July 2009

The following highlights the most significant New Developments published in the Pension Plan Guide since the last update on June 1, 2009.

During the past month, courts have ruled that: a single equity fund within a plan did not give rise to a violation of ERISA’s diversification requirement; distributions taken for educational expenses did not constitute a modification of periodic payments; participants of a distress-terminated defined benefit plan lacked standing to sue fiduciaries; a consultant was not liable for the failure to monitor the performance of plan investment managers; debtors could not deduct 401(k) loan repayments under the means test of the Bankruptcy Code as necessary expenses; and a new loan taken by a plan participant to consolidate and extend the due date of prior loans was a taxable distribution.

In Congress, legislation introduced in the House of Representatives would provide for increased disclosure to participants and employer-sponsors of 401(k) and other qualified plans of the fees charged by plan service providers. Legislation approved by the House Education and Labor Committee would specifically require service providers to disclose fees assessed against a participant's account and potential conflicts of interest, expand the information that must be included in the worker's quarterly benefits statement, and require plan sponsors to include an index fund in the plan's investment lineup.

Finally, as the July 31, 2009 deadline by which sponsors of one person 401(k) plans must submit the 2008 Form 5500-EZ fast approaches, small employers maintaining such plans need to be aware of the potentially onerous penalties for noncompliance. This Update contains an article cautioning small employers that the Delinquent Filer Voluntary Compliance Program, by which noncompliance penalties may be reduced, is not available to redress the failure to file Form 5500-EZ.

NEW DEVELOPMENTS

1. Single Equity Fund Within Plan Did Not Give Rise to Violation of ERISA Diversification Requirement

Plan participants' charge that single equity investment funds offered under a plan, rather than plan investments as a whole, were insufficiently diversified, did not state a claim under ERISA for fiduciary breach, according to the Second Circuit Court of Appeals.

Investment in single equity funds. The participants charged that the fiduciaries offered undiversified single equity funds that they "knew or should have known "were too risky and volatile to serve as investments under a plan designed to provide retirement income. According to the participants, the offering of single equity funds was inconsistent with modern portfolio theory, which prescribes diversification across and within assets classes as the best way to balance risk and return.

Initially, the appeals court explained that a violation of the ERISA Sec. 404(a)(1) requirement that a fiduciary diversify plan investments occurs when the plan as a whole is not sufficiently diversified. Thus, the court indicated that an ERISA violation does not arise if a specific fund is not diversified (e.g., single equity funds) as long as the plan as a whole offers a range of diversified options.

The court, however, noted that the participants, rather than addressing the diversification of the entire plan, alleged only that specific funds within the plan were not diversified. The narrow focus on a few individual funds was not sufficient, the court ruled, to state a claim for lack of diversification.

Excessive fees. The participants further charged that GMIMC "knew or should have known" that the fees and expenses assessed by certain mutual funds offered under the plan were excessive, as compared to alternative investments, because similar investment products were available with substantially lower fees and expenses.

The Second Circuit framed the excessive fee claim as a charge of imprudent investment under ERISA Sec. 404(a)(1). However, because ERISA Sec. 404(a)(1) does not specifically address excessive fee claims, the court applied the standard developed by the Second Circuit for evaluating excess fee claims under the Investment Company Act. Under this standard, the fee must be so disproportionately large as to bear no reasonable relationship to the services rendered.

The participants contended that the investment in the plans' mutual funds caused the loss of millions of dollars a year in excess fees. However, the participants failed to allege either that the fees were excessive relative to the services rendered or other facts relevant to a determination of whether the fees were excessive under the circumstances. Accordingly, the court concluded that the participants did not provide a basis upon which to infer that the fiduciaries breached their duties under ERISA by offering and retaining the suspect mutual funds in the plan.

Young v. General Motors Investment Management Corp. (CA-2) was reported in PEN Report 1790 (June 15, 2009) at Par. 24,005C.

2. Distributions Taken for Educational Expenses Did Not Constitute Modification of Periodic Payments
Distributions from an employee's IRA that satisfied the statutory exception for higher education expenses were not a modification of her election to receive a series of substantially equal periodic payments, because, according to the U.S. Tax Court, the distributions did not result in a change in the method of calculating the annual periodic payments.

In 2002, an employee, who was under age 59, elected to receive a series of substantially equal periodic payments from her IRA that qualified for a statutory exception to the 10% additional tax imposed on early distributions under Code Sec. 72(t)(2)(A)(iv). In 2004, the employee received additional distributions from her IRA for higher education expenses which qualified for the statutory exemption to the 10% early withdrawal tax under Code Sec. 72(t)(2)(E). The Commissioner determined that the employee no longer qualified for the periodic payment exception for 2004 because the additional distributions for higher education expenses constituted an impermissible modification of her election to receive a series of substantially equal periodic payments.

The Tax Court disagreed, explaining that a modification of a series of periodic payments occurs when the method of determining the periodic payments changes to a method that no longer qualifies for the exception. In the instant case, the method of calculating the employee's annual periodic payments would not change as a result of the additional distributions for higher education expenses. Thus, the additional distributions were not a modification of a series of substantially equal periodic payments.

Benz v. Commissioner of Internal Revenue (TC) was reported in PEN Report 1789 (June 8, 2009) at Par. 24,005A.

3. Participants of Distress-Terminated DB Plan Lacked Standing to Sue Fiduciaries
Participants in a spun-off defined benefit plan that was subsequently terminated in a distress termination and turned over to the PBGC (resulting in reduced benefits to the participants) lacked standing under ERISA to sue for breach of fiduciary duty, the Ninth Circuit U.S. Court of Appeals has ruled.

Claims stemming from spin-off. The participants alleged claims falling into three general categories: (1) claims under ERISA §502(a)(2) against the former employer and the new plan's fiduciaries for breach of fiduciary duty in connection with the spin-off; (2) a claim against the PBGC for breach of fiduciary duty under ERISA; and (3) a state law professional negligence claims against the plan actuary.

The district court dismissed all claims and the participants appealed.

Claim against fiduciaries. The appellate court ruled that the participants lacked standing under ERISA to pursue their fiduciary breach claims. With respect to the ERISA §502(a)(2) claim, the participants lacked "constitutional" standing, as they failed to show they had a redressable claim. In other words, the court explained, any possible recovery under 502(a)(2) would inure to the benefit of the plan. Here, however, since the plan was terminated, any recovery would go to the PBGC, and not to the participants.

Claim against PBGC. The court also rejected the participant's fiduciary breach claim against the PBGC. Although exceptions may exist, the discretionary decision of any government agency, including the PBGC, not to pursue a particular enforcement action will generally not be subject to judicial review.

Claim against actuary. The court did hold that the participants; potential state law claim against the plan actuary for professional negligence was not preempted by ERISA, as the state law claims had neither a "reference to" nor a "connection with" an employee benefit plan. Using its own "relationship test" to analyze the "connection" prong, the Ninth Circuit explained that the duty giving rise to the negligence claim runs from the third-party actuary--a non-fiduciary service provider--to the plan participants (assuming they can prove they are intended third party beneficiaries of the actuary's service with the plan). However, the court found no interference with the actuary's relationship to the ERISA plan or its fiduciaries.

Paulsen v. CNF, Inc. (CA-9) was reported in PEN Report 1790 (June 15, 2009) at Par. 24,005D..

4. Consultant Not Liable for Failure to Monitor Performance of Plan Investment Managers
An investment management company hired by a defined benefit and a 401(k) plan to provide consulting services did not breach its contract with the plans when it failed to monitor the performance of private investments made by one of the plans' investment managers, according to the Ninth Circuit Court of Appeals.

Consultant did not breach contract. The appellate court affirmed the ruling of the trial court that the consultant did not breach its contract with the plans. Whatever was said in the promotional materials, in the actual contract the consultant agreed only to prepare quarterly investment performance reports. Specifically excluded from the agreement was any duty to analyze private placement investments. In addition, the consultant expressly stated in every quarterly report provided to the plans that it was not monitoring private investments.

Consultant was not ERISA fiduciary. The court further ruled that the consultant was not an ERISA fiduciary and, thus, could not have breached fiduciary duties under ERISA. The preparation of quarterly financial reports and attendance at trustee meetings did not constitute the rendering of investment advice for a fee or for compensation and, therefore, were not activities that fell within the ERISA Sec. 3(21) definition of fiduciary. In addition, the court, noting that ministerial tasks do not impart fiduciary status or give rise to fiduciary liability, explained that the consultant did not exercise control or discretionary authority over the plans.

CCH Note: Third party administrator fiduciary liability. Third-party administrators who exercise discretion in adjudicating benefit claims act as plan fiduciaries under ERISA. Thus, TPAs who are empowered by the plan to instruct trustees in the investment of plan assets have been held to be investment fiduciaries, even though they did not have significant authority over plan assets. By contrast, courts have consistently held that third-party administrators who perform clerical or ministerial functions, such as the preparation of financial reports, that do not involve the exercise of discretionary authority or control over plan assets, are not fiduciaries.

Conditioning continued service on repayment of missing funds was not an exercise of control. An issue, related to the subject of the Stahly case, that has been addressed by the Ninth Circuit is whether a TPA that is retained to prepare financial reports and provide other services for a 401(k) plan moves beyond merely rendering administrative services and actually exercises discretionary authority or control over the plan when, after discovering the apparent embezzlement of plan funds by a plan trustee, it notified the plan trustees, and, thereafter, conditioned its continued service on the repayment of the missing funds.

In CSA 401(k) Plan v. Pension Professionals Inc., CA-9 (1999), 195 F.3d 1135, it was argued that the conditions the TPA proposed for its continued employment with the plan established effective control over the plan and constituted actual decision making power. The Ninth Circuit rejected this contention, finding that the conditions proposed by the TPA were designed to assert control over its own services to the plan, and not to exercise discretionary authority and control over the plan's management or administration. The TPA was not empowered to unilaterally impose the conditions on the plan or to enforce the repayment schedule, the court explained. Moreover, the TPA had no power over the management or disposition of plan assets and was never required to make discretionary decisions regarding eligibility or claims. Accordingly, the ministerial services of the TPA, as in the Stahly case, did not subject it to suit under ERISA as a deemed fiduciary.

Stahly v. Salomon Smith Barney, Inc. (CA-9), was reported in PEN Report 1792 (June 29, 2009) at Par. 24,005H.

5. Debtor Could Not Deduct 401(k) Loan Repayments Under Bankruptcy Means Test as Necessary Expense
A debtor's repayment of a 401(k) plan loan did not constitute a payment of secured debts or a necessary expense that could be deducted from the debtor's monthly income for purposes of applying the means test under Chapter 7 of the Bankruptcy Code, according to the Ninth Circuit Court of Appeals. Therefore, the debtor's petition under Chapter 7 was "presumptively abusive" and his petition was dismissed. .

Bankruptcy means test calculations. The Bankruptcy Code requires debtors to complete a means test calculation to determine whether the debtor has sufficient disposable income to raise the presumption that granting Chapter 7 relief would be an abuse of the bankruptcy law protections. However, debtors are allowed to subtract specified deductions from their total current monthly income (CMI) in running the means test calculation.

An issue that has appeared before federal bankruptcy courts is whether a debtor's 401(k) plan loan repayments may be properly deducted on Form B22A (Statement of Current Monthly Income and Means Test Calculation) as ``Other Necessary Expenses,'' as defined by the IRS in the Internal Revenue Manual (IRM). The IRM does not specifically list repayments of qualified plan loans as Other Necessary Expenses. However, the IRS does allow expenses that are a "requirement of the job: i.e., union dues, uniforms, work shoes" to be deducted as "Involuntary Deductions."

Debtors have argued that loan repayments should be properly deducted where the plan requires payments to be made through payroll deduction. However, courts have rejected the argument that payroll deductions are mandatory, noting that a debtor's participation in the plan, the decision to take a loan from the plan, and the contributions to the 401(k) account are matters of individual discretion and are not job requirements or conditions for employment. Courts have further explained that loan repayments increase a debtor's retirement benefits and are in effect contributions to the debtor's account. Pursuant to this reasoning, a loan against those funds under terms that mandate repayment by payroll deduction does not change the nature of the funds to an involuntary deduction when they are repaid. Accordingly excluding loan repayments as an allowable expense under the means test calculation allows for the presumption that granting the debtor Chapter 7 relief would be an abuse of bankruptcy protection.

The Ninth Circuit, in a case of first impression, has now adopted the prevailing position, but with an emphasis on the understanding that loan repayments are not debts or necessary expenses under the bankruptcy law.

Loan repayment is not a secured debt. A debtor is permitted under the Chapter 7 means test to deduct average monthly payments made on account of ``secured debts.'' However, the Ninth Circuit, in accord with the majority of jurisdictions, held that a debtor's obligation to repay a loan from a retirement account is not a debt under the Bankruptcy Code that may be deducted from income under the means test.

Noting that an employee's obligation under a 401(k) loan is to himself, the court stressed that the plan administrator has no right to personal recovery against the debtor in the event of default. The plan is not empowered to sue the debtor for payments, but may only offset the funds against future benefits. In addition, the court emphasized, the deemed distribution that results from a loan default, will subject the debtor only to tax penalties, and does not provide the plan with repayment rights or other legal recourse.

The court acknowledged that debtors in Chapter 13 proceedings are expressly authorized to deduct 401(k) loan repayments in the calculation of disposable income. However, the court cautioned, bankruptcy law does not provide a comparable right for Chapter 7 debtors

Loan repayment is not necessary expense. Under the means test, debtors may deduct actual monthly expenses that qualify as ``other necessary expenses.'' A necessary expense is defined by the IRS (in IRM Sec. 5.15.1.10) as a cost incurred to provide for the health and welfare of the debtor and/or his or her family, or provide for the production of income.

The debtor maintained that the monthly 401(k) loan repayments were a necessary expense. According to the debtor, the replenishment of is 401(k) account was necessary to his long-term health and welfare because the account would be his only significant asset in retirement.

In rejecting the debtor's claim, the court noted that the IRM and the Bankruptcy Code expressly state that contributions to voluntary retirement plans are not a necessary expense. Finding 401(k) loan repayments to be the functional equivalent of voluntary contributions to a retirement plan, the court concluded that the contributions could not be deducted from income as a necessary expense.

Rejecting contrary conclusions, based on application of the totality of circumstances test under prior law, the court explained that, under the currently applicable means test, voluntary retirement contributions are per se not a necessary expense. Therefore, allowing the debtor to deduct the 401(k) loan repayments from his disposable income for purposes of the means test would justify a presumption of abuse of Chapter 7 relief.

Egjebjerg v. Anderson (CA-9), was reported in PEN Report 1791 (June 22, 2009) at Par. 24,005E.

6. New Loan Taken to Consolidate and Extend Due Date of Prior Loans Was a Taxable Distribution
A plan participant who took out a new loans from his retirement plan account in order to consolidate and extend the due date of his existing loans was deemed to have received a taxable distribution because the amount of the loans exceeded the statutory limit, the U.S Tax Court has ruled.

Refinanced loans as deemed distributions. A refinanced loan is treated, under the IRS Reg. 1.72(p)-1, as a continuation of the prior loan, plus a new loan, to the extent of any increase in the loan balance. Accordingly, while a refinanced loan may be repaid over a 5 year period from the date of the refinancing, to the extent that the refinanced loan exceeds the amount of the prior loan, the prior outstanding loan must continue to be repaid in substantially level installments over a period of not longer than the original term remaining on the prior loan in order for the refinancing not to result in a deemed distribution.

Alternatively, a refinancing may satisfy the repayment requirements of Code Sec. 72(p)(2)(B) and Code Sec. 72(p)(C) if the refinanced loan is repaid within the original term remaining on the prior loan. However, if any portion of the refinancing loan has a later repayment date than the original term remaining on the prior loan, both the prior loan and refinancing loan are treated as outstanding at the time of the refinancing for purposes of the Code Sec. 72(p)(2) limits on the maximum loan amount.

Latest permissible term of replaced loan. Under IRS Reg. 1.72(p_1, Q&A-20, if the term of the replacement loan ends after the latest permissible term (under Code Sec. 72(p)(2)(C)) of the replaced loan, the replacement loan and the replaced loan are both treated as outstanding on the date of the transaction. Therefore, if the term of the replacement loan ends after the latest permissible term of the replaced loan (i.e., generally 5 years from the date of the original loan, absent any extension authorized for a principal residence loan or military leave) and the sum of the replacement loan and the outstanding balance of all other loans (including the replaced loan) on the date of transaction exceeds the dollar limits of Code Sec. 72(p)(2)(A), the replacement loan will result in a deemed distribution. However, a replacement loan will not result in a deemed distribution if the replaced loan and the replacement loan (treated as two separate loans) are repaid by the end of the latest permissible term of the prior loan.

In the instant case, an employee with outstanding plan loans refinanced. The terms of the replacement loan resets the number of remaining payments from 77 to 130. Thus, the replacement loan effectively extended the repayment terms of the loans being replaced by two years.

The replacement loan, when added to the sum of the loans being replaced, exceeded the applicable Code Sec. 72(p)(2) (A)(ii) limitation by $10,032. Although the total amount of the employee's loans was under $50,000, the loans exceeded one-half of his retirement account balance. Accordingly, the $10,032 was treated as a deemed distribution and subject to the 10 percent penalty tax under Code Sec. 72(t).

Marquez v. Commissioner (TC) was reported in PEN Report 1793 (July 7, 2009) at Par. 24,005I.

7. Proposed Bills Would Require Increased Disclosure of Service Provider Fees to Participants and Employers
Legislation introduced in the House of Representatives would provide for increased disclosure to participants and employer-sponsors of 401(k) and other qualified plans of the fees charged by plan service providers. The ``Defined Contribution Plan Fee Transparency Bill of 2009'' (H.R. 2779), as introduced by Rep. Richard E. Neal (D-Mass.), would require employers to provide employees with an annual enrollment notice, disclosing available investment options and attendant fees, and a quarterly notice, detailing charges assessed their accounts. Service providers would need to provide employers with detailed fee and expense information (including revenue sharing information) in advance of signing the contract. Substantial penalties, assessed per violation, per day, up to a specified cap, would apply.

Legislation approved on June 24, 2009 by the House Education and Labor Committee would similarly provide employees and plan sponsors with greatly enhanced information regarding fees incurred in maintaining 401(k) plans. The ``401(k) Fair Disclosure and Pension Security Bill'' (H.R. 2989), sponsored by George Miller (D-CA), chairman of the House Education and Labor Committee, and Rob Andrews (D-NJ), chairman of the Health, Employment, Labor, and Pensions Subcommittee, would require service providers to disclose fees assessed against a participant's account and potential conflicts of interest, expand the information that must be included in the worker's quarterly benefits statement, and require plan sponsors to include an index fund in the plan's investment lineup.

Note, while the 401(k) plan fee disclosure provisions of the bill are essentially the same as those contained in the measure introduced in April 2009, the legislation approved by Education and Labor Committee has been amended to incorporate funding relief for single employer and multiemployer defined benefit plans. The amendment may have been adopted in order to secure greater Republican support for the bill.

Service provider disclosures to plan. H.R. 2779 would require service providers, under new Code Sec. 4980I, to provide plan administrators with the following information, prior to entering into (or materially modifying) a service contract with a plan.

1. An estimate of: the total fees and expenses expected to be paid by the plan under the contract, including an itemization of compensation under a contract that provides for both investment management and administration and recordkeeping; the annual fees and expenses attributable to investment management; and the annual fees and expenses attributable to plan administration and recordkeeping.

2. A detailed, itemized list of the services to be provided by the service provider, its affiliates, and any subcontractor under the contract.

3.A schedule of fees and expenses associated with participant-initiated transactions or services which may be deducted from participant or beneficiary accounts.

4. A statement indicating whether the service provider reasonably expects to remit fees and expenses expected to be paid by the plan under the contract (including commissions, finder's fee, sale loads and charges) to one or more third-party service providers or intermediaries, and the amount expected to be paid to each third party.

5. A statement indicating whether the service provider expects to receive compensation from a source other than the plan or the sponsor in connection with the services provided to the plan, and a statement of the amount expected to be received from each such source.

6. A statement indicating whether the service provider (or any affiliate thereof) may benefit from the offering of its own proprietary investment products or those of third parties.

Periodic disclosures. Service providers would be further required, by the due date for filing the Form 6058 Annual Return for the plan year, to provide a written statement disclosing:

1. fees and expenses paid by the plan to the service provider under the arrangement during the plan year; and

2. the amount of compensation received by the service provider during the plan year from each source other than the plan or plan sponsor in connection with services provided to the plan by the service provider, identifying the source of the payments.

Employers would need to provide participants and beneficiaries with a copy of any statement received under these rules within 30 days after a receipt of a written request for such statement.

Form of fee disclosure. The service provider would need to disclose the fees and expenses as a dollar amount or as a percentage of assets (or a combination thereof). However, service providers would be allowed to use estimates of expenses, fees, and compensation if they disclosed the basis for the estimate and the estimates were made in a reasonable and good faith manner.

Exemption for small providers. A service provider would not be subject to the disclosure requirements if total fees and compensation received directly and indirectly by the provider, its affiliates, and any subcontractor of the provider in connection with the service agreement was under $5,000.

Note: 401(k) service providers would also be required under H.R. 2989 (no less than 10 days before entering into the service contract) to disclose to employers (in a single statement) all fees assessed against the participant's account, broken down into four categories: administrative fees, investment management fees, transaction fees, and other fees. The required disclosures are designed to empower plan fiduciaries with sufficient information to compare service providers and negotiate more favorable fee arrangements.

Present charges as aggregate dollar amount. The total administrative, recordkeeping and investment management charges must be presented as an aggregate dollar amount, but may also be presented as a percentage of assets. Transaction-based charges could be itemized separately as a dollar amount or as a percentage of applicable base amounts. Note, the service provider would be allowed to furnish a reasonable and representative estimate of the charges required to be disclosed.

Disclosure of financial relationship and conflict of interest. Unlike H.R. 2779, H.R 2989 would specifically require that the service disclosure statement include a written disclosure of any payment provided to the service provider (or an affiliate thereof) pursuant to or in connection with the service contract and the amount and type of any payment made or credit received for such services. The requirement would apply irrespective of whether the service provider or other person providing such services was affiliated or unaffiliated with the plan, the plan sponsor, the plan administrator, or any other plan official.

The service provider would also need to disclose any personal, business, or financial relationship with the plan sponsor, the plan, or the service provider (or any affiliate of the service provider) or any totality of such relationships which is material, if such relationship results in the service provider (or any affiliate thereof) deriving any material benefit. With respect to such potential conflicts of interest, the service provider would be required to indicate the extent to which it (or any affiliate) could benefit from the offering of its own proprietary investment products or those of third parties.

Tax penalties. Service providers that fail to comply with the disclosure requirements of H.R. 2779 would be subject to a tax penalty of $1,000 for each day during the period of noncompliance. Each compliance failure with respect to a plan would be treated as a separate violation. However, the total amount of tax imposed on a service provider for any failure with respect to any applicable plan could not exceed the lesser of:

1.10 percent of the assets of the plan (as of the first day of the plan year); and

2.$1 million.

Correction avoids penalty. A service provider may avoid the tax penalty if it exercised reasonable diligence in attempting to comply with notice rules and actually provided the notice during the 90-day period beginning on the date the provider knew or should have known that the failure occurred..

Mandated passive index fund. 401(k) plans that seek limited employer liability under ERISA Sec. 404(c) would be required under H.R. 2989 (but not H.R. 2779) to include at least one index fund in the plan's investment lineup. The Department of Labor would be required to review compliance with new disclosure requirements and impose penalties for violations.

Under the measure, plans would no longer be allowed to restrict investments to actively managed funds. Accordingly, the proposal incorporates the belief that index funds (unmanaged or passively managed mutual funds) are less expensive and generally outperform actively managed mutual funds.

Note: A spokesperson for the House Education and Labor Committee indicated the Rep. Miller will determine the next step for H.R. 2989 after consulting with the House Ways and Means Committee, which also has jurisdiction over 401(k) plans and which will address H.R. 2779. Any eventual bill will presumably reflect the House measures. While legislation (S. 401) has been introduced by Senate Special Committee on Aging Chairman Herb Kohl (D-WI) and Senator Tom Harkin (D-IA), fee transparency is being primarily driven by House members.

8. Noncompliance With Annual Reporting Rules May Subject Small Employers Maintaining One-Participant Plans to Big Penalties
As the July 31, 2009 deadline by which sponsors of one person 401(k) plans must submit the 2008 Form 5500-EZ fast approaches, small employers maintaining such plans need to be aware of the potentially onerous penalties for noncompliance. Specifically, small employers need to be cautioned that the Delinquent Filer Voluntary Compliance Program, by which noncompliance penalties may be reduced, is not available to redress the failure to file Form 5500-EZ.

Annual reporting requirements. 401(k) plans are required to file Form 5500 annual reports with the Employee Benefits Security Administration (EBSA) of the Department of Labor on or before the last day of the 7th month following the close of the plan year (generally July 31, 2009 (absent extension to October 15, 2009)). As an alternative to the full Form 5500, a one-person 401(k) plan may file a streamlined Form 5500-EZ, is specified requirements are met. Among the requirements, benefits under the plan must be limited to the individual owner of the business and his or her spouse and the plan must independently satisfy the minimum coverage rules.

Penalties for failure to file annual report. The IRS and DOL are empowered to assess penalties for the failure to file a Form 5500 annual report. The penalties are imposed concurrently and are not offsetting. In addition, the plan sponsor may not deduct the penalty assessments.

The IRS is authorized to impose a penalty of $25 per day (up to $15,000) for the failure to comply with the annual reporting rules. However, the IRS will not impose a penalty if the failure to file was due to reasonable cause and not to willful neglect.

Plan administrators who fail to provide a complete annual report or who file the report after the specified date are, in addition to the IRS penalty, subject to a separate ERISA imposed penalty of $1,100 per day.

Failure to file 5500-EZ may not be corrected under DFVCP. Plan administrators of traditional 401(k) plans may ameliorate possible penalties for failure to timely file Form 5500, prior to receiving a late file notice from the DOL, by participating in the Delinquent Filer Voluntary Compliance Program. However, the DVFCP is not available to sponsors of one-person 401(k) plans that fail to file Form 5500-EZ.

The fact that the DFVCP does not cover failures to file Form 5500-EZ may most affect small employers who are maintaining one person 401(k) plans. The failure to file a Form 5500-EZ could result in a $15,000 penalty that a small employer is less likely to withstand, especially in down economy.

One Person 401(k) Plans and the applicable reporting requirements are discussed at PEN Pars. 4085 and 7410.

PEN ENHANCEMENTS

Latest Benefit Practice Portfolio Analyzes Impact of Economy on 401(k) Matching Contributions
The latest Benefits Practice Portfolio examines the question of whether plan sponsors should cut the 401(k) matches they make in response to the challenging economy. Michael S. Snyder, General Counsel of Hillside Family of Agencies in New York State and a noted author and lecturer, notes that ``[b]ottom line, there is obviously no magic answer. Plan sponsors need to run their businesses, plan participants need to hold onto their jobs and save for retirement.’’

The Portfolio, ``Beyond Investment Loss: Economy Hits 401(k) Employer Match,’’ is available exclusively to internet subscribers. To access, select ``Pension Explanations’’ and click on ``Benefit Practice Portfolios.’’

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.

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 capsulizes all 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.

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:

• Current withholding tax tables (PEN Pars. 46, 46A, and 46B)
• Cost-of-living adjustment charts for retirement plans, IRAs, and social security (PEN Par 48)
• PBGC monthly benefit chart (PEN Par. 49)
• Table of Public Laws Amending the Internal Revenue Code and ERISA (PEN Par. 51B)
• Table of current and historical interest rates (PEN Par. 52 and following)

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.