Pre-2009 Contracts and the "Employer Involvement" Criterion

[Christine Roberts]

Transition reporting relief applicable to pre-2009 annuity contracts or accounts require that, in order for the contract/account to be excluded from plan assets for reporting purposes, all rights and benefits under the contract or account must be "legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement of the employer." (FAB 2009-2). FAB 2010-1 clarified that employer confirmation of the account or contract holder's employment status (active, terminated) is not "involvement" for these purposes.

The question is whether or not employer involvement could be inferred from self-serving contract or annuity endorsement language regarding required minimum distributions, such as the example below:

MINIMUM DISTRIBUTION REQUIREMENTS FOR SECTION 403(b) PLANS

4. Code Section 403(b)(10) requires a Participant to take withdrawals from the Contract or 403(b) Plan in a manner which satisfies requirements similar to the required minimum distribution rules under Code Section 401(a)(9) and the regulations promulgated thereunder. To the extent they apply to 403(b) Plans, these required minimum distribution rules are hereby incorporated by reference in this Endorsement as a permissible withdrawal, subject to Section 3. This incorporation by reference includes changes made to such minimum distribution rules by legislation, proposed and final regulation, or rulings by the United States Department of Treasury.

We assume no responsibility for monitoring withdrawals, mandating distributions or insuring compliance with these required minimum distribution rules.

ERISA REQUIREMENTS

If this Contract is subject to the requirements of ERISA, we are not the Plan Administrator. Any responsibility related to the appropriateness of any withdrawal, consents (or revocation thereof), or any other fiduciary decision related to the administration of the Plan is that of the Employer or the Plan Administrator.

In this particular instance the carrier notifies participants on their 70th birthday of the upcoming requirement to begin RMDs but does not provide follow-up contact. It is my opinion that the self-serving "we assume no responsibility" language in the endorsement does not give rise to any legal right enforceable against the employer, such that a contract or account subject to such language (and meeting other requirements of FAB 2009-2) would still be excludible under 2009-2 transition relief. Basically the responsibility for timely RMDs lies with the former employee and the endorsement language does not change that. However I would be interested in hearing other viewpoints/comments on the issue particularly from readers who have reviewed the same or similar endorsement language.

[Peter Gulia]

Christine, as I read the Bulletin’s key condition, it is that the contract rights against the insurer are legally enforceable by a participant without involving the employer. I don’t read the key sentence as requiring that the insurer’s rights against the group holder (if there is one) or against a participant – or, differently stated, the group holder’s or a participant’s obligations – must be enforceable by the insurer without the employer’s involvement.

To use one of your examples, that an employer might choose not to get involved in whether a participant takes a minimum distribution does not impair a participant’s right to take a distribution (if he or she otherwise is entitled to it).

The second contract provision you quoted could be troublesome if a plausible interpretation of it (considering the whole contract) is that the insurer is not obligated to pay a benefit unless the plan administrator has confirmed to the insurer that the benefit is correct under the plan. If such an interpretation is correct, that would mean that a participant acting alone could not enforce his or her contract rights.

However, some 403(b) insurers purport to “require” a plan administrator’s decision even in circumstances for which the “requirement” cannot be a correct reading of the annuity contract.

[Christine Roberts]

Peter thanks for the comments.

[mbozek]

Transition reporting relief applicable to pre-2009 annuity contracts or accounts require that, in order for the contract/account to be excluded from plan assets for reporting purposes, all rights and benefits under the contract or account must be "legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement of the employer." (FAB 2009-2). FAB 2010-1 clarified that employer confirmation of the account or contract holder's employment status (active, terminated) is not "involvement" for these purposes.

The question is whether or not employer involvement could be inferred from self-serving contract or annuity endorsement language regarding required minimum distributions, such as the example below:

MINIMUM DISTRIBUTION REQUIREMENTS FOR SECTION 403(b) PLANS

4. Code Section 403(b)(10) requires a Participant to take withdrawals from the Contract or 403(b) Plan in a manner which satisfies requirements similar to the required minimum distribution rules under Code Section 401(a)(9) and the regulations promulgated thereunder. To the extent they apply to 403(b) Plans, these required minimum distribution rules are hereby incorporated by reference in this Endorsement as a permissible withdrawal, subject to Section 3. This incorporation by reference includes changes made to such minimum distribution rules by legislation, proposed and final regulation, or rulings by the United States Department of Treasury.

We assume no responsibility for monitoring withdrawals, mandating distributions or insuring compliance with these required minimum distribution rules.

ERISA REQUIREMENTS

If this Contract is subject to the requirements of ERISA, we are not the Plan Administrator. Any responsibility related to the appropriateness of any withdrawal, consents (or revocation thereof), or any other fiduciary decision related to the administration of the Plan is that of the Employer or the Plan Administrator.

In this particular instance the carrier notifies participants on their 70th birthday of the upcoming requirement to begin RMDs but does not provide follow-up contact. It is my opinion that the self-serving "we assume no responsibility" language in the endorsement does not give rise to any legal right enforceable against the employer, such that a contract or account subject to such language (and meeting other requirements of FAB 2009-2) would still be excludible under 2009-2 transition relief. Basically the responsibility for timely RMDs lies with the former employee and the endorsement language does not change that. However I would be interested in hearing other viewpoints/comments on the issue particularly from readers who have reviewed the same or similar endorsement language.

I dont understand how the "we assume no responsibility for montoring withdrawals" language can infer any legally enforceable right against the employer since IRS reg 1.403(b)-6(e) (7) provides that the employee can elect to take the MRD for one 403b contract from another 403b contract in order to satisfy the 401(a)(9) requirement in the same manner permitted for IRAs under Reg. 1.408-8 A-9. In other words there is no way for the employer to know if the employee is taking the MRD for one 403b contract from another 403b contract. It appears that an employee could take an MRD due under a contract established under one 403b plan from a 403b contract established under another employer's 403b plan.