Retirement Plans Newsletter

November 24, 2014

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[Official Guidance]

Text of PBGC Final Regs: Title IV Treatment of Rollovers from Defined Contribution Plans to Defined Benefit Plans
"In April 2014, PBGC proposed to amend its regulations to clarify the treatment of benefits resulting from a rollover distribution from a defined contribution plan to a defined benefit plan, if the defined benefit plan was terminated and trusteed by PBGC. Under the proposal, a benefit resulting from rollover amounts generally would not be subject to PBGC's maximum guaranteeable benefit or phase-in limitations and would be in the second highest priority category of benefits in the allocation of assets. PBGC is now finalizing that proposal. Except for making minor clarifications suggested by commenters, the final regulation is the same as the proposed regulation. This rulemaking is part of PBGC's efforts to enhance retirement security by promoting lifetime income options." (Pension Benefit Guaranty Corporation [PBGC])  


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[Guidance Overview]

IRS Employee Plans News 2014-19, November 24, 2014 (PDF)
Topics in this issue: [1] Modified 403(b) plan Listing of Required Modifications coming soon; [2] Plans may file for determination letters -- Cycle D ends January 31, 2015, for individually designed plan sponsors whose EIN ends in 4 or 9 and multiemployer plans; and [3] Rollover chart. (Internal Revenue Service [IRS])  

[Guidance Overview]

IRS Issues Final and Proposed Rules for Hybrid Pension Plans (PDF)
"The final rule provides greater flexibility than the 2010 regulations on the market rate of return, the statutory metric used to credit interest ... on participants' hypothetical account balances. Commenters on the 2010 rule pointed out that the proscribed permissible rates of return and some of the permissible indices were neither broad enough nor representative of true market rates of return. The IRS now specifies that the hybrid plan's interest-crediting rate cannot be greater than the set of rates or indices established in the new final rule[.]" (Milliman)  

[Guidance Overview]

IRS Clarifies Key Rollover Question
"One of the most hotly debated issues in the retirement planning community has been whether a client with pretax and after-tax employer-plan money can roll it over in two parts -- moving that after-tax cash to a Roth IRA tax-free, that is, while also directly moving the pretax money into a traditional IRA.... [A] new IRS notice provides an emphatic answer: Yes, they can.... Although the notice says it will generally apply to distributions taken in 2015 or later, it also says taxpayers can apply a reasonable interpretation of the existing rules. Practically speaking, the guidance is effective immediately." (Ed Slott, in Financial Planning)  

Proposed Enhancements for a Modest IRS Pilot-Compliance Program Limited to Owner-Employee Plans and Foreign Deferred Compensation Plans
"The article ... offers three suggestions about reporting improvements, many of which were previously implemented, but are no longer in use. First, sponsors of foreign plans maintained primarily for non-resident aliens and of domestic plans limited to owner-employees should provide more information on their respective annual U.S. income-tax returns about their plan contributions and distributions. Second, the Service should issue separate 5500 forms for the different kinds of non-ERISA plans required to make such filings.... Third, the Service's reporting regulations should be revised to be consistent with its practices, whether it be to require annual Form 5500 reports from Code Section 403(b)(1) plans or from unfunded plans." (Albert Feuer, via SSRN)  


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Chart of Self-Directed IRA and 401(k) Prohibited Transaction Disqualified Persons
"Often times, a disqualified person is generically referred to as a family member. While that definition can be accurate, it really can cause problems when applied as some family members are disqualified (e.g. spouse of plan owner) while others are not (e.g. brother of plan owner).... [The author has] created a disqualified person diagram to help sort out the details. If a party is in red, that means they are a disqualified person and that your retirement plan cannot transact with them. If the party is green, that means they are NOT disqualified and your retirement plan may transact with them." (Mat Sorensen)  

Pension Funds Lambaste Private-Equity Firms for Large Fees
"Pension fund managers from the Netherlands to Canada, searching for new ways to invest, lambasted private-equity executives at a [recent] conference in Paris ... for charging excessive fees.... The world's largest investors, including pension funds and sovereign-wealth funds, are seeking new ways to invest in private equity to avoid the supersize fees. Some investors are buying companies and assets directly. Others are making more of their own decisions about which funds to invest in, rather than giving money to fund-of-fund managers. Big investors are also demanding to invest alongside private-equity funds to avoid paying fees." (The Wall Street Journal; subscription may be required)  

Retirement Distributions: Choose the Right Mix for Your Situation
"Cover essentials with predictable income sources ... Fund discretionary expenses with fluctuating income ... Generate cash flow when you rebalance your portfolio ... When it comes to selling assets, it's usually better to part with investments held in taxable accounts before taking money from tax-deferred accounts.... A possible exception is if your IRA balance is very large." (Charles Schwab)  

CalPERS Retirees Will Outnumber Active Workers Soon
"The growing number of retirees, partly due to aging baby boomers, is one reason a staff report last week argues that CalPERS has too much 'risk' and should consider a number of options during a board workshop early next year. Among the options listed are a more conservative investment allocation, a lower earnings forecast, an employer choice of asset allocations with different risk and expected returns, and workers sharing the risk through contributions, benefit design or cost sharing." (Calpensions)  

Judge Rejects Overhaul of Illinois's Beleaguered State Pension System
"Illinois ... argued that the constitutional clause was not airtight. All states have a fundamental authority known as their 'police power,' which gives them the duty and the legal tools to protect the safety and well-being of their citizens.... [Judge John W. Belz of the Sangamon County Circuit Court in Springfield] did not explain why he found those arguments unpersuasive. But in a court hearing on [Nov. 20], he pointed out that no court had used the 'police powers' argument to authorize changes in public pensions." (The New York Times; subscription may be required)  

Illinois State Circuit Court Rules State Pension Reform Bill Unconstitutional
"[As] long as SB 1 is tangled up in the courts, Illinois' massive pension debt will continue to balloon. The unfunded pension liability is so large today that it would take three years of a complete government shutdown, during which the entire general fund went toward pensions, just to break even.... Illinois' unfunded pension liability grew to more than $111 billion this year, according to official estimates. That's a $48 billion increase just since 2009." (Illinois Policy Institute)  

Benefits in General; Executive Compensation

[Guidance Overview]

DOL Regulatory Agenda, Fall 2014
A list of the upcoming regulatory projects of the DOL, including the Employee Benefits Security Administration [EBSA]. Also available: Fall 2014 Statement of Regulatory Priorities. (U.S. Department of Labor)  

[Guidance Overview]

New Annual Filing Requirements for Multiple Employer Retirement Plans -- and Some for Welfare Plans Too (PDF)
"An interim final regulation from DOL... provides that the [2014] annual return/report (Form 5500) of a MEP must include a list of participating employers and a good faith estimate of the percentage of total contributions (employer and employee) made by each participating employer during the plan year.... It is required of all MEPs including defined benefit, defined contribution, and welfare benefit plans.... The contribution percentages reported can be developed using the same method (cash, modified cash, or accrual) for calculating the good faith estimate that is used for recognizing other financial transactions on the Form 5500." (Buck Consultants at Xerox)  

DOL's New Audit Focus: Health Plan Claims and Appeals, and Hard-to-Value Retirement Plan Assets
"DOL representatives have expressed concern that the complexity of health and welfare benefits adjudication creates an inherent risk of error (or, worse, fraud). The DOL is also concerned that benefits are being systematically denied at the initial claim level, because, more often than not, participants do not appeal the initial claims determinations. Further, the DOL is questioning whether plans are providing sufficient and understandable information regarding the reasons for denial of a claim, such that participants can adequately avail themselves of the appeals process." (Proskauer's ERISA Practice Center)  

Federal District Court: Participant in Possession of Accurate SPD Cannot Rely on Oral Misrepresentation
"Here, Forristall argues that Fedex's liability stems from Strong's mistaken impression that Mary remained eligible for coverage under Forristall's [group health] insurance plan after the divorce and his failure to correct the relevant data entries in Fedex's computer system. This argument, however, directly touches on Fedex's recordkeeping and disclosure duties as an ERISA plan administrator, which include providing participants with an accurate written description of the plan.... To permit plan participants to bring state law claims premised on oral explanations that deviate from the statutorily required written plan description would undo Congress's intent of insuring the integrity and consistency of ERISA plan administration." [Forristall v. Federal Express Corp., No. 1:13-cv-11454-RGS (D. Mass. Nov. 21, 2014)] (U.S. District Court for the District of Massachusetts)  

Employer Errors in Dealing with Additional Medicare Tax
"If an employer fails to withhold the correct amount of additional [0.9% 'high earner'] Medicare tax and discovers the error in the year in which it should have withheld the tax, the employer should make an interest-free adjustment on the applicable corrected employment tax return (e.g., Form 941-X), and the missed amount of additional Medicare tax should be deducted from other wages or remuneration that it pays to the employee on or before the last day of that year. However, whether or not the employer is able to deduct the correct amount of additional Medicare tax from the employee's other wages or remuneration, the employer must report and pay the correct amount of additional Medicare tax.... If an employer mistakenly withholds too much additional Medicare tax and discovers that error in the same year ... the employer must first repay or reimburse the employee for the overwithholding before the end of the calendar year; if the employee is not repaid or reimbursed before the end of the year, the overwithholding cannot be corrected with an interest-free adjustment." (Ford & Harrison LLP)  

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