The Retirement Equity Act of 1984 led to the creation of "qualified domestic relations orders" or QDROs, thereby adding several new phrases and acronyms to the language of retirement plans. As is the case with much congressional action on employee benefits, the intent was laudable but the finished product has added to the growing administrative burden being shouldered by retirement plan administrators. With careful planning and appropriate procedures, however, it is possible to ease the burden.
Benefit periodicals are peppered with articles about new, innovative pension plans--pension equity plans; cash balance plans; age-weighted profit sharing plans; age-weighted cash balance plans; new comparability plans; and retirement builder plans. But are any of these The Perfect Plan?The answer, of course, is yes. And no. The fact is, one company's "Cinderella" is another company's "evil stepsister." What works beautifully in one situation produces an ugly mess in another. This article takes a closer look at how one M&R client company found the glass slipper to fit its particular situation.
The nondiscrimination rules for 401(k) plans compel many employers to actively encourage nonhighly compensated employees (NHCEs) to make pre-tax salary reduction contributions, particularly if allowing highly compensated employees (HCEs) to maximize their contributions is a key employer consideration. As more plans have trouble passing the nondiscrimination tests under Internal Revenue Code sections 401(k) and (m), as HCE contribution limits are being cut back, and as an increasing number of plans set a contribution limit for HCEs at the beginning of the plan year in anticipation of failing the tests, employers are looking for ways to increase the level of participation by NHCEs.But before an employer spends a great deal of time, energy and money on increasing NHCEs participation levels, it should weigh the cost of doing so against the benefit of increasing the ability of HCEs to contribute more to a 401(k) plan, particularly because nonqualified plan options exist for HCEs. In performing the cost-benefit assessment, employers should carefully evaluate the reasons they sponsor a 401(k) plan and the overall goals of the plan.
Secretary of Labor Alexis M. Herman today [6/10/97] announced transmittal to Congress of a proposal to enhance pension security that reaffirms the Administration's commitment to safeguard the retirement savings of American workers. The "Pension Security Act of 1997" would protect nearly 23 million employee benefit plan participants by making financial audits more comprehensive and accurate. The Act would also protect participants by requiring plan administrators to promptly report to the Department of Labor egregious violations of law affecting the integrity of the benefit plans. The proposal would also save plans nationwide an estimated $2.5 million through elimination of an unnecessary filing requirement.Federal pension law currently requires that pension plans with 100 or more participants receive an annual financial audit. Plan assets held by financial institutions (such as banks and insurance companies) may be excluded from the scope of the audit when a plan sponsor elects a so-called "limited scope audit." Consequently, the auditor does not express an opinion on the overall accuracy of the financial statements. Currently, approximately half of the 65,000 larger plans are not receiving a meaningful audit. These plans have assets totaling $950 billion.
"In these instances, the department, plan sponsors and participants cannot tell whether plan assets are secure," Herman said. "The department has proposed to repeal the limited scope audit to give plan participants and beneficiaries and federal law enforcement officials more assurance that the financial operation of larger plans are more fully exposed to the sunlight of an audit."
Other protections include: expansion of the Pension Benefit Guaranty Corporation's (PBGC) successful program to locate missing pension beneficiaries; increase in the amount of benefits guaranteed by the PBGC for multiemployer pension plans; increase of funding limits for contributions to multiemployer pension plans; and provision of additional retirement income protections for surviving spouses of federal workers under the Civil Service Retirement System.
"Our audit reform proposal is intended to build on our existing enforcement program by assuring that serious abuses are promptly reported," Herman said. "At the same time, we are reducing reporting burdens and associated costs to plans and improving the federal pension guarantee program."
This draft bill is the latest in a number of actions undertaken by the Labor Department to protect pensions of millions of Americans. Just last month, Herman and Attorney General Janet Reno jointly announced a multi-agency enforcement initiative to crack down on pension fraud and abuse. As part of its broader pension enforcement program, the Department of Labor has been targeting investigations into misuse of employee contributions to 401(k) plans. To date, more than $24 million has been recovered for more than 40,000 workers nationwide through this effort. Earlier, the department modified the regulations to ensure employee contributions to their 401(k) plans were deposited as quickly as possible.
The Pension Benefit Guaranty Corporation (PBGC) today announced the nationwide expansion of a successful premium audit pilot program to enforce compliance with PBGC insurance premium requirements."Premium audits give us another useful tool to help keep the insurance program financially sound and pensions secure for America's workers and retirees," said Acting Executive Director John Seal.
Under the expanded program, PBGC will audit premium payments by single-employer defined benefit plans selected from around the country. In a pilot program, launched in 1995, PBGC focused on plans located in the eastern part of the country. The pilot program showed premium audits to be a cost-effective means of identifying and collecting premium underpayments. The program generated over $4 million in additional income for PBGC, collecting $8 for every $1 spent on the effort.
The Alexander Hamilton Institute has been helping executives manage their companies and their careers since 1909. We currently publish newsletters, booklets, and looseleaf manuals targeted to top management, Human Resource directors, Personnel managers, front-line managers, and supervisors at small-to-medium sized firms.Our publications deal with all aspects of employment law, and are specifically designed to keep managers and executives from making mistakes that could lead to fines and lawsuits.
During the past several years, the Secretary of Labor has filed amicus curiae briefs arguing that ERISA does not preempt negligence or medical malpractice claims (outside the context of benefit denials) against HMOs and other managed care programs where the patient's health care is paid for through an employer-sponsored health plan covered by ERISA. The Secretary's briefs address preemption of such claims under ERISA § 514(a), 11 U.S.C. § 1144(a), which preempts all state laws that "relate to" an ERISA plan. The Secretary's briefs also address whether such claims can be removed from state court to federal court under a doctrine of federal question jurisdiction known as "complete preemption," a concept which is distinct from preemption of a state claim under § 514(a).Here is a list of the cases. Click on case name to get the Secretary's brief:
QUESTION 33: In Q&A 32, we dealt with the following question from a reader: What would be the proper correction in the case of a profit sharing plan that has allocated a company profit sharing contribution (say, 2% of pay) to participants who had satisfied the plan's eligibility requirements, but had not yet entered the plan because the entry date was after the plan's year end? Assume this occurred for several plan years.ANSWER: In the prior Q&A, we discussed how this would be handled under the one-year self-correction procedure in the IRS' new Administrative Policy Regarding Self-Correction (APRSC). Under that procedure, almost any error in plan operation -- no matter how serious -- can be treated as a "nondisqualifying defect," if it is discovered and corrected within the first plan year after the year in which the defect occurred. (We refer to this as the "first following year.") We indicated that the defect for the most recent year could be corrected under the new APRSC procedure.
Now, let's analyze the second part of APRSC, which permits self-correction of defects after the one-year self-correction period. Under this part of APRSC, defects not corrected within the first following year will be treated as non-disqualifying only if they are "insignificant." If an operational error is insignificant, then it can be corrected retroactively without risking plan disqualification and without penalty, no matter how many errors occurred and no matter how many plan years are involved.
Social Security and Medicare Face Dim Future, CFOs Say
America's leading financial executives believe that today's 25-year-olds will receive lower Social Security and Medicare benefits -- or none at all -- when they reach retirement age, according to a new survey by Watson Wyatt Worldwide.Gender Gap Politics Produce Pension Proposals
Congress seems reluctant to address the biggest retirement security problems facing the country -- Social Security, long-term Medicare solvency and inadequate savings. But lawmakers of both parties appear eager to make changes to the pension system that they think will attract women voters.Senator Levin Changes Forum for Attack on Stock Options
Having failed in his attempt to eliminate the favorable accounting treatment for stock options when FASB adopted FAS 123 Accounting for Stock-Based Compensation, Senator Carl Levin (D-Michigan) has teamed with Senator John McCain (R-Arizona) to sponsor the Ending Double Standards for Stock Options Act (S.576). The bill would eliminate the tax deduction for stock options unless the company either (1) expenses the options for accounting statements or (2) maintains a broad-based stock option plan. The bill would apply only to stock options granted on or after the date of enactment.PWBA Starts Hotline
The Department of Labor's (DOL's) Pension and Welfare Benefits Administration (PWBA) opened a new hotline on March 31, 1997. Its purpose is to provide employee participants and plan sponsors with information about employee benefit plans. Hotline representatives will respond promptly to telephone orders for a variety of DOL publications. The hotline telephone number is 1-800-998-7542.PBGC Seeks Comments on Top 50 Data Collection
The Pension Benefit Guaranty Corporation (PBGC) has invited public comment on the data collection process for its annual Top 50 list of underfunded pension plans. To comply with the Paperwork Reduction Act, the PBGC needs approval from the Office of Management and Budget (OMB) to continue involving plan sponsors in the process.Getting the Job Done: Alternative Work Arrangements
Watson Wyatt's survey of alternative work arrangements offered by more than 500 companies reveals chinks in the armor of traditional full-time, Monday to Friday, office-tied work schedules. The survey sheds light on how once-rigid requirements governing when and where workers get the job done are gradually giving way to more flexible work and retirement arrangements.