April 2011
The following highlights the most significant New Developments published in the Pension Plan Guide since the last update on April 1, 2011.
During the last month, the Joint Board for the Enrollment of Actuaries has issued final regulations that update the eligibility requirements for enrolled actuaries performing actuarial services for ERISA-covered pension plans. The new rules also modify the applicable standards of conduct to address conflicts of interest.
The Employee Benefits Security Administration has finalized an amendment to Class Prohibited Transaction Exemption 96-23 that expands the transactions available to large employee benefit plans whose assets are managed by in-house asset managers (INHAMs). The definition of an INHAM has further been modified to include a subsidiary that is 80% or more owned by the employer or by the parent company of the employer.
The DOL has also filed an amicus brief challenging the dismissal of a fiduciary breach claim against an independent fiduciary for failing to discontinue an investment in company stock. In the brief, DOL forcefully rejects the position articulated by the Ninth Circuit that the presumption of prudence attendant an investment by an ESOP fiduciary in company stock should apply absent the "impending collapse" of the company.
Finally, this Update highlights a cutting edge DB/K ‘’wrap’’ document produced by fortwilliam.com. The DB/K document plan will allow investors to direct more contributions into a singular, tax-deductible plan while consolidating the reporting requirements of plan providers.
A thorough discussion of DB/K plans, detailing the governing rules, is also included in this Update.
NEW DEVELOPMENTS
1. JBEA Final Regulations Update Eligibility Requirements for Enrolled Actuaries
The Joint Board for the Enrollment of Actuaries has issued final regulations that update the eligibility requirements for enrolled actuaries performing actuarial services for ERISA-covered pension plans. The eligibility conditions include enrollment and continuing education requirements, professional standards for performing actuarial services, and rules and procedures for taking disciplinary actions.
Comprehensive regulations were last issued in 1988. Proposed rules were issued in September 2009. The final regulations adopt the proposed rules with certain modifications. The rules will be effective on May 2, 2011.
Application for renewal. An enrolled actuary seeking to renew his or her enrollment must file an application for renewal of enrollment between October 1, 2010 and March 1, 2011, and between October 1 and March 1 of every third year thereafter. The regulations continue to provide that the effective date for renewal of enrollment for individuals who are currently enrolled (and in active status) and who file complete renewal applications by the March 1 due date will be the April 1 immediately following the March 1 due date.
Continuing education. An enrolled actuary must earn 36 hours of continuing professional education during each full enrollment cycle. An enrollment cycle is the three-year period from January 1, 2011, to December 31, 2013, and every three-year period thereafter.
The regulations further require at least 18 hours of continuing professional education in core subject matter during the enrollment cycle that ends December 31, 2010, for all enrolled actuaries enrolled during the entire cycle. Thereafter, for actuaries who have already been enrolled for at least one full enrollment cycle before the start of a new enrollment cycle, the regulations provide that only 12 of the 36 hours of required continuing professional education during the new enrollment cycle must consist of core subject matter.
Standards of conduct. The final rules add a new requirement that an enrolled actuary "shall perform actuarial services only in accordance with all of the duties and requirements for such persons under applicable law and consistent with relevant generally accepted standards for professional responsibility and ethics."
The JBEA has also modified the rules regarding conflicts of interest and adopted requirements similar to those contained in Circular 230 that apply to IRS practitioners. Accordingly, the regulations provide that, unless an exception applies, an enrolled actuary cannot perform actuarial services for a client if the representation involves a conflict of interest. A conflict of interest exists if either: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the enrolled actuary's responsibilities to another client, a former client, or by a personal interest of the enrolled actuary. Notwithstanding the existence of a conflict of interest, the enrolled actuary may represent a client if: (1) the enrolled actuary reasonably believes that the enrolled actuary will be able to provide competent and diligent representation to each affected client, (2) the representation is not prohibited by law, and (3) each affected client waives the conflict of interest and gives informed consent, at the time the existence of the conflict of interest is known by the enrolled actuary.
The final rules were reported in PEN Report 1883 (April 11, 2011). The regulations are reproduced at PEN Pars. 15,221, 15,222, 15,223, 115,223A, 115,223C, 15,224, 15,224B, 15,224C, 15,224R, and 15,225B.
2. EBSA Finalizes Amendment to Class PTE 96-23 Expanding Allowable Transactions Involving In-House Asset Managers
The Employee Benefits Security Administration (EBSA) has finalized an amendment to Class Prohibited Transaction Exemption (PTE) 96-23 (CCH Pension Plan Guide Par. 16,644), which expands the transactions permitted for large employee benefit plans whose assets are managed by in-house asset managers (INHAMs). Class PTE 96-23 allows the portion of a plan managed by an INHAM to engage in transactions prohibited by ERISA Sec. 406(a)(1)(A)-(D) (sales, loans, provisions of services, and transfers) with most party in interest service providers, except the INHAM or a party related to the INHAM, if certain conditions are met.
Consistent with the proposed amendment to Class PTE 96-23 (see CCH Pension Plan Guide Newsletter, Report No. 1842, June 21, 2010) the definition of an INHAM is expanded to include a subsidiary that is 80% or more owned by the employer or by the parent company of the employer. The rule also provides relief for parties in interest that are joint venturers and extends the relief to certain existing leases with an employer or an affiliate resulting from the plan's acquisition of the office or commercial space.
In addition, EBSA has increased the 5% ownership threshold to 10% for purposes of the determination of whether a party in interest and increased the amount of assets that must be managed by an INHAM from $50 million to $85 million. The rules also clarify and amend the exemption to state EBSA's views and expectations concerning the class exemption's audit and written report requirements.
Areas where relief is not provided. The amended exemption does not provide relief for the receipt of compensation by an INHAM or any minority owner of the INHAM with respect to the provision of investment management services to a plan maintained by the INHAM or an affiliate of the INHAM. Further, no INHAM may receive compensation from the plan for providing services in excess of direct expenses. Finally, EBSA also cautions that the INHAM exemption only provides relief from the restrictions of ERISA Sec. 406(a)(1)(A)-(D) for transactions between a party in interest and a plan sponsored by the INHAM or an affiliate of the INHAM.
The amendments to Class PTE 96-23 were reported in PEN Report 1883 (April 11, 2011) and reproduced at Par. 16,649Z.
3. Plan Sponsors Favor Limited Scope Investment Advisors Over Investment Managers, Survey Finds
A recent survey by Grant Thornton LLP, Drinker Biddle and Reath, and Plan Sponsor Advisors has revealed that most plan sponsors engage limited scope investment advisors, rather than investment managers, for purposes of selecting and managing plan investments. Under such limited scope arrangements, the plan sponsors and investment advisors have co-fiduciary responsibilities with respect to plan investments and share in the attendant liability.
Investment advisor relationships. The survey found that slightly over one-half of plan sponsors work with limited scope investment advisors (ERISA Sec. 3(21)(A) advisors), under arrangements in which the advisor and the plan sponsor have co-fiduciary responsibility with respect to plan investments and share attendant liability.
Alternatively, 14% of plan sponsors engage an outsourced investment advisor (ERISA Sec. 3(38) investment manager). Pursuant to this arrangement, the investment manager selects and adjusts investment options without explicit direction from the plan sponsor. The investment manager is empowered to manage, acquire and remove investment options.
The plan sponsor does not retain any veto power over the investment process. However, plan sponsors that engage an ERISA Sec. 3(38) investment manager are cautioned that they retain a continuing fiduciary responsibility to prudently select and monitor the investment manager. In addition, plan sponsors remain responsible for administration and compliance issues associated with the plan, unless the plan recordkeeper or third party administrator has assumed, in writing, fiduciary responsibility for plan administration.
Factors to consider in structuring fiduciary arrangement. In determining whether to adopt an ERISA Sec. 3(21)(A) limited scope investment advisor or an ERISA Sec. 3(38) investment manager relationship, Grant Thornton suggests that plan sponsors consider the following factors:
(1) the investment committee's expertise and capacity to interpret, and monitor investment metrics, as well as its understanding of the risks and fiduciary responsibilities of the plan sponsor; (2) the interest of the plan sponsor in selecting and monitoring plan investment options; and (3) the higher cost of outsourcing fiduciary responsibility to investment managers.
Note: Related to the issue of the expertise of plan fiduciaries, 77% of the plan sponsors reported providing fiduciary training to their plan's administrative/investment committee. However, 41% of respondents indicated that they furnish such training "only infrequently and with no set pattern." In light of the many new developments annually impacting plan fiduciaries, Grant Thornton recommends, as a best practice, providing fiduciaries training every year, supplemented by legal updates of new developments as they arise.
In addition, Grant Thornton notes that some investment advisors may elect not to provide advice with respect to company stock. Therefore, plans with company stock must clearly establish responsibility for the monitoring of company stock.
Note: In large measure because of liability concerns, the agreement with the investment advisor should clearly state whether the fiduciary advisor will be a limited scope investment advisor or an investment manager.
The Grant Thornton 2011 Retirement Plan Survey, "Trends and Insights: Focusing on the Fiduciary Agenda," was discussed in PEN Report 1883 (April 11, 2011).
4. DOL Amicus Brief Challenges Heightened Standard for Rebutting Presumption of Prudence in Stock Drop Suits
In an amicus brief challenging the dismissal of a fiduciary breach claim against an independent fiduciary for failing to discontinue an investment in company stock, the DOL has forcefully rejected the position articulated by the Ninth Circuit that the presumption of prudence attendant an investment by an ESOP fiduciary in company stock should apply absent the "impending collapse" of the company. The DOL also stresses that ERISA Sec. 404(c) does not shield a fiduciary from liability stemming from the imprudent selection and monitoring of plan investment options.
Failure to divest company stock held in ESOP. State Street Bank and Trust Company was retained by General Motors Corp. as the independent fiduciary and investment manager of the two 401(k) plans sponsored by the company. Among the investment options offered under the plan was an ESOP that invested exclusively in GM stock (Fund). State Street's contract with GM required that the Fund be invested exclusively in GM stock unless the fiduciary determined from reliable public information that: (1) there was a serious question as to GM's short-term viability as a going concern without resort to bankruptcy proceedings; or (2) there was no possibility in the short-term of recouping any substantial proceeds from the sale of stock in bankruptcy proceedings.
State Street continued to hold GM stock as a plan investment option until March 31, 2009. Plan participants maintained, however, that a reasonably prudent fiduciary would have known by July 15, 2008 (if not earlier) that GM's deteriorating business and financial prospects rendered the stock an imprudent plan investment. When State Street eventually did liquidate the plans' 50 million shares of GM stock on April 24, 2009, the stock was virtually worthless. Six weeks later, GM filed for bankruptcy protection, effectively wiping out nearly all of the value of the plans' GM holdings.
Class action suit dismissed for lack of causation between plan loss and alleged fiduciary breach. Plan participants filed a class lawsuit, claiming that State Street breached its fiduciary duties under ERISA by allowing the plans to maintain investments in company stock when prudence dictated that the stock was too risky of an investment. The trial court initially ruled that the participants had alleged facts sufficient to state a claim for fiduciary breach by plausibly suggesting that State Street should have divested the plans' GM stock holdings before March 2009. In addition, the court held that the participants averred facts sufficient to rebut the presumption of prudence that attends an ESOP investment in company stock by plausibly charging, as required by the contract between State Street and GM, that GM was in serious financial trouble at the time State Street become the ESOP plan fiduciary and investment manager, and on the verge of bankruptcy shortly thereafter.
However, the trial court dismissed the complaint, concluding that the losses sustained by the plans from the GM stock investment were not caused by the fiduciary's alleged imprudence, but resulted from the actions of the plan participants in selecting GM stock as an investment option for their retirement assets. State Street, the court reasoned, could not be liable for actions which were actually controlled by plan participants
Rebutting presumption of prudence. In it amicus brief challenging the ruling, the DOL initially maintained that the trial court misconstrued the presumption of prudence afforded ESOP fiduciaries who invest plan assets in company stock by establishing a higher threshold for rebutting the presumption beyond prudence. ESOP fiduciaries, the DOL explained, may offer and retain a plan's investment in company stock only if a prudent fiduciary in similar circumstances would do the same. Although a court may presume that an ESOP fiduciary's decision to maintain an investment in employer securities was reasonable, the presumption may be rebutted by a showing that a prudent fiduciary acting under similar circumstances would have made a different investment decision. Thus, the statutory standard of prudence set forth in ERISA Sec. 404 controls and courts may not further require evidence that the company is on the brink of collapse or undergoing serious mismanagement in order the rebut the presumption. The "impending collapse" standard articulated by the Ninth Circuit (Quan v. Computer Sciences Corp,. CA-9 (2010), 623 F.3d 870 (See PEN Par. 24,007Z)), the DOL charged is inconsistent with the statutorily-based prudent person standard of ERISA and represents an unauthorized expansion of federal common law.
The trial court ruled that State Street was required to continue offering the company stock fund in accordance with the conditions of its contract with GM. The court did conclude that the participants’ proffered evidence sufficient to satisfy the high threshold for rebutting the presumption of prudence established in the contract. The DOL, however, argued that ERISA Sec. 404(a)(1)(D) prohibits fiduciaries from contracting out of the statutory prudent man standard. All fiduciaries, including ESOP fiduciaries, may follow plan terms only to the extent that the terms are consistent with ERISA. Thus, an ESOP may not prohibit a fiduciary from trading out of company stock, or effectively restrict a fiduciary from divesting company stock by implementing an impending collapse threshold standard.
Fiduciary's imprudent selection of company stock investment option caused plan loss. The DOL next argued that the trial court erred in ruling that the loss the plans incurred when the company stock lost nearly all of its value was caused by plan participants whose accounts held the stock, and not by the fiduciary whose job it was to select and maintain only prudent investment options for the plan. All 401(k) plan participants, the DOL explained, are entitled to the prudent selection and oversight of the investment options available to them. ERISA Sec. 404(c) affords fiduciaries a limited shield from liability for plan losses which result from a participant's exercise of control over individual account assets. However, ERISA Sec. 404(c) does not protect fiduciaries from liability from losses caused by their own fiduciary misconduct.
Note: Initially, the DOL noted that the applicability of ERISA Sec. 404(c) is an affirmative defense that must be raised and proved by the defendants. State Street, however, did not prove or even assert the applicability of the affirmative defense. Rather , the court assumed without out deciding and without basis that the plans at issue were ERISA Sec. 404(c) compliant arrangements.
While highlighting the procedural issue, the DOL, however, reserved its primary focus for the trial court's alleged misinterpretation of the scope of ERISA Sec. 404(c). Relying on language in the Preamble to ERISA Reg. 2550.404c-1(b)(2), the DOL emphasized that the act of designating investment alternatives in a 404(c) plan is a fiduciary function. In addition, because the selection or monitoring of investment options available under the plan is not the direct and necessary result of participant direction of the plan, the ERISA Sec. 404(c) protection does not apply. Thus, fiduciaries, the DOL stressed, remain liable, even under 404(c) compliant plans, for imprudent actions with respect to the selection and monitoring of plan investment options.
DOL interpretation entitled to deference. Finally the DOL maintained that its interpretation of ERISA through the exercise of its regulatory authority is entitled to deference. Accordingly, the DOL argued, its interpretation of ERISA Sec. 404(c) as not shielding fiduciaries from liability for losses attributable to their own imprudent selection and monitoring of investment options should be deferred to and accepted as authority by the courts.
The DOL Amicus Curiae Brief in Pfeil, et al. v. State Street Bank and Trust Co., CA-6 (2011), was the subject of a CCH Comment published in PEN Report 1885 (April 25, 2011) at Par. 27,080.
5. DB/K Document from Ftwilliam.com is Industry First for Leveraging DB/K Plans
In an industry first, ftwilliam.com, which provides third-party administrators (TPAs) and other retirement plan professionals integrated Software as a Service (SaaS) workflow solutions, has launched its all-new DB/K document. The DB/K document (see CCH Pension Plan Guide ¶136 ), which wraps a 401(k) document (the 401(k) component) and either a cash balance or a defined benefit document (the DB component) together into one plan, is an important tool for individuals working with those types of documents.
“The combined DB/K document is definitely an industry trend right now and after listening to our customers, we’re excited to be the first to offer this unique plan,” said Tim McCutcheon, General Manager of ftwilliam.com. “As DB/K plan safe harbor compliance becomes more popular with businesses, ftwilliam.com is in position to support customers with the new DB/K wrap option.”
The new DB/K “wrap” document is available in the ftwilliam.com retirement plan document package.
Features of DB/K plans. DB/K plans may be more attractive to businesses than traditional plans for a number of reasons. For example, the 401(k) component is not subject to the 401(k) actual deferral percentage (ADP) test or the 401(m) actual contribution percentage (ACP) test because the 401(k) component provides required matching contributions that are somewhat less than the basic matching contributions of a safe harbor 401(k) plan. Furthermore, a DB/K plan that complies with the requirements of Code Sec. 414(x) during a plan year is not required to provide any top-heavy minimum contributions or benefits (under either the 401(k) or DB Component), even though the plan may be top-heavy. A DB/K plan must provide certain minimum contributions and benefits, but they are generally less than the minimum contributions/ benefits required for other varieties of retirement plans.
The advantage of the new ftwilliam.com DB/K document plan: Investors have the ability to direct more contributions into a singular, tax-deductible plan while plan providers may enjoy less paperwork by consolidating their reporting requirements.
The following analysis of the DB/K plan (taken from the CCH Practical Guide to 401(k) Plans) may prove instructive.
Combined Defined Benefit/401(k) (DB/K) Plan
Employers with 500 or fewer employees are authorized, effective for plan years beginning after 2009, to establish a combined plan, consisting of a defined benefit (DB) plan and an automatic enrollment 401(k) plan ( .05 ). The arrangement would provide employees the guaranteed employer-provided retirement benefit offered by a DB plan, supplemented by tax deferred elective employee contributions under a 401(k) plan and a required employer matching contribution.
The DB/K plan would necessitate only one plan document and, significantly, only require the filing of a single Form 5500 annual report. However, the assets of the plan must be held in a single trust and must be clearly identified and allocated to the DB plan and the 401(k) plan, to the extent necessary for the separate application of the rules of the Internal Revenue Code (IRC) and ERISA ( .10 ).
The plan must meet specified benefit, contribution, vesting, and nondiscrimination requirements. A plan that satisfies the applicable requirements will be deemed (a) not to be top-heavy and (b) to satisfy the ADP/ ACP tests.
CCH Pointer:
Separate application of Code Sec. 415 limits. Generally, the provisions of the IRC and ERISA will apply to a DB plan and 401(k) plan that are part of the DB/K plan as if each were not part of the DB/K plan ( .15 ). Thus, the Code Sec. 415 limitations will apply separately to contributions under the 401(k) and the DB plan. Similarly, the spousal protection rules will apply to the DB plan, but not to the 401(k) plan.
Separate participant accounts. Separate participant accounts must be maintained under the 401(k) component of the DB/K plan. Earnings or losses on a participant's account will be based on earnings or losses with respect to the assets of the 401(k) plan ( .20 ).
l Eligible small employers
Eligibility to establish a DB/K plan would be limited to employers who employ an average of at least 2 but no more than 500 employees on business days during the preceding calendar year and that employ at least 2 employees on the first day of the plan year ( .25 ). Note, persons treated as a single employer under the aggregation rules of Code Sec. 414 would be treated as one employer for purposes of the small employer definition.
l Defined benefit plan requirements
The defined benefit component of the DB/K plan would be required to provide each participant with a benefit of not less than the "applicable percentage" of the participant's final average pay. The applicable percentage would be the lesser of (1) one percent of final average pay multiplied by the participant's years of service with the employer, or (2) 20 percent ( .30 ). Final average pay would be determined using the consecutive-year period (not exceeding 5 years) during which the participant earns the highest aggregate compensation ( .35 ).
Participants 100 percent vested after 3 years. Any benefits provided under the DB components of the DB/K plan (including benefits provided in addition to required benefits) must be fully vested after the participant completes 3 years of service ( .40 ).
Cash balance component. As an alternative to the 1 percent of pay final average pay formula for 20 years of service, the DB component of the DB/K plan may be a cash balance plan, under which the accrued benefit is calculated as the balance of a hypothetical account or an accumulated percentage of the participant's average compensation, and which meets the applicable interest credit requirements of Code Sec. 411(b)(5)(B)(i) (as added by the Pension Protection Act of 2006). The plan would be treated as meeting the benefit requirements if each participant received a pay credit for the year which is not less than a specified percentage of compensation, based on the participant's age. For participants who are age 30 or less at the beginning of the year, the percentage is 2. The applicable percentage increases to 4 for participants older than 30, but younger than 40; 6 for participants older than 40, but younger than 50; and 8 for participants who are age 50 or older ( .45 ).
CCH Pointer:
Required benefit not conditioned on elective deferral. A defined benefit plan that is part of the DB/K arrangement must provide the required benefit to each participant, including participants who do not make elective deferrals to the 401(k) component of the plan ( .50 ).
Funding considerations. Practitioners suggest that the sponsor of a combo plan prepare DB valuations at the beginning of the plan year (rather than at year-end) in order to ascertain the required DB funding for the year by the end of the of the first quarter ( .52 ). Knowing the full amount of the projected DB funding requirement will enable an employer to better anticipate the 401(k) profit-sharing funding contribution for the year.
Early planning will also allow an employer the flexibility of amending the plan (before benefits fully accrue) to modify DB plan liabilities in the event changes (i.e., reduction in total contribution amount) need to be implemented.
Actuarial certification. Preparing the DB valuation at the beginning of the plan year will further ensure that the actuarial certification (due April 1 of the next calendar year for calendar year plans) is timely completed. Sponsors are cautioned that, if the actuarial certification cannot be timely competed, the DB plan may be required to freeze benefits and discontinue lump-sum contributions ( .53 ). By contrast a plan meeting the April 1 deadline will not be required to freeze benefits until the ratio of plan liabilities to assets in the certification drops below 60 percent.
Timing of funding contribution. Practitioners recommend that the sponsor of a combo plan begin making projected DB contributions early in the plan year and then make additional contributions through the plan year ( .535 ). Accordingly, sponsors should not delay making required DB contributions until the latest possible date (i.e., for calendar year plans, September 15 of the next calendar year).
Sponsors are also encouraged to make profit-sharing contributions during the year. Practitioners note that discretionary profit-sharing contributions often become a fixed requirement each plan year, as the tax qualification of the DB plan is conditioned on the employer satisfying the nondiscrimination and coverage rules by making minimum profit-sharing contributions to the 401(k) plan ( .54 ).
Finally, practitioners suggest that the profit-sharing contribution not be allocated to a participant's account until after the discrimination testing has been completed ( .545 ). The results of the testing will enable the employer to determine the proper allocations.
l Defined contribution requirements
The 401(k) component of the DB/K plan must provide for automatic employee contributions at a specified enrollment rate and for a fully vested matching contribution.
Automatic contribution arrangement. The cash or deferred arrangement under the DB/K plan must constitute an automatic contribution arrangement, pursuant to which each eligible employee is treated as having elected to make an elective contribution of 4 percent of compensation (see ¶1225). However, an eligible employee may elect not make such contributions or elect contributions at a different enrollment rate ( .55 ).
Notice requirement. Each employee eligible to participate in the automatic contribution arrangement must receive a notice explaining their right not to make contributions or to make contributions at a different rate. Participants must be afforded a reasonable period of time after receipt of the notice (and before the first elective contribution is made) to make the election ( .60 ).
In addition, eligible participants must receive an annual notice, within a reasonable period prior to the beginning of the year, informing them of their rights and obligations under the automatic contribution arrangement ( .65 ).
Employer matching contribution. In addition to incorporating an automatic contribution arrangement, the 401(k) component of the DB/K plan must provide for an employer matching contribution on behalf of each employee eligible to participate in the arrangement. The matching contribution must be equal to 50 percent of the employee's elective deferrals, up to 4 percent of compensation ( .70 ).
Nondiscriminatory rate of matching contribution. The rate of matching contribution with respect to any elective deferrals for highly compensated employees may not exceed the matching contribution rate for nonhighly compensated employees ( .75 ). However, consistent with the rules generally applicable to matching contributions under a 401(k) plan, matching contributions may be provided at a different rate, if (1) the rate of matching contributions does not increase as the rate of elective deferrals increases, and (2) the aggregate amount of matching contributions with respect to each rate of elective deferral is not less than the amount that would be provided under the general rules ( .80 ).
CCH Pointer:
Matching contributions in addition to the required matching contributions may be made for the participant ( .85 ).
Nonelective contributions. An employer may make nonelective contributions under the 401(k) plan. However, the nonelective contributions would not be taken into account in determining whether the matching contribution requirement is satisfied ( .90 ).
Fully vested contribution. Matching contributions under the 401(k) plan (including contributions in excess of the required matching contributions) are fully vested when made ( .92 ). However, an employee will not be fully vested in nonelective contributions until the completion of 3 years of service ( .94 ).
Combined deduction limit. An employer's deduction for profit-sharing and DB pension contributions made in the same year is limited to the lesser of 25 percent of gross participant pay or the required contribution to the DB plan ( .943 ). However, practitioners note that, if the DB plan is covered by the PBGC (i.e., plan of nonprofessional employers or professional employers with 25 or more participants), or if the total profit-sharing contribution does not exceed 6 percent, the limit on tax deductible contributions does not apply ( .945 ). In the event the Code Sec. 404(a)(7) limit applies, the total profit-sharing contribution to the 401(k) plan (irrespective of all deferrals) will be capped at 6 percent of total pay, if the DB contribution is at least 25 percent of pay ( .947 ).
l Uniform contributions and benefits
All contributions, benefits, and other rights and features that are provided under the DB plan or 401(k) component of the DB/K plan must be provided uniformly to all participants ( .95 ).
CCH Pointer:
The requirement to provide for uniform contributions and benefits applies regardless of whether nonuniform contributions, benefits, or other right or features could be provided without violating the nondiscrimination rules. However, the plan will not violate the uniformity requirement merely because benefits that are accrued for a period before a DB or DC plan becomes part of the combined plan are protected under the anti-cutback rules ( .97 ).
l Nondiscrimination requirements
The 401(k) component of a DB/K plan that complies with the applicable rules (i.e., automatic contribution and matching contribution requirements) would be deemed to satisfy the ADP test on a safe harbor basis ( .98 ). Matching contributions under the plan must satisfy the ACP test or may comply with the matching contribution safe harbor under Code Sec. 401(m) ( .99 ).
CCH Pointer:
Disregard contributions and benefits under other plans and permitted disparity. Nonelective contributions under a 401(k) plan and benefits under a DB plan that are part of the DB/K plan will be subject to the applicable nondiscrimination rules ( .100 ). However, neither the DB nor the 401(k) components of the DB/K plan may be combined with any other plan in determining compliance with the nondiscrimination requirements. In addition, the permitted disparity rules will not apply in ascertaining whether an applicable DC plan or DB plan that is part of a DB/K plan satisfies the contribution or benefit requirements or the nondiscrimination rules ( .105 ).
Increased allocation to NHCEs to satisfy nondiscrimination testing. Practitioners caution that, as the ages of HCE and NHCE participants in the plan become close, the employer will need to make a larger profit-sharing contribution in order to satisfy the applicable nondiscrimination tests ( .107 ). Accordingly the 6 percent profit-sharing deduction limit that applies to the aggregate compensation of participants generally will need to be structured to allow certain nonhighly compensated participants to receive an allocation in excess of 6 percent of pay. In the event an allocation in excess of 6 percent of pay must be made to a NHCE, for testing purposes, the profit-sharing allocation for HCEs will fall below 6 percent. However, the reduction in contributions for HCEs would be more than offset by increased funding of the DB component of the combo plan.
l Top-heavy requirements deemed satisfied
The 401(k) and DB components of the DB/K plan will be deemed to satisfy the applicable top-heavy rules (see discussion at ¶7020) ( .110 ).
l Annual reporting rules
A Form 5500 annual report must be filed for the DB/K plan. However, the combined plan will be treated as a single plan for annual reporting purposes ( .115 ). Accordingly, the DB/K plan sponsor would need to file only one Form 5500. However, all the information required with respect to the DB/K plan must be disclosed in the report.
l Summary annual report
Each participant and each beneficiary who is receiving benefits under an employee benefit plan is entitled to receive from the plan administrator, a copy of the summary annual report (SAR). Only a single summary annual report would need to be provided to participants ( .120 ).
l Separate termination of DB and DC components of plan
In the event of the termination of the defined benefit plan and the applicable defined contribution plan forming part of the eligible combined plan, the plan administrator must terminate the individual account and the defined benefit components of the plan separately ( .125 ).
.05 Code Sec. 414(x), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.10 Code Sec. 414(x)(2)(A), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(A), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.15 Code Sec. 414(x)(1), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(1), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.20 Joint Committee on Taxation, Technical Explanation of the Pension Protection Act of 2006 (JCX-38-06).
.25 Code Sec. 414(x)(2), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.30 Code Sec. 414(x)(2)(B)(ii), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(B)(ii), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.35 Code Sec. 414(x)(2)(B)(i), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(B)(i), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.40 Code Sec. 414(x)(2)(D)(i), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(D), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.45 Code Sec. 414(x)(2)(B)(iii), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(B)(iii), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.50 Code Sec. 414(x)(2)(B)(iii) and (iv), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(B)(iii) and (iv), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.52 Eric Brust, Matthews Benefit Group, 401(k) Plan Advisor, November 2009, Vol. 16, No. 11.
.53 Ibid.
.535 Ibid.
.54 Ibid.
.545 Ibid.
.55 Code Sec. 414(x)(2)(C)(i)(I), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); Code Sec. 414(x)(5), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(C)(i)(I), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b); ERISA Sec. 210(e)(4), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.60 Code Sec. 414(x)(5)(B)(ii), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(4)(B)(ii), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.65 Code Sec. 414(x)(5)(B)(iii), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(4)(B)(iii), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.70 Code Sec. 414(x)(2)(C)(i)(II), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(C)(i), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.75 Ibid.
.80 Joint Committee on Taxation, Technical Explanation of the Pension Protection Act of 2006 (JCX-38-06).
.85 Ibid.
.90 Code Sec. 414(x)(2)(C)(ii), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(C)(ii), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.92 Code Sec. 414(x)(2)(D)(ii)(I), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(D)(ii)(I), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.94 Code Sec. 414(x)(2)(D)(ii)(II), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(D)(ii)(II), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.943 Code Sec. 404(a)(7).
.945 Eric Brust, Matthews Benefit Group, 401(k) Plan Advisor, November 2009, Vol. 16, No. 11.
.947 Ibid.
.95 Code Sec. 414(x)(2)(E), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(E), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.97 Joint Committee on Taxation, Technical Explanation of the Pension Protection Act of 2006 (JCX-38-06).
.98 Code Sec. 414(x)(3)(A), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(3)(A), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.99 Code Sec. 414(x)(3)(B), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(3)(B), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.100 Code Sec. 414(x)(3), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(3), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.105 Code Sec. 414(x)(2)(F), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(2)(F), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.107 Eric Brust, Matthews Benefit Group, 401(k) Plan Advisor, November 2009, Vol. 16, No. 11.
.110 Code Sec. 414(x)(4), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a).
.115 Code Sec. 414(x)(6)(B), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(a); ERISA Sec. 210(e)(5)(B), as added by P.L. 109-280 (Pension Protection Act of 2006), Act Sec. 903(b).
.120 Joint Committee on Taxation, Technical Explanation of the Pension Protection Act of 2006 (JCX-38-06).
.125 Code Sec. 414(x)(1), as amended by P.L. 110-458 (Worker, Retiree, and Employer Recovery Act of 2008), Act Sec.109; ERISA Sec. 210(e)(1), as amended by P.L. 110-458 (Worker, Retiree, and Employer Recovery Act of 2008), Act Sec. 109.
PEN ENHANCEMENTS
1. Rolling PEN Revision. A significant value added feature of PEN that should be highlighted is the ``rolling revision,’’ in which important developments in the pension and benefits field are reflected in PEN Explanations within a short period of time following release. Reflecting legislation, court cases, Final and Proposed Regulations, Revenue Rulings, Revenue Procedures, Letter Rulings, Opinion Letters, Field Assistance Bulletins and other releases by IRS, DOL, PBGC, SEC and other governmental agencies allows PEN to be the most current and up-to-date resource available.
2. Benefit Practice Portfolios Provide Practitioner Oriented Insight on Pension Law. Benefit Practice Portfolios are available to internet subscribers to the CCH Pension Plan Guide. These Portfolios, usually written by nationally recognized experts, provide insights into specific areas of pension law. There are well over 150 Portfolios on a host of diverse subjects, written for pension and benefits practitioners.
A sampling of recent Benefit Practice Portfolios includes:
3. Keeping Up with PPA Guidance
The Pension Protection Act of 2006 represents the most sweeping overhaul to the pension law in more than 30 years. In addition to making myriad changes to the Internal Revenue Code and ERISA, the PPA requires government agencies to issue perhaps hundreds of guidance items over the next several years.
Keeping track of these guidance issuances will be a monumental task for pension and benefit practitioners. CCH has created a valuable search aid --the Table of PPA Guidance --which allows practitioners to quickly locate PPA guidance items. The Table lists official guidance issued by government agency (Internal Revenue Service, Department of Labor, Pension Benefit Guaranty Corporation, and joint agency releases), form of guidance, date of issuance, short description of the guidance, and the CCH paragraph number at which the guidance item may be found in full text. Internet customers can quickly link from the Table to a specific guidance item. The Table of PPA Guidance is designed to help busy practitioners stay abreast of the continuing flow of PPA issuances and is available exclusively to CCH PENSION PLAN GUIDE subscribers.
The Table of PPA Guidance is at PEN Par. 51C.
4. Comprehensive Plan Reporting and Disclosure Calendar Chart
Employee benefit plans are subject to numerous reporting and disclosure requirements that require information to be provided to plan participants and beneficiaries and filed with the IRS, DOL, PBGC, and other government agencies. Failure to comply with any applicable reporting requirement can result in significant penalties.
In order to assist plan administrators and others in satisfying their reporting obligations, PEN features a plan reporting calendar that neatly encapsulates all of the various reporting requirements. The calendar lists the reports required in a calendar year in chronological order. In addition, the calendar highlights the subject matter of a report and indicates both the party required to file the report and the party to whom the report must be directed.
The Plan Reporting Calendar is at PEN Par. 36.
5. Check "Calendars . Tables . Interest Rates" for Quick Answers
Electronic and print customers of the CCH Pension Plan Guide can find many pertinent pension facts and figures by consulting the handy "Calendars. Tables. Interest Rates" section of the Guide.
Some of the helpful features of this section are:
Print customers will find the "Calendars . Tables . Interest Rates" division in Volume 1 of their Guide. Internet customers will find the same information by selecting "Pension Plan Guide" under the "CCH Pension Explanations" blue bar, then clicking on "Tables and Other Documents," the first item on the menu.