Employer subsidy for stable value penalty

It's a common situation. The employer is merging into another and is required to terminate the Plan. The insurance company requires a "market adustment" for its "stable value" fund. 

The Plan is broad-based and the employer does not want its employees, who thought the money was safe, to lose money because of this "market adjustment."

Is there any guidance that would allow for this, without making this a prohibited transaction or a contribution that needs to be counted for 415 or 401(a)(4) concerns?

I think this has come up previously in the case of surrender charges (which are similar but not the same). I believe if the restorative payment was to forestall an actual or potential fiduciary lawsuit then it would not be counted as a contribution to the plan subject to all the conditions of an employer contribution. But I do not have any specific cases I can point you to (perhaps someone in the investment arena on the legal side can provide some for you to look at) and do not know if it extends from the surrender charge to MVA analogy.

The IRS gave some guidance on this topic in Rev. Rul. 2002-45 (https://www.irs.gov/pub/irs-drop/rr-02-45.pdf).  The question comes down to whether the fiduciary reasonably determines that there is reasonable risk of liability for a fiduciary breach as a result of the surrender fee/MVA.  From 02-45:

Quote

As a general rule, payments to a defined contribution plan are restorative payments for purposes of this revenue ruling only if the payments are made in order to restore some or all of the plan’s losses due to an action (or a failure to act) that creates a reasonable risk of liability for breach of fiduciary duty. 

I cannot make that determination for you or the plan, but the fiduciary's justification (or lack thereof) for purchasing the SVF with the MVA, the facts that gave rise to the change (i.e., an unanticipated merger), and the participant's opinions regarding the MVA would weigh into that decision.

I'm not heavily involved in this area, but are the subsidy payments typically structured as: (1) plan loses actual dollars after application of the MVA; then (2) employer puts more money into plan? Or: (1) plan remains whole as a result of insurer not applying the MVA; then (2) employer pays insurer directly the amount of the MVA?

Under a Treasury rule, a payment a fiduciary makes (and uniformly applies regarding all similarly situated participants) when the fiduciary faces “a reasonable risk of liability” might be a restorative payment, treated as not an annual addition. 26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C). A fiduciary’s breach need not be proven or conceded; it is enough that there is “a reasonable risk of liability[.]” (The rule is wider than the earlier Revenue Ruling. And a rule is more reliable than nonrule guidance.)

Even if all related decisions were proper and prudent, selecting a stable-value contract or deciding to make it a designated investment alternative (or continuing either decision) might have been a breach (or might set up facts allowing a complaint plausibly to assert a breach) if the fiduciary then knew—or had it exercised the care, skill, prudence, and diligence then required, would have known—that there was more than a remote possibility that the business would be acquired, or even that an owner might seek to sell the business. (One might presume a prudent fiduciary knows that a careful business acquirer typically requires the target to end its retirement plan before closing.)

Or, if the plan’s fiduciary finds there is no “reasonable risk of liability” and that the adjustment is an annual addition, allocations of the adjustment might fit within all or most participants’ annual-additions limit ($69,000 [2024]) and might comport with coverage and nondiscrimination conditions.

Either way, be careful if the restoration or adjustment disproportionately favors highly-compensated employees or affects a decision-maker’s individual account.

37 minutes ago, David Schultz said:

The IRS gave some guidance on this topic in Rev. Rul. 2002-45 (https://www.irs.gov/pub/irs-drop/rr-02-45.pdf).  The question comes down to whether the fiduciary reasonably determines that there is reasonable risk of liability for a fiduciary breach as a result of the surrender fee/MVA.  From 02-45:

I cannot make that determination for you or the plan, but the fiduciary's justification (or lack thereof) for purchasing the SVF with the MVA, the facts that gave rise to the change (i.e., an unanticipated merger), and the participant's opinions regarding the MVA would weigh into that decision.

Thanks, David, for that citation Rev. Rul. 2002-45. 

15 minutes ago, Peter Gulia said:

Under a Treasury rule, a payment a fiduciary makes (and uniformly applies regarding all similarly situated participants) when the fiduciary faces “a reasonable risk of liability” might be a restorative payment, treated as not an annual addition. 26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-1#p-1.415(c)-1(b)(2)(ii)(C). A fiduciary’s breach need not be proven or conceded; it is enough that there is “a reasonable risk of liability[.]” (The rule is wider than the earlier Revenue Ruling. And a rule is more reliable than nonrule guidance.)

Even if all related decisions were proper and prudent, selecting a stable-value contract or deciding to make it a designated investment alternative (or continuing either decision) might have been a breach (or might set up facts allowing a complaint plausibly to assert a breach) if the fiduciary then knew—or had it exercised the care, skill, prudence, and diligence then required, would have known—that there was more than a remote possibility that the business would be acquired, or even that an owner might seek to sell the business. (One might presume a prudent fiduciary knows that a careful business acquirer typically requires the target to end its retirement plan before closing.)

Or, if the plan’s fiduciary finds there is no “reasonable risk of liability” and that the adjustment is an annual addition, allocations of the adjustment might fit within all or most participants’ annual-additions limit ($69,000 [2024]) and might comport with coverage and nondiscrimination conditions.

Either way, be careful if the restoration or adjustment disproportionately favors highly-compensated employees or affects a decision-maker’s individual account.

Peter, I just thanked David Schultz for his citation. Let me also thank you for your well-thought contribution.  I'm comfortable on the facts for this client that the SPD was sufficiently silent about "adjustments," which would not be occurring if this employer had not decided to merge with another larger entity. The adjustment will actually favor employees who are not HCEs. 

Good collaboration, and I hope I can add something should you have an issue with your clients.

I aslo recommend carefully reviewing the "stable value" contract language with the insurance carrier to see if there are any exceptions applicable to MVA trigger on account of special circumstances (such as merger, benefit payments, etc.)

Something also to consider, since you mentioned Plan Termination.  Participants will be required to take distributions, generally I have seen with Stable Value funds if participants request a distribution they will receive full value.  It is only in the case where the sponsor is directing the distribution (i.e. force-out) that the MVA comes into play.  I would discuss with the Stable Value firm on what requirements they are enforcing the MVA.  You may be able to get all participants to request distributions and not have any force-out of the Stable Value and then no MVA in play.  Stable Value companies generally call this benefit responsive distributions.

It might be stating the obvious here, but *if* the plan sponsor determines that a restorative payment is warranted (under the guidance given by my esteemed professional colleagues above), the the plan sponsor is essentially *admitting* (at least the serious possibility) of a fiduciary breach and that breach essentially entails the selection of the SVF fund in the initial instance (with the possibility of an MVA.)  While a restorative payment may solve the back end issue of a MVA, it leaves the fiduciary exposed for any other damages that an enterprising plaintiff's counsel may see for the entirety of the fund being in the plan.

We never recommend a restorative payment (which is iffy in any event), and usually advise that the client seek an alternative (installment payments, a "put" or the like,)  If the contract is benefit responsive, participant's generally will suffer no loss.  Inconvenient, yup, but we do it all the time (both with respect to incoming business, and outgoing business using our SVF).

MoJo is right that a careful lawyer advises her client not only about whether the facts might or might not support a § 415 restorative payment but also about whether providing restoration, even with no concession, might alert someone about a fiduciary’s arguable breach and a loss or harm beyond the one on which the fiduciary provided restoration.

Also, banks and insurers offer many ways to resolve a market-value adjustment (if a plan or its participant has not by other means done something for the adjustment not to apply).

Note that if the employer does not meet the extremely hard to prove either way requirement of the Rev. Rul. and 415 regulations that it have a credible fear of litigation, the result is that the additional amount would be treated as a contribution, so subject to 415(c) and to nondiscrimination testing, which might or might not be a problem.