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Guest Article

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(From the June 7, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

H.R. 4213: Includes Fee Disclosure for Defined Contribution Plans, but No Extension of COBRA Premium Subsidy


On May 28 the House passed H.R. 4213 by a narrow margin after various items were stripped from the bill, including an extension of the COBRA premium subsidy. Now headed to the Senate for approval, the bill includes pension funding relief for single-employer plans and new "fee disclosure requirements" for defined contribution plans, which are highlighted below.

COBRA Premium Subsidy Not Extended

Eligibility for the COBRA premium subsidy expired on May 31. H.R. 4213 originally proposed to extend the eligibility period for the subsidy though December 31, 2010, but that proposal was cut back to November 30, and then was eliminated altogether over cost concerns.

The COBRA premium subsidy enables an individual who lost group health plan coverage as a result of an involuntary termination of employment to purchase COBRA coverage by paying only 35 percent of the COBRA premium. The remaining 65 percent is paid though an employer tax credit. Unless Congress acts to extend this subsidy, employees who are involuntarily terminated after May 31 will not be eligible for the benefit. Individuals who are already eligible (i.e., because their involuntary termination occurred on or before May 31) would generally continue to receive the subsidy until the expiration of the 15-month maximum subsidy period, when they become eligible for coverage under another group health plan, or when their COBRA coverage ceases - whichever occurs first.

"Fee Disclosure" Requirements for Participant-Directed Individual Account Plans

Subtitle B of Title III of H.R. 4213 - subtitled the "Defined Contribution Fee Disclosure Act of 2010" - would impose detailed fee disclosure requirements over the portion of any individual account plan that permits a participant or beneficiary to direct the investment. Three general sets of disclosures would be imposed: (1) from the service provider to the plan administrator, (2) from the administrator to the participant or beneficiary, and (3) in the participants' quarterly benefit statements.

A service provider is anyone who provides administration, recordkeeping, consulting, investment management service or investment advice to the plan under a contract or other arrangement. Significantly, a service provider would include all persons who would be treated as a single employer under IRC § 414(b) or (c) if IRC § 1563(a)(1) was applied using a 50 percent rather than an 80 percent threshold (i.e., a parent-subsidiary group would exist if at least 50 percent of the vote or value was owned). An even lower 20 percent threshold would be applied to determine the parent-subsidiary group that is treated as the service provider for purposes of its required disclosure of any plan investment for which it provides substantial investment, trustee, custodial or administrative services.

In the event of noncompliance, penalties of up to $1,000 per day against the service provider, and up to $110 per day against the plan administrator, could be assessed by the Department of Labor. Similar amounts could be assessed by the Internal Revenue Service as penalty taxes.

If enacted, the new requirements would generally become effective for plan years beginning after December 31, 2011. However, a "good faith compliance" standard would apply until twelve months after final regulations are issued by the Department of Labor.

Service Provider Disclosures

Service providers would be required to provide the plan administrator with an Initial Statement, an Annual Statement, and Material Change Statements.

  • Initial Statement - The Initial Statement would generally include a detailed description of the services to be provided, the total expected annual revenue for such services, the manner in which the revenue will be collected, and the extent to which the revenue varies between investment options. It would also disclose any investment options for which the service provider provides substantial investment, trustee, custodial or administrative services. The total expected annual revenue would need to be broken down among administrative or recordkeeping services, investment management, and other services. Total expected annual revenue means the amount - expressed as a dollar amount or percentage of assets - expected to be received during the plan year from the plan, any participant or beneficiary, or any plan sponsor. This includes amounts expected to be received by the service provider in connection with services undertaken by it or any other person with respect to the plan (e.g., for administration, management, recordkeeping, consulting, etc.). Additional disclosures apply.
  • Annual Statement - For each plan year after the Initial Statement, an Annual Statement providing the same type of information would need to be provided.
  • Material Change Statement - If the information in the Initial or Annual Statement becomes materially incorrect, a Material Change Statement providing the correct information would need to be provided within 30 days.

The Initial Statement would need to be provided before the service provider enters into the contract or arrangement to provide service to the plan, within the time frame set by the Labor Secretary. An exception to the disclosure requirements would be provided for small service providers (i.e., where total annual revenue for the year with respect to the plan is expected to be less than $5,000 and the provider provides a statement to the plan administrator to that effect).

Plan Administrator Disclosures

In turn, plan administrators would be required to provide participants and beneficiaries with Advance Notice of Investment Options, any Service Provider Statements, and Notice of Material Change.

  • Advance Notice of Investment Options - Akin to the disclosures already required under ERISA § 404(c), the plan administrator would be obligated to disclose basic information about each investment option (e.g., name, description of objectives, whether designed to be a standalone comprehensive investment for retirement, extent to which actively managed, where further information can be obtained, etc.). Also required would be a fee comparison chart comparing the service and investment charges that could be charged against the accounts.
  • Service Provider Statements - The plan administrator would be required to provide, within 30 days after a request by a participant or beneficiary, any service provider statement it receives.
  • Notice of Material Change - If the information in the Advance Notice of Investment Options becomes materially incorrect, a Notice of Material Change providing the correct information would need to be provided within 30 days.

The Advance Notice of Investment Options would need to be provided before the earliest date of the participant's initial investment of any contributions, and within the time frame set by the Labor Secretary. For employers with 100 or fewer employees, the Labor Department would make available educational assistance, compliance aids, and services to assist in finding appropriate investment options.

Quarterly Benefit Statements

Quarterly benefit statements would need to disclose various specific items, including a description of the investment options in which the account is invested on the last day of the quarter, the different assets classes in which the participant is invested (and the percentage of the account allocated to each), the starting and ending balances for the quarter, total contributions for the quarter (and separate statements of the amounts that were contributed by the employer and the employee), total fees and expenses that were deducted during the quarter along with an itemization, and the net returns for the plan year-to-date expressed as a percentage (and a statement as to whether the net returns include fees and expenses that were deducted). Also, for each investment option, it would be necessary to disclose: the percentage of the participant's account invested in the option as of the last day of the quarter, the starting and ending balance of the participant's account invested in the option, the annual operating expenses of the option (and whether the operating expenses include the fees and expenses that were deducted), and directives on how the participant can obtain more information.

The Labor Department would provide a Model Disclosure for plan administrators to use. Plans with fewer than 100 participants as of the first day of the plan year would be permitted to provide the disclosures on an annual rather than quarterly basis.


Deloitte logoThe 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, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2010, Deloitte.


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