July 2010

The following highlights the most significant New Developments published in the Pension Plan Guide since the last update on June 29, 2010.

During the past month, the Employee Benefits Security Administration (EBSA) Department of Labor's has issued interim final regulations that are designed, effective July 16, 2011, to provide plan fiduciaries with sufficient information to evaluate the reasonableness of compensation and fees directly and indirectly paid to certain service providers (including affiliates), and assess the potential for conflicts of interest that may affect the performance of a service provider.

EBSA has also adopted an amendment to existing Class Prohibited Transaction Exemption 84-14 that, effective November 3, 2010, permits various parties that are related to employee benefit plans to engage in transactions involving plan assets if, among other conditions, the assets are managed by qualified professional asset managers (QPAMs). The amendment effectively authorizes a financial institution to act as a QPAM for its own plan under specified circumstances.

Finally, the PBGC has provided a simplified method for applying the requirement under the Pension Protection Act of 2006 that a multiemployer defined benefit plan in critical status disregard certain benefit reductions in determining the plan's unfunded vested benefits in order to calculate an employer's withdrawal liability. The guidance describes the method for determining the value of the affected benefits and the unamortized balance of the affected benefits.

NEW DEVELOPMENTS

1. DOL Rules Require Service Providers to Furnish Detailed Fee Disclosures to Plan Fiduciaries

The Department of Labor's Employee Benefits Security Administration (EBSA) has issued interim final regulations that are designed, effective July 16, 2011, to provide plan fiduciaries with sufficient information to evaluate the reasonableness of compensation and fees directly and indirectly paid to certain service providers (including affiliates), and assess the potential for conflicts of interest that may affect the performance of a service provider. A service contract or arrangement would not be reasonable, for purposes of the prohibited transaction exemption authorized under ERISA for necessary plan services, unless covered service providers (including fiduciary service providers, banks, consultants, investment providers, and third party administrators) comply with a series of new disclosure requirements.

Absent compliance by the service provider with the disclosure requirements, the plan fiduciary would be subject to liability for engaging in a prohibited transaction. However, the DOL has incorporated a Class Exemption into the final regulations that would relieve a fiduciary of liability for a Prohibited Transaction resulting from a service provider's failure to comply with the notice requirements. The fiduciary may not have had knowledge of the service provider's compliance failure and would be required to take actions upon discovering the failure, including notification to the DOL.

Note, the interim final rules retain the basic structure of proposed rules issued in December 2007 (see CCH Pension Plan Guide Par 20,537F), but with significant modifications. In order to allow parties sufficient time to address the new rules and establish procedures to ensure compliance with the regulations and the Class Exemption, the rules will not be effective until July 16, 2011. In the meantime, the DOL has invited comment on the interim final regulations. Written comments must be received by August 30, 2010.

Covered plans. Plans covered by the new disclosure rules include pension plans (defined contribution and defined benefit) within the meaning of ERISA Sec. 3(12)(A), including SEPs, SIMPLE Plans, and IRAs. Note, EBSA believes that guidance on the disclosure of fees for services rendered to welfare benefits is necessary. However, because of the unique circumstances applicable to welfare plans, EBSA has reserved ERISA Reg. 2550.408(b)-2(c)(2) as a place holder, pending development of future guidance.

Covered service providers. Not every entity providing services to the plan would be covered by the new rules. Accordingly, the threshold determination under the final rules would be whether a service provider is subject to the disclosure requirements.

Service providers subject to the disclosure requirements would be restricted to those who have entered into a contract or arrangement with a covered plan and reasonably expect $1,000 or more in compensation (direct or indirect) to be received in connection with the provision of specified services, regardless of whether the services will be performed, or such compensation received by the covered service provider, affiliate or subcontractor.

Service contract no longer need specify disclosure requirements. The proposed rules would have required that the service contract or arrangement be set forth in writing and that the terms of the contract or arrangement (including an extension or renewal of the contract or arrangement) specifically obligate the service provider to comply in writing with the disclosure rules. In addition, the written contract or arrangement would have needed to include a representation by the service provider that, before the contract was entered into (or extended or renewed), all required information was provided to the plan fiduciary with the authority to cause the plan to enter into (or extend or renew) the contract (i.e., the "responsible plan fiduciary").

The final regulations, by contrast, do not require that a formal contract or arrangement be set forth in writing or that any representations concerning the specific obligations of the service provider be included in the contract. However, the service provider must continue to furnish the required disclosures to the plan fiduciary in writing.

The interim rules do not require the service provider to make disclosures in a specified manner or format. The proposed rules allowed service providers to meet the disclosure conditions by using different documents for separate services, as long as the documents collectively contained all the required information. The DOL is not imposing specified standards regarding the format in which the information is to be released. However, the DOL is soliciting public comment as to whether service providers should be required to furnish a summary disclosures statement, including key information, providing an overview of the required information.

Disclosure of compensation and fees. The primary focus of the final rules is on highlighting the compensation or fees received by service providers and their affiliates in connection with services provided to the plan.

The regulations specify the following four categories of compensation to be disclosed:

(1) Direct compensation (either in the aggregate or by service (i.e., itemized basis)) that the service provider, affiliate or subcontractor reasonably expects to directly receive from the plan.

(2) Indirect compensation that the service provider, affiliate or subcontractor reasonably expects to receive from a source other than the plan, plan sponsor, service provider, affiliate or subcontractor in connection with the services to be provided pursuant to the contract, including the services for which the indirect compensation will be received and the payor of the indirect compensation.

(3) Compensation paid among related parties (i.e., covered service providers, affiliates and subcontractors) that is: (a) set on a transaction basis (e.g., commissions, soft dollars, finder's fees or other similar incentive compensation based on business placed or retained), or (b) charged directly against the covered plan's investments and reflected in the net value of the investment (e.g., 12b-1 fees). In addition, the service provider must identify the services for which compensation will be paid, the recipients of the compensation, and the status of each payer or recipient as an affiliate or subcontractor. However, the disclosure requirement does not extend to compensation received by employees from their employers for work performed by the employee.

(4) Compensation that the service provider, affiliate, or subcontractor reasonably expects to receive in connection with the termination of the contract and how any pre-paid amount will be calculated and refunded upon such termination.

Class exemption adopted. In the event that a service contract or arrangement fails to require disclosure of the specified information, or the service provider fails to comply with the disclosure requirements, the contract will not qualify for the exemptive relief under ERIS Sec. 408(b)(2), and the plan fiduciary would be liable for a prohibited transaction under ERISA Sec. 406. The DOL, concurrently with the issuance of the proposed disclosure regulations, released a Proposed Prohibited Transaction Class Exemption that would relieve a plan fiduciary of liability for a prohibited transaction that results from the failure by a service provider to comply with the disclosure regulations. The DOL has now adopted the Class Exemption, with modifications, and incorporated it into the final rules as a statutory exemption.

The Class Exemption shields a responsible plan fiduciary from the restrictions of ERISA Sec. 406(a)(1)(C) and (D) following the failure of a covered service provider to comply with the disclosure requirements if: (1) the fiduciary did not know that the covered service provider failed or would fail to make a required disclosure and reasonably believed that the provider made the required disclosure; (2) the responsible plan fiduciary, upon discovering the failure of the covered service provider to disclose the required information, makes a written request for the information to the service provider; and (3) the fiduciary notifies the DOL of the service provider's failure to comply with the written request for information within 90 days.

ERISA Reg. 2550.408(b)-2 was reported in PEN Report 1847 (July 26, 2010). The Preamble to the final rules is reproduced at Par. 24,808T. The final regulations are set forth at Par. 14,782.

2. IRS Indicates Deadline for Filing New Form 8955-SSA Expected to be in 2011

The IRS has indicated that the due date for filing Form 8955-SSA (Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits), which replaced Schedule SSA for the 2009 plan year, is expected to occur in 2011. Thus, the 2009 Form 8955-SSA would be filed in 2011.

Once the new form and instructions become available, the IRS will provide plan administrators a reasonable amount of time to complete and file the form. However, IRS cautions that the special due date for the 2009 Form 8955-SSA will not affect the filing deadline for the applicable 2009 Form 5500 or Form 5500-SF.

Schedule SSA. Prior to the 2009 plan year, plan administrators were required to use Schedule SSA (Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits) to report participants with deferred vested benefits who: separated from service during the plan year, transferred into the plan during the plan year, or were previously reported under the plan, but were no longer entitled to deferred vested benefits (e.g., because of the receipt of their benefits). Schedule SSA was also used to correct previously reported information for participants with deferred vested benefits.

Elimination of Schedule SSA. EBSA eliminated Schedule SSA beginning with returns for the 2009 plan year. The IRS will introduce a new Form 8955-SSA to replace the obsoleted Form SSA. The information to be reported on Form 8955-SS, the IRS advises, will be similar to the information that was reported on Schedule SSA. However, administrators will not be required to file the new form for the 2009 plan year and subsequent years until guidance is issued by the IRS.

Note, Schedule SSA was eliminated in order to facilitate implementation of the electronic filing of the Form 5500 series. Significantly, however, IRS advises that the Form 80955-SA will be filed with the IRS and not through the EFAST2 filing system.

The deadline for the Form 8955-SSA was discussed in PEN Report 1846 (July 19, 2010).

3. EBSA Adopts Amendments to Class PT Exemption on QPAMs

The Employee Benefits Security Administration (EBSA) has adopted an amendment to existing Class Prohibited Transaction Exemption 84-14 that, effective November 3, 2010, permits various parties that are related to employee benefit plans to engage in transactions involving plan assets if, among other conditions, the assets are managed by qualified professional asset managers (QPAMs). The amendment effectively authorizes a financial institution to act as a QPAM for its own plan under specified circumstances.

Qualified professional asset managers. PT Exemption 84-14 authorizes transactions between a party in interest with respect to an employee benefit plan and an investment fund in which the plan has an interest, and which is managed by a qualified professional asset manager. However, among other conditions, the party in interest, or its affiliates, may not have the power to appoint or terminate the QPAM and the party in interest dealing with the investment fund may not be the QPAM or a person "related to" the QPAM.

Independent fiduciary requirement. A QPAM must be an "independent fiduciary." Thus, the QPAM must be independent of and unrelated to the employer sponsoring the plan. In addition, the QPAM may not directly or indirectly control, or be controlled by, or be under common control with the employer sponsoring the plan.

QPAM-sponsored plans. Am unresolved issue had been whether the "independent fiduciary" requirement precludes employers in the financial services industry (e.g., investment managers and asset managers) from serving as QPAMs for their in-house plans. Prior to amendment, PTE 84-14 did not permit financial services entities to act as QPAMs for their own plans. However, the DOL, in August 2005, issued a notice of proposed amendment to PTE 84-14 that would allow a financial institution to act as a QPAM for its own plan, subject to an independent audit requirement (Proposed Amendment to PT Class Exemption 84-14 (Application No. D-112870), 8-21-05 (70 FR 49312).

The finalized amendment to Class PTE 84-14, effective November 3, 2010, authorizes a QPAM to prospectively manage an investment fund that contains the assets of its own plan or the plan of an affiliate. The QPAM must, however, have discretionary authority or control with respect to the plan assets involved in the transaction. In addition, the QPAM must adopt written polices and procedures that are designed to assure compliance with the conditions of the exemption.

Annual exemption audit. The relief is further contingent upon an "independent auditor" conducting an annual "exemption audit" to determine whether the written procedures adopted by the QPAM are designed to assure compliance with the conditions of the exemption. The auditor is required to test a representative sample of the plan’s transactions during the audit period that is sufficient in size and nature to afford the auditor a reasonable basis to make specific findings regarding whether the QPAM is in compliance with its written polices and procedures and the objective requirements of the exemption.

Written audit report. The auditor’s written report to the plan must contain its overall opinion with respect to whether the QPAM’s program complied: (1) with the policies and procedures adopted by the QPAM; and (2) with the objective requirements of the exemption. The report must further describe the steps performed by the auditor during the course of its review and its findings.

Complete audit within 6 months of end of year. The proposed amendment to the class exemption did not specify the date by which the annual exemption audit must be completed. To avoid uncertainty, the final amendment specifies that the exemption audit must be completed within six months following the end of the year to which it relates.

The Amendment to PTE 84-14 was reported in PEN Report 1846 (July 19, 2010) and reproduced at Par. 16,649Y.

4. PBGC Provides Multiemployer DB Plans With Simplified Method to Disregard Benefit Reductions in Calculating Withdrawal Liability

The PBGC has provided a simplified method for applying the requirement under the Pension Protection Act of 2006 that a multiemployer defined benefit plan in critical status disregard certain benefit reductions in determining the plan's unfunded vested benefits in order to calculate an employer's withdrawal liability.

Under Code Sec. 432(e)(1), a multiemployer plan that is certified to be in critical status for a plan year must adopt a rehabilitation plan that consists of actions that will enable the plan to cease to be in critical status by the end of the rehabilitation period or, under certain circumstances, that consists of reasonable measures to emerge from critical status at a later time or to forestall possible insolvency. The plan sponsor must provide the bargaining parties with one or more schedules reflecting reductions in future benefit accruals and adjustable benefits, and increases in contributions that the sponsor determines are reasonably necessary to emerge from critical status in accordance with the rehabilitation plan. Under Code Sec. 432(e)(9)(A), benefit reductions under a rehabilitation plan are disregarded in determining a plan's unfunded vested benefits for purposes of calculating an employer's withdrawal liability.

Simplified method for calculating withdrawal liability. The PBGC, pursuant to a requirement under Code sec. 432(e)(9)(C), has prescribed a simplified method to disregard the benefit reductions in calculating withdrawal liability. Under the simplified method, the amount of unfunded vested benefits allocable to an employer that withdraws after the last day of the plan year in which the benefit reduction occurred is equal to the sum of (1) the amount determined in accordance with ERISA Sec. 4211 under the method in use by the plan, and (2) the employer's proportional share, determined as of the end of the plan year prior to withdrawal, of the unamortized balance of the value of the reduced nonforfeitable benefits (i.e., affected benefits). The guidance describes the method for determining the value of the affected benefits and the unamortized balance of the affected benefits.

PBGC Technical Update 10-3 was reported in PEN Report 1847 (July 26, 2001) and reproduced at PEN Par. 19,975Z-28.

5. Oral Misrepresentation Did Not Create Fiduciary Breach Where Retirees Were Apprised of Their Rights Through Clearly Written Plan Documents

An employer did not breach its fiduciary duty by orally misrepresenting the amount of pension plan benefits to participants because the participants received clearly written plan documents explaining their benefit options and because the alleged oral statements were insufficient to induce reasonable reliance by the participants, according to the U.S. Court of Appeals in New York City (CA-2).

The plan provided level payments of benefits that would be coordinated with retirees' Social Security benefits. Documentation received by the retirees at their retirement interviews explained that the payments would be structured so that the overall amount received from the plan and Social Security would be the same throughout the remainder of their lives. In order to effect this result, the amount distributed from the plan before Social Security benefits were paid to the retirees would be larger and the amount distributed from the plan after Social Security benefits commenced would be smaller. The retirees alleged, however, that oral representations led them to believe that the plan benefit payout operated like a loan, under which they would initially receive higher amounts of benefits and then would receive lower amounts only until the "loan" was repaid

The Appeals Court ruled against the retirees, finding that their "meager" deposition testimony was not sufficient to create an issue of material fact as to whether the employer and plan had breached their fiduciary duty. The court stressed that given the clearly written plan documents, no reasonable jury could find that "these alleged vague oral statements were sufficient to induce reasonable reliance" by the retirees.

Watson v. Consolidated Edison Company of New York, Inc. was reported in PEN Report 1845 (July 12, 2010) and reproduced at PEN Par. 24,007H.

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, 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. 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.

3. 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.

4. 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.

5. 2010 Edition of U.S. Master Pension Guide

The 2010 U.S. MASTER™ PENSION GUIDE is now available for purchase. The book provides a comprehensive explanatory overview of qualified retirement plans and other retirement arrangements, reflecting up-to-date law changes and regulations, including the sweeping rules governing the minimum funding requirements applicable to single employer and multiemployer pension plans. Benefit COLAs, calendars, and tables have also been enhanced to reflect the year 2010 figures.

The book begins with a survey of the different types of plans from which an employer may choose and then describes the procedures for obtaining plan qualification. Rules governing minimum participation, coverage and vesting, nondiscrimination, distributions, reporting and disclosure, funding, and fiduciary standards are covered in separate chapters. Examples and pointers are used to illustrate the rules. The five final chapters cover the special rules applicable to 401(k) plans, ESOPs, tax-sheltered annuities, IRAs, and nonqualified arrangements.

The 2010 U.S. MASTER™ PENSION GUIDE is available for $87.50 from CCH INCORPORATED, 4025 W. Peterson Ave., Chicago, IL 60646-6085 or by calling 1-800-248-3248 and asking for book no. 0-4738-400. Discounts are available for multiple copies.