee Retirement Income Security Act (ERISA) was signed in to law in 1974 and was designed to protect the beneficiaries of retirement plans. However, due its strict funding rules and required fees for the PBGC (Pension Benefit Guaranty Corporation), certain plans are given exclusion from ERISA to help them save money. There are several groups that have been provided these exclusions, one of which is church organizations. Originally only churches themselves fell under this category, but eventually Congress felt the need to expand on this definition, so in 1980 they made an amendment to ERISA. From this point on, a “church plan” has been defined as:

  • A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or convention or association of churches.. 1002(33)(C)(i)

However, there is some ambiguity in this definition that has led to controversy on exactly how it should be interpreted. These controversies came to an end as a result of the recent Supreme Court case of Advocate Health Care Network et al. v. Stapleton et al.

The final Supreme Court ruling for this case took place on June 5, 2017.  The Defendants’ argument was unanimously upheld, stating that “a non-church—such as a church-affiliated hospital or school—may establish a church plan so long as the plan is maintained by an organization qualifying under section 3(33)(C)(i) that is controlled by or associated with a church.” Considering that this definition had already been used by the U.S. Department of Labor (DOL), Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) for over 30 years, this ruling came as a relief to plan sponsors who had already been operating under this definition.

Although this was a huge win for plan sponsors who have “avoided millions of dollars in penalties, attorney fees, back fees, and PBGC premiums,” (Every word matters: Supreme Court finds “church plans” include those established by church-affiliated organizations), it may leave the retirement of thousands in jeopardy. Participants in these plans are less secure in their retirement because ERISA’s funding, vesting, and fiduciary requirements will not apply to them. This could potentially end in hospital employees spending their entire careers contributing to pension plans that will be insolvent by the time they retire. This is not the only problem people are having with the court’s ruling.

Of the arguments against the ruling, the most popular is that it is unfair to secular organizations that have to compete with non-ERISA church affiliated organizations, despite the fact that these “church-affiliated” organizations run more like a secular ones. According to Justice Sotomayer, “Church-affiliated organizations operate for-profit subsidiaries, employee thousands of people, earn billions of dollars in revenue, and compete with companies that have to comply with ERISA.” Many have argued that this gives an unfair and undue edge to church-affiliated hospitals over the non-church-affiliated ones.

For these and several other reasons, this will almost certainly not be the end of legislation concerning ERISA church-affiliated plans. Not only is there disagreement over the fairness of the ruling as a whole, but the Court has also left many questions unanswered, such as: “What exactly constitutes a ‘principle purpose organization’ that may attain a church plan?”; “What does it mean to be ‘controlled by’ or ‘associated with’ a church?”; and “Exactly how close must the connection between hospitals and the church be?” The Court may have clarified the general definition of “church plans” to some extent, but the exact guidelines as to what qualifies as a “church-affiliated organization” may not be as clear as hoped. Stay tuned for updates on this ongoing discussion.

 

For further reading:

Religious Institution Client Alert, June 2017: U.S. Supreme Court Interprets ERISA Church Plan Exemption In Favor of Religious Charities: http://www.stradley.com/insights/publications/2017/06/religious-institution-client-alert-june-2017

Unanimous Supreme Court Decision In Favor of “Church Plan” Defendants: http://www.lexology.com/library/detail.aspx?g=d4d30826-3328-425d-8926-e8f3c3b39532

Every word matters: Supreme Court finds “church plans” include those established by church-affiliated organizations: http://www.ilntoday.com/2017/06/every-word-matters-supreme-court-finds-church-plans-include-those-established-by-church-affiliated-organizations/