Market Value Adjustment Switching Recordkeepers

Curious to see thoughts on this - client is switching recordkeepers, and has a guaranteed fund with a market value adjustment option for termination. Client wants all assets to come over... the guaranteed fund contract states:

"Unless the Company (listed as the guaranteed fund provider) receives payment of any applicable market value adjustment from the Group Contractholder (listed in the document as plan sponsor) prior to the Distribution Date, Company will remit to the Group Contractholder or its designee the lesser of the Guaranteed Fund Value or Guaranteed Fund Value adjusted pursuant to the Market Value Adjustment Factor."

The recordkeeper has given the sponsor the option to wire the amount of the MVA prior to the distribution of assets, so that no plan assets will be adjusted. Would this be considered a contribution, even if no assets are moving into the plan and no assets are being adjusted from the plan?

Before considering that, check to see if there's another way to get the funds moved without the MVA. Participants should be able to request a transfer of their own funds held in the guaranteed fund to the new recordkeeper in order to avoid the MVA. It's a hassle to get everyone to complete the paperwork (it has to be participant-directed, not trustee-directed) but it beats the alternative especially if the MVA is significant.

Yes, the government's position is that it is a contribution (testing problems?  permitted by the plan document?  in SPD?) unless there is a reasonable claim that there has been a breach of fiduciary duty (and who wants to admit that?)

11 hours ago, Albert said:

Curious to see thoughts on this - client is switching recordkeepers, and has a guaranteed fund with a market value adjustment option for termination. Client wants all assets to come over... the guaranteed fund contract states:

"Unless the Company (listed as the guaranteed fund provider) receives payment of any applicable market value adjustment from the Group Contractholder (listed in the document as plan sponsor) prior to the Distribution Date, Company will remit to the Group Contractholder or its designee the lesser of the Guaranteed Fund Value or Guaranteed Fund Value adjusted pursuant to the Market Value Adjustment Factor."

The recordkeeper has given the sponsor the option to wire the amount of the MVA prior to the distribution of assets, so that no plan assets will be adjusted. Would this be considered a contribution, even if no assets are moving into the plan and no assets are being adjusted from the plan?

 

And to add fuel to the fire... we have very few of these type of contracts left (thankfully), but we always value the account at the market value (rather than the "fake" book value) in our annual valuations and reportings.  If you can only get $9,000 if you surrender the contract that they say is "worth" $10k, that's like a $10,000 bond that is currently only worth $9,000 due to "market" adjustments.  Why should we use anything other than $9k as the true value?  Yes, I know this is controversial with some people, but not me! ?

Do you handle it as a pop up if the contract is benefit sensitive? 

Without suggesting anything about what a contractholder might do (or refrain from doing):

To meet the § 415 rule for treating an amount as restoration rather than an annual addition, it is enough that there is a reasonable risk of liability for a fiduciary breach.

Restorative payments.  A restorative payment that is allocated to a participant’s account does not give rise to an annual addition for any limitation year.  For this purpose, restorative payments are payments made to restore losses to a plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under title I of the Employee Retirement Income Security Act of 1974 (88 Stat. 829), Public Law 93-406 (ERISA) or under other applicable federal or state law, where plan participants who are similarly situated are treated similarly with respect to the payments.  Generally, payments to a defined contribution plan are restorative payments 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 such a breach of fiduciary duty (other than a breach of fiduciary duty arising from failure to remit contributions to the plan).  This includes payments to a plan made pursuant to a Department of Labor order, the Department of Labor’s Voluntary Fiduciary Correction Program, or a court-approved settlement, to restore losses to a qualified defined contribution plan on account of the breach of fiduciary duty (other than a breach of fiduciary duty arising from failure to remit contributions to the plan).  Payments made to a plan to make up for losses due merely to market fluctuations and other payments that are not made on account of a reasonable risk of liability for breach of a fiduciary duty under title I of ERISA are not restorative payments and generally constitute contributions that give rise to annual additions under paragraph (b)(4) of this section.

26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C).

A fiduciary might support such a finding with a memo that describes relevant facts and analyzes risks of liability.  Unless the fiduciary’s conduct always was completely careful, skillful, prudent, and diligent (including before the selection of the contract, for all periodic reviews, and about how the contract affects decision-making about whether and when to change service providers), it might not be too difficult to find a risk of liability.

If the fiduciary personally engages its lawyer for advice the fiduciary seeks for its own protection, the evidence-law privilege for lawyer-client communications applies without the fiduciary variation.  The fiduciary need not reveal the memo, and likely would reveal it only if needed to persuade the Internal Revenue Service that the amount paid to make whole the annuity contract was a restorative payment.  (In my experience, the IRS is unlikely to challenge a restorative-payment treatment unless a big portion of the payment benefitted a business owner.)

Some other opportunities (each of which might be imprudent, depending on the facts and circumstances) might include:

Evaluating whether there is a plausible claim about the insurer’s ERISA fiduciary breach, ERISA prohibited transaction, securities deception, insurance sales-practices violation, or something else that could motivate the insurer to adjust the contract.

If the plan will buy another credited-interest contract, arranging with the next insurer an initial credit in the amount of the market-value adjustment the preceding insurer applied and contract terms by which the insurer is not at risk for the amount so credited.  (A fiduciary should not consider this until it has found that it is prudent to include such a contract at least as an alternative for participant-directed investment and has prudently evaluated how the terms would affect the plan’s opportunities to exit the credited-interest contract and to change service providers.)

Can forfeitures be allowed to pay for the MVA ?

What do the documents governing the plan provide about how to apply forfeitures?

(That a plan could allow a use of forfeitures without tax-disqualifying the plan does not by itself mean that the plan does allow such a use of forfeitures.)

Does the plan document specify the order in which forfeitures are applied?

(Some plan sponsors prefer that the plan’s administrator lack discretion. If there is no choice, one cannot have made it disloyally.)

Does the plan document grant the administrator discretion about applying forfeitures?

To the extent (if any) that forfeitures may be applied to plan-administration expenses, is paying the market-value adjustment a proper and reasonable expense of administering the plan?

If the plan’s administrator treats a payment of the market-value adjustment as a restorative payment [see above], does this suggest the administrator believes it has a reasonable risk of liability for its breach of a fiduciary duty?

If so, does the plan’s administrator have a self-interest in a decision about how to apply forfeitures?

If so, must or should the plan’s administrator engage an independent decisionmaker or get independent advice?

This is not advice to anyone.

15 hours ago, Keith Lowery said:

Can forfeitures be allowed to pay for the MVA

Are you suggesting that the plan pay for investment loss experienced by the individual participant? 

Let me rephrase my question, is it possible to pay the MVA fee out of forfeitures ?

The issue of reimbursing participants affected by a Market Value Adjustment (MVA) triggered by an early termination of an insurance contract was address in Private Letter Ruling 200404050.  The conclusion was the MVA reimbursement is not a contribution and is not considered 401(a)(4) or 415.

This interpretation also is consistent with Revenue Ruling 2002-45 which addressed "restorative payments" and concludes these are not contributions or considered for 401(a)(4) or 415.

Whether or not forfeitures can be used top reimburse participants depends upon the terms of the plan document regarding the use of forfeitures. The plan's ability to use of forfeitures increasingly has come under scrutiny, and we have seen an increasing need for the plan to specify possible uses of forfeitures.  In other words, since the MVA reimbursement is not a contribution, having a plan provision that says it can be used as a contribution likely will not permit the use of forfeitures here.

None of the pre-approved documents that I have seen do not have language that explicitly says forfeitures can be used to make corrective allocations.

I suggest consulting ERISA legal counsel for advice before the plan moves forward with using forfeitures to cover the MVA.

1 hour ago, Paul I said:

The issue of reimbursing participants affected by a Market Value Adjustment (MVA) triggered by an early termination of an insurance contract was address in Private Letter Ruling 200404050.  The conclusion was the MVA reimbursement is not a contribution and is not considered 401(a)(4) or 415.

This interpretation also is consistent with Revenue Ruling 2002-45 which addressed "restorative payments" and concludes these are not contributions or considered for 401(a)(4) or 415.

Whether or not forfeitures can be used top reimburse participants depends upon the terms of the plan document regarding the use of forfeitures. The plan's ability to use of forfeitures increasingly has come under scrutiny, and we have seen an increasing need for the plan to specify possible uses of forfeitures.  In other words, since the MVA reimbursement is not a contribution, having a plan provision that says it can be used as a contribution likely will not permit the use of forfeitures here.

None of the pre-approved documents that I have seen do not have language that explicitly says forfeitures can be used to make corrective allocations.

I suggest consulting ERISA legal counsel for advice before the plan moves forward with using forfeitures to cover the MVA.

Thanks Paul for your commentary.  It is much appreciated !