Guest Article

(From the October 20, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

EBSA Interim Rule Now Final: Fiduciary "Safe Harbor" for Terminated Plans Requires Direct Rollover to IRA for Missing Non-Spouse Beneficiaries

EBSA adopted its 2007 interim rule as final -- requiring the fiduciary of a terminated individual account plan with benefits payable to a missing non-spouse beneficiary to transfer those benefits to an IRA in order to meet the fiduciary safe harbor. The original safe harbor required transfer to a non-IRA account.

Fiduciaries who comply with the "missing participant and beneficiary" safe harbor receive a significant advantage, in that they are deemed to satisfy their duties under ERISA § 404(a) with respect to the distribution of benefits, the selection of a transferee entity, and the investment of the funds in connection with the transfer. 73 FR 58459 (October 7, 2008).

Pre-PPA Safe Harbor Required Transfer to Non-IRA Account

In April 2006, prior to the passage of the Pension Protection Act of 2006 (PPA), the Employee Benefits Security Administration (EBSA) published a regulatory safe harbor providing the fiduciaries of terminated defined contribution plans (and the qualified termination administrators of abandoned plans) with clear guidance on how to satisfy ERISA's prudence requirement in handling the thorny issues surrounding distributions to missing participants and beneficiaries. The pre-PPA safe harbor required a fiduciary to transfer the benefit of a missing participant or spousal beneficiary to an individual retirement account or individual retirement annuity (IRA), and to transfer the benefit of a missing nonspouse beneficiary to a non-IRA. The safe harbor also set forth notice requirements and restrictions on the entities which could be selected to provide the IRA and non-IRA accounts, and on the investment of those accounts.

PPA Changes and IRS / EBSA Response

After EBSA published the safe harbor, PPA added IRC § 402(c)(11) to permit a plan to offer a nonspouse beneficiary the ability to elect a direct rollover to an IRA effective for distributions after December 31, 2006. Shortly after passage of PPA, IRS issued guidance on non-spouse direct rollovers in the context of the EBSA fiduciary safe harbor:

The IRS Notice made clear that terminated defined contribution plans under the EBSA safe harbor did not need to be amended to specifically allow direct rollovers for non-spouse beneficiaries. Rather, despite the permissive nature of IRC §402(c)(11), such plans would be considered as automatically providing such feature. Notice 2007-7 was published January 29, 2007. Shortly thereafter, on February 15, 2007, EBSA published an interim final rule which eliminated the ability under the safe harbor to transfer the benefits of a missing non-spouse beneficiary to a non-IRA account -- and substituted the requirement of a direct rollover to an IRA -- effective for distributions made on or after March 19, 2007. That interim rule was adopted as final without change by EBSA effective November 6, 2008.

Parallel changes were also made to Prohibited Transaction Class Exemption 2006-06, which provides an exemption from ERISA's prohibited transaction provision, to allow a qualified termination administrator to designate itself or an affiliate to provide the IRA. 73 F R 58629 (October 7, 2008).

EBSA is looking to further expand the safe harbor once PBGC issues final regulations under ERISA § 4050, which was amended by PPA to permit terminating plans that are not subject to the PBGC insurance program -- such as defined contribution plans -- to transfer the benefits of missing participants to the PBGC.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.