Pension Update - January 2011

The following highlights the most significant New Developments published in the Pension Plan Guide since the last update on December 30, 2010.

During the past month, the IRS has: clarified that Form 5500 preparers will not be required to obtain tax preparer identification numbers; released its series of annual Revenue Procedures dealing with matters, such as revised procedures for obtaining determination letters on the qualified status of employee plans; issued guidance addressing the special amortization rules applicable to single-employer pension plans under the 2010 Pension Relief Act; and expanded the types of plans eligible to use group trusts.

In a series of interesting cases, courts have ruled that: a decline in an inflated stock price did not support a plausible imprudent investment claim; a primary beneficiary was not liable as a distribute for the tax on 401(k) plan benefits received by a minor son; and a former spouse retained rights to a deceased participant’s 401(k) plan benefits as a designated beneficiary.

Finally, the latest Benefit Practice Portfolio examines the tax rules applicable to rollovers from 401(k) and 403(b) plans to designated Roth accounts. The Portfolio specifically addresses the special tax rules that allow amounts rolled over in 2010 to be included in income in 2011 and 2012.

1. Form 5500 Preparers Will Not Be Required to Obtain Tax Return Preparer Identification Number

Individuals who are paid to prepare Form 5500s do not have to obtain a preparer tax identification number (PTIN), according to guidance recently issued by the IRS. The relief will also extend to preparers of Form 1099 and other forms associated with the administration of retirement plans.

Preparer tax identification number. Under IRS Reg. 1.6109-2, all tax return preparers who are compensated for preparing, or assisting in the preparation of, all or substantially all of a U.S. federal tax return or claim for refund must obtain a PTIN, prior to filing any return after 2010. Each preparer must obtain their own individual PTIN. Multiple individuals or offices may not share a PTIN.

Individuals who have not obtained (or renewed) a PTIN by January 1, 2011 may still be able to prepare returns. However, they would first need to sign up through the online registration system, pay the required fees, and obtain (or renew) a PTIN.

Form 5500 preparers. The IRS had indicated that all individuals who are compensated for preparing or assisting in the preparation of all or substantially all of a federal tax return or claim for refund are required to obtain a PTIN and, if applicable, successfully pass a competency examination. However, the IRS had not clearly stated whether the program applied to preparers of the Form 5500 Series. The 2009 and 2010 versions of Form 5500 did not provide for inclusion of a preparer's PTIN. Absent definitive clarification, speculation had arisen that the PTIN requirements would be applied to all Form 5500 preparers beyond individuals who perform clerical and incidental services (e.g. inputting information into data fields of preparation software or electronically filing returns prepared by another party)

Forms excluded from PTIN requirements. All tax returns, claims for refund, or other tax forms submitted to the IRS are considered tax returns or claims for refund, for purposes of the PTIN requirements. However, incident to the authority to specify the forms, schedules, and other forms that qualify as tax returns or claims for refund, the IRS may provide for exceptions. Thus, an individual is not required to obtain a PTIN in order prepare for compensation all or substantially all of any form specifically identified by the IRS as not subject to PTIN requirements.

The IRS has now definitively indicated that the Form 5500 is not subject to the PTIN requirements. In addition the IRS has provided a specific exclusion for: Form 5300 (Application for Determination of Employee Benefit Plan); Form 5307 Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans); Form 5310 (Application for Determination for Terminating Plan); Form 8717 (User Fee for Employee Plan Determination, Opinion, and Advisory Letter Request); the Form 1099 series; and the W-2 series. The IRS notes that it may further modify this list in the future.

IRS Notice 2011-6 was reported in PEN Report 1871 (January 17, 2011) and reproduced in The Daily Document Section of PEN at Par. 103Q.

2. IRS Releases Annual Procedural Rulings

The IRS has released its series of annual Revenue Procedures dealing with procedural matters, such as revised procedures for issuing determination letters on the qualified status of employee plans. The guidance supersedes Revenue Procedures issued early in 2010.

The Revenue Procedures include: revised procedures for letter rulings, information letters, and determination letters; procedures relating to technical advice; areas in which rulings will not be issued (domestic areas); revised procedures for furnishing ruling letters, information letters under the jurisdiction of the Office of the Division Commissioner, Tax Exempt and Government Entities (TE/GE); revised procedures for furnishing technical advice regarding issues in the employee plans area (including actuarial matters); revised procedures for issuing determination letters on the qualified status of employee plans; areas in which rulings will not be issued (international areas); and up-to-date guidance for complying with the user fee program.

Note, a number of the user fees applicable to employee plan determination letters have increased significantly. Increased user fees apply to submissions involving Form 5300, 5307, and 5310 (see Rev. Proc. 2011-8 at PEN Par. 17,299T-58).

Rev Procs. 2011-1 -- 2011-8 were reported in PEN Report 1871 (January 17, 2011). The Rev. Procs. are set forth, beginning at PEN Par. 17,299-51.

3. IRS Guidance Address Special Funding Rules Under 2010 Pension Relief Act

The IRS has issued a notice, in the form of questions and answers, on the special rules that provide pension funding relief for single-employer defined benefit plans (including multiple-employer DB plans) under the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (P.L. 111-192).

Alternative amortization schedules. Code Sec. 430(c )(2)(D), as added by the Pension Relief Act, permits plan sponsors of single-employer defined benefit plans to elect, for certain plan years, to amortize the shortfall amortization base established for the plan year under one of two alternative schedules. The same schedule must be used for both plan years if the sponsor elects to use alternative amortization schedules for two plan years. The election may be made with respect to one or two plan years that begin in 2008, 2009, 2010, and 2011. Electing sponsors are required to give notice of the election to plan participants and beneficiaries as well as the PBGC.

The IRS guidance explains the general rules and addresses: installment acceleration amounts, excess compensation amounts, excess shareholder payment amounts, mergers and acquisitions, elections of alternative amortization schedules, notification requirements, eligible charity plans, reporting requirements, and transition rules.

The IRS cautions, however, that the election to use an alternative amortization schedule could affect a plan sponsor's ability to obtain a funding waiver. According to the IRS, each request for a funding waiver is reviewed based on the facts and circumstances applying to that individual plan. One relevant factor is whether the combination of a funding waiver and an election to use an alternative amortization schedule would reduce the minimum required contributions to a point where the granting of the waiver would be adverse to the interest of plan participants in the aggregate. To ensure that the granting of the waiver is not adverse to the interest of participants in the aggregate, the IRS said that it may impose additional requirements relating to any election of an alternative amortization schedule as a condition for granting a funding waiver.

Election of funding relief. In order to take advantage of the funding relief, a plan sponsor must: (1) make an election to use either the two-plus-seven year or the 15-year alternative amortization table by the latest of the last day of the plan year for which the election is made, 30 days after the valuation date for the plan year for which the election is made, or January 31, 2011; (2) notify participants of the election by the later of 120 days after the end of the plan year for which the alternative amortization schedule is elected or by May 2, 2011; and (3) if the plan is covered by the PBGC, email a copy of the election to the PBGC by the later of 30 days after the election is made or January 31, 2011.

IRS Notice 2011-3 was reported in PEN Report 1869 (January 3, 2011) and reproduced at Par. 17,146M.

4. IRS Expands Types of Plans Eligible to Use Group Trusts

The IRS has expanded the types of plans that are eligible to participate in group trusts described in IRS Rev. Rul. 81-100 (CCH Pension Plan Guide Par. 19,571B), as modified by IRS Rev. Rul. 2004-67 (CCH Pension Plan Guide Par. 19,948Z-77). Under the expanded rules, if specified conditions are met, custodial accounts under Code Sec. 403(b)(7), retirement income accounts under Code Sec. 403(b)(9), and governmental retiree benefit plans under Code Sec. 401(a)(24) will be permitted to participate in group trusts.

Model language is supplied that may be used by group plans to comply with the IRS's requirements, and the IRS has provided reliance on favorable determination letters issued before January 10, 2011 to trustees of group trusts that adopt the model language under certain circumstances.

Additional types of plan may use group trust. The new rules provide that, in the event specified requirements are met, on or after January 10, 2011, the assets of qualified plans, IRAs, and eligible 457(b) governmental plans may be pooled in a group trust with the assets of custodial accounts under Code Sec. 403(b)(7), retirement income accounts under Code Sec. 403(b)(9), and governmental retiree benefit plans under Code Sec. 401(a)(24) without affecting the tax status of the group trust or individual plan trusts participating in the group trust.

Among the applicable requirements, separate accounting must be implemented to prevent the transfer of value from the account of one plan to another. Separate model amendments address group trusts that do not meet the separate accounting requirement and group trusts that intend to allow participation by 403(b) custodial and retirement income accounts and government retirement plans.

IRS Rev. Rul. 2011-1 was reported in PEN Report 1868 (December 27, 2011) at Par. 19,948Z-293.

5. Decline in Inflated Stock Price Did Not Support a Plausible Imprudent Investment Claim

The fact that artificially inflated stock held by an ESOP participant declined in value prior to sale did not establish the participant’s standing to bring ERISA claims, where the out-of-pocket injury was not traceable to the alleged fiduciary misconduct and not redressable, the Eighth Circuit Court of Appeals has ruled.

An ESOP participant, alleged class action claims under ERISA relating to purported breaches of fiduciary duties associated with information disclosures/nondisclosures surrounding two Medtronic products. The participant specifically claimed that the company, several of its directors, a retirement plan committee, and various fiduciaries breached their fiduciary duties by (1) failing to adequately disclose the information, (2) making a disclosure that deceptively downplayed the information, and (3) imprudently continuing to invest in Medtronic stock after receipt of the adverse information. The district court ruled that the ESOP participant lacked constitutional standing because, as a net beneficiary of an artificial stock price inflation caused by the employer’s actions, he suffered no constitutionally cognizable injury fairly traceable to the alleged breach of duty.

On appeal, the participant maintained that he suffered an injury sufficient to confer standing because he sold the stock for less than it was worth at the start of the proposed class period. The Eighth Circuit rejected the participant’s argument with respect to the claims related to one product as failing to establish an injury that was traceable to the conduct of the defendants and redressable by the court. The alleged breach, the court explained, conferred a financial benefit on the participant who had liquidated his shares and had no ongoing financial stake in the company.

The participant was able to articulate a traceable and redressable injury sufficient to establish standing with respect to claims related to another product because the alleged stock price drop could be attributable to the defendants’ alleged wrongdoing. However, the court dismissed the participant’s claim as implausible.

The court declined the invitation by the defendants to join the Third, Fifth, Sixth, and Ninth Circuits in adopting the Moench presumption, which shields investments in company stock with a rebuttable presumption of prudence. However, the court ruled that the participant had not alleged sufficient facts to allow for a reasonable inference that the defendants were liable for the alleged misconduct or to establish a plausible imprudent investment claim.

Note: The import of the decision is that courts need not apply the Moench rebuttable presumption of prudence absent sufficient evidence to establish a plausible imprudent investment claim.

Brown v. Medtronic, Inc., was reported in PEN Repro 1872 (January 24, 2011) at Par. 24,008I.

6. Primary Beneficiary Not Liable as Distributee for Tax on 401(k) Plan Benefits Received by Minor Son

The minor son recipient of a deceased plan participant's 401(k) plan benefits remained liable for the attendant income tax, even though his mother was the primary beneficiary under the plan, the U.S. Court of Appeals in San Francisco (CA-9) has ruled. The mother was prohibited from receiving the benefits under state law and the son did not acquire his right to the benefits from the mother.

Liability of primary beneficiary as distributee of plan benefits not received. The plan participant was killed by his spouse, the primary beneficiary under the plan of his 401(k) assets. Because the spouse was ineligible under state law from receiving the funds, the participant's account assets were paid to his minor son. The son paid the applicable income tax on the distribution, but sought a refund from the IRS. After the refund was denied, the son brought suit, alleging that, although he received the funds, his mother, as the primary beneficiary under the plan, was the "distributee" of the account assets for purposes of income tax liability.

The trial court rejected the son's claim. On appeal, the son argued that, his mother should be treated as the distirbutee of the funds from his father's 401(k) plan because she was originally entitled to the proceeds.

Recipient's right to benefits did not arise from primary beneficiary. In affirming the trial court, the Ninth Circuit stressed that the mother was not the distributee of the funds, as she never received any money and was never entitled (pursuant to state law) to receive the funds. In addition, the court noted that the son did not acquire his right to the funds from the mother. As the money was distributed directly to the son from the plan, he was liable for the attendant tax as the distributee of the funds.

D.N. v. Commissioner was reported in PEN Report 1868 (December 27, 2010) and reported at Par. 24,008G.

7. Former Spouse Retained Right to Deceased Participant's 401(k) Plan Benefits as Designated Beneficiary

The interest of a designated beneficiary in the 401(k) plan benefits of her former spouse was not waived by a property settlement negotiated incident to the parties' divorce, according to a federal district court in New Jersey. Nor could the participant's estate recover the benefits distributed to the former spouse, as that would undermine a principal objective of ERISA of assuring certainty in the final distribution of benefits to named beneficiaries.

Property settlement as waiver of spouse's beneficiary interest. The issue before the court was whether the property settlement agreement was an effective waiver of the ex-wife's beneficial interest in the plan participant's account. The spouse maintained that the property settlement agreement could not invalidate the 401(k) beneficiary form executed by the participant.
The court agreed with the former spouse, citing the United States Supreme Court's ruling in Kennedy v. DuPont (CCH Pension Plan Guide Par. 24,004F), that, while ERISA does not categorically preempt all non-QDRO divorce decrees, plan administrators are bound to distribute benefits pursuant to plan documents. In adopting the "plan document rule," the High Court essentially held that a beneficiary does not waive benefits merely by executing a property settlement or other instrument that constitutes a valid waiver under federal common law. Finding Kennedy dispositive, the trial court held that, even if the property settlement agreement at issue in the instant case constituted a valid waiver of the rights of the former spouse to the participant's 401(k) benefits, the employer was required, under the governing documents of the plan (i.e., the beneficiary designation form) to transfer the proceeds to the designated beneficiary (the former spouse).

In the Matter of the Estate of Kensinger was reported in PEN Report 1869 (January 3, 2011) at Par. 24,008H.

8. IRS Updates Reporting Requirements for Form 1099-R to Reflect Small Business Jobs Act Changes.

The IRS has updated Publication 1220 (Specifications for Filing Forms 1097-BTC, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G Electronically) to redress practitioner concerns about the impact of the Small Business Jobs Act of 2010 (P.L. 111-240) on the 2010 filing of Form 1099-R. The reporting requirements for Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) were changed by the Act. The IRS states that plans should follow the guidelines in the Instructions for Forms 1099-R and 5498 for reporting requirements. Electronic filers who have a reporting requirement for in-plan Roth rollovers can report the amount in the Special Data Entries field, positions 663-722 of the Payee B Record. For assistance with filing requirements, call toll-free 1-866-455-7438.

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. Latest Benefit Practice Portfolio Analyzes Tax Rules governing In-Plan Rollovers to Roth Accounts. The latest Benefit Practice Portfolio examines the tax rules applicable to rollovers from 401(k) and 403(b) plans to designated Roth accounts. The Portfolio, written by Aimee Nash, Senior Writer Analyst for ftwilliam.com (part of Wolters Kluwer Law and Business) specifically addresses the special tax rules that allow amounts rolled over in 2010 to be included in income in 2011 and 2012.

The Portfolio, IRS Provides Guidance on In-Plan Rollovers to Roth Accounts’’ is available exclusively to Internet subscribers. The article may be accessed by selecting ``Pension Explanations’’ and clicking on ``Benefit Practice Portfolios .’’

Note: Roth 401(k) Plans are discussed in detail at PEN Par 7432. The rules governing in-plan rollovers are explained at PEN Par. 7710.

Benefit Practice Portfolios Cover Wide Range of Topics. Benefit Practice Portfolios provide unique practitioner oriented perspectives on a variety of pension and benefits topics. A sampling of recent Benefit Practice Portfolios includes:

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.

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.

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.