Pension Protection Act Blog

In a recent article in the Wall Street Journal, Kelly Greene answers the question from a reader about whether her employer can keep a percentage of the matching contribution in her account because she is not fully vested. It is not the question which is so interest, but the answer, provided by David Wray, president of the Profit Sharing / 401(k) Council of America. (hat tip to BenefitsLink.com)

His answer is:

What your company is doing is legal - - as long as it is following what’s called the “summary plan description,” which outlines how the plan works, including its vesting requirements.

I thought his answer was very smart. By directing the employee to a something they should already have a copy of - the summary plan description - instead of something they probably do not have a copy of - the plan document, he answered the question without creating more questions. Additionally, when there is a conflict between the provisions in the plan document and the provisions in the summary plan description, the courts have been ruling that the provisions in the summary plan description control. So by directing the employee to the summary plan description for the answer, Mr. Wray also avoided that possibility.

pension protection act, Kelly Greene, Wall Street Journal, vesting, summary plan description, David Wray, Profit Sharing / 401(k) Council of America, SPD, ERISA

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On Wednesday, the House of Representatives passed another Pension Protection Technical Corrections Act of 2008 by voice vote. This act, H.R. 6382, now heads to the Senate, where the last Pension Protection Technical Corrections Act of 2008, H.R. 3361, has been languishing since March 31, 2008. The Senate, which has already passed its version of the Pension Protection Technical Corrections Act of 2007, S.1974, can take up either version of these Acts from the House, or can create its own version.

Out of curiousity over what would have compelled the House of Representatives to pass a second Pension Protection Technical Corrections Act of 2008, I compared to two Acts to find the differences. The only differences between the Acts are in the last few pages in the section on Title II - Other Provisions.

The new sections of the PPTCA of 2008 are Section 201, which amends Sections 102 and 112 of PPA by adding the last sentence of section 303(g)(3)(B) of ERISA to state:

“Any such averaging shall be adjusted for contributions, distributions, and expected earnings (as determined by the plan’s actuary on the basis of an assumed earnings rate specified by the actuary but not in excess of the third segment rate applicable under subsection (h)(2)(C)(iii)), as specified by the Secretary of the Treasury.”

The last sentence of section 430(g)93)(B) is amended to read as follows:

“Any such averaging shall be adjusted for contributions, distributions, and expected earnings (as determined by the plan’s actuary on the basis of an assumed earnings rate specified by the actuary but not in excess of the third segment rate applicable under subsection (h)(2)(C)(iii)), as specified by the Secretary.’’

The effective date for these two changes is that they will take effect as if included in the provisions of PPA to which the amendments relate, which is Congressional speak for everyone pretending that these two sentences are to be treated as if they were originally contained in Sections 102 and 112 of PPA.

The new version of PPTCA of 2008 modifies the interest rate assumption required with respect to certain small employer plans effective for years beginning after December 31, 2007. It amends section 415(b)(2) by adding this new clause at the end of Subparagraph (E):

‘‘(vi) In the case of a plan maintained by an eligible employer (as defined in section 408(p)(2)(C)(i)), clause (ii) shall be applied without regard to subclause (II) thereof.’’

Also included are changes to determining the market rate of return for governmental plans, the treatment of certain reimbursements from governmental plans for medical care, the rollover of amounts received in airline carrier bankruptcy to Roth IRAs, and the modification of the penalty for failure to file tax returns for partnerships and S corps.

pension protection act, ppa, 415(b)(2), PPTCA, Pension Protection Technical Correction Act, 303(g)(3), ERISA

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I always find a stack of “stuff” on my desk after a long weekend. Like everyone, I like free stuff, high tech stuff, and stuff that is designed for pension geeks. Here is a quick rundown of some of the more interesting stuff I found on my desk this morning:

Tuesday, at 2pm ET, the IRS is streaming another free live webcast as part of their popular Tax Talk Today series. Tomorrow’s edition is an hour about Retirement Plan Pitfalls. The official program content states:

Don’t wait until the IRS knocks on your client’s doors to help them find, fix and avoid common retirement plan mistakes. Attend this program where you will learn how to use the IRS Fix-It Guides to identify and correct frequently encountered errors the IRS sees in retirement plans. In addition, the IRS will provide tips you can share with your clients on how these mistakes can be avoided in the future. Use IRS Fix-it Guides to keep your clients out of trouble.

The IRS creating programs for their own web channel is pretty interesting stuff, and I like a lot of the speakers, so I will probably attend, especially because it is free. The speakers include Monika Templeman, Director of IRS Employee Plans Examinations, and Avaneesh Bhagat, Program Coordinator for IRS Employee Plans Voluntary Compliance. I am hopeful that the upcoming changes to EPCRS will be discussed. The IRS has also created and posted several free podcasts on this website. One of the interesting items is that the programs and podcasts are free, with CE credit available for purchase at the rate of $20 per CE hour.

The Groom Law Group has invited me to the 13th Annual Employee Benefits Seminar on October 14, 2008 in D.C. I am already planning on being in D.C. on October 7, 2008, to attend oral arguments before the U.S. Supreme Court in Kennedy v. Plan Admin. for DuPont Savings, No. 07-636, and staying for this conference is very possible. The issue before the Supreme Court in Kennedy is:

Was the Fifth Circuit correct in concluding that ERISA’s Qualified Domestic Relations Order provision, 29 U.S.C. section 1056(d)(3)(B)(i), is the only valid way a divorcing spouse can waive her right to receive her ex-husband’s pension benefits under ERISA?

I previously blogged about Kennedy here, and am working on a book about retirement plans and divorce, including QDROs, so the oral argument in Kennedy is doubly fascinating. I believe that Chief Justice Roberts has his own views about ERISA, and Kennedy should be another link in that chain.

pension protection act, ppa, Kennedy, Supreme Court, QDRO, qualified domestic relations order, 1056(d)(3)(B), Tax Talk Today, Groom Law Group, ERISA

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In a Special Edition of Employee Plan News, dated July 1, 2008, the IRS provides some guidance on sample language under Code section 409(p) for the Transfer of an ESOP’s S Corporation Shares. This plan language is designed to prevent a nonallocation year by transferring assets from the accounts of disqualified persons to the non-ESOP portion of the plan according to Treas. Reg. 1.409(p)-1(f). A nonallocation year can occur when disqualified persons, as defined in Code section 409(p)(4), own or are deemed to own 50% of the outstanding stock of an S corporation.

The sample plan language provided by the IRS for Code section 409(p) transfers is:

The IRS is requesting comments on this sample language language until August 15, 2008. This plan language can be used now pending the comment period.

Technorati Tags: Pension Protection Act, ppa, IRS, ESOP, S Corporation, nonallocation, ERISA

June 30th marks the end of the IRS’ 2007-2008 Priority Guidance Plan. Tomorrow, making barely a ripple in the employee benefits universe, the IRS’ 2008-2009 Priority Guidance Plan will begin. Of course, the IRS has not released the 2008-2009 Priority Guidance Plan yet. They traditionally release Priority Guidance Plans during the month of August.

June 30th is also the mid-point in 2008 for calendar year plans, and is just a good day to reflect on what guidance the IRS has released so far this year, and what guidance is likely to be released before the Cycle D Cumulative List is released later this year. The IRS posts all guidance issued since January 1, 2008 on their website here.

Reviewing most of this guidance reveals that the IRS has really had a dual agenda this year. One part of the agenda has been issuing guidance for housekeeping issues, such as guidance needed in order to update cafeteria plans and non-qualified deferred compensation plans before the end of this year. The other part of the agenda has been issuing guidance to implement the Pension Protection Act.

With at least two bills pending before Congress to amend the Pension Protection Act - the Pension Protection Technical Corrections Act of 2008 and the Pension Protection Act ERISA Amendments of 2008 - one of the bills is likely to pass and create more PPA guidance items on the 2008-2009 Priority Guidance Plan.

Technorati Tags: Pension Protection Act, ppa, IRS, Priority Guidance Plan, ERISA

In a fascinating and completely unexpected twist to the U.S. Sugar ESOP class action lawsuit, the governor of Florida today announced that the State of Florida will buy U.S. Sugar for $1.75 billion. With the purchase, Florida will gain control over 187,000 acres of farmland in the northern Everglades while leasing the land back to U.S. Sugar for at least the next 6 years.

As the largest block of shareholders, the participants in U.S. Sugar’s ESOP will be the largest group of individuals affected by this purchase. Florida’s announced goal with this purchase is to gain control of the U.S. Sugar acreage to aid its plans to resurrect the Everglades. I originally wrote about the US Sugar ESOP litigation here.

More Information:

Booting US Sugar from the Everglades, Michael Gunwald, Time.com and Yahoo News;
US Sugar Class Action Lawsuit website, law firm of Colson Hicks Eidson.

Technorati Tags: Pension Protection Act, ppa, US Sugar, ESOP, Florida, ERISA

The new edition of Employee Plan News, released today by the IRS, contains this warning information about the new Form 5307 - it is important that customers send in the original copy of the application and not a photocopy. Photocopies of the bar code will not scan properly.

It seems that the bar code contains important information that will be optically scanned into the IRS’ computer system. What information the IRS is optically scanning from the bar code is not known. The same edition of Employee Plan News contains information that the DOL/EBSA is moving forward with the development of the EFAST2 system, which will receive, process, store, publicly disclose, distribute, and archive approximately one million Form 5500 submissions filed annually via the Internet. Mandatory electronic filing of Form 5500 is required for plan year 2009 filings, which will be filed in 2010.

Additionally, in this edition of Employee Plan News, Monika Templeman explains that one of the IRS’ critical priorities for this year is to target noncompliance through data-drive case selection methodologies.

In the private sector, this is called data mining and has been going on for years. It is a little disquieting that the IRS will be data mining both Form 5307s and Form 5500s. The new Form 5307 was first announced in Announcement 2008-23, and is available now. Use of the new Form 5307 becomes mandatory beginning Octoboer 1, 2008.

The IRS will still permit practitioners to create their own version of IRS bar coded Form 5307s and Schedules 8717 and 8905 by following the procedures in Publication 1167. The IRS notes that:

The substitute version of the form that is created MUST mirror (exactly) the IRS-printed Form 5307. (emphasis provided by the IRS).

The IRS is offering a limited number of paper copies of Form 5307 and Schedules 8717 and 8905, imprinted with bar codes for optical scanning through their form ordering service at 1-800-TAX-FORM.

Technorati Tags: Pension Protection Act, ppa, Form 5307, 8717, 8905, Publication 1167, IRS, data mining, ERISA

Often the entity that administers the plan, such as an employer or an insurance company, both determines whether an employee is eligible for benefits and pays benefits out of its own pocket. We here decide that this dual role creates a conflict of interest; that a reviewing court should consider that conflict as a factor in determining whether the plan administrator has abused its discretion in denying benefits; and that the significance of the factor will depend upon the circumstances of the particular case.

- Justice Breyer, majority opinion

In today’s decision in Metropolitan Life Insurance Co. v. Glenn, No. 06-923, the Supreme Court extends the four principles from Firestone Tire & Rubber Co. B. Bruch, 489 U.S. 101, in determining whether a conflict of interest materially affected MetLife’s decision to ultimately deny Glenn long term disability benefits. Firestone involved an employer who administered an ERISA benefits plan as well as evaluating claims for benefits and paying those benefits. MetLife has the Court evaluating a conflict of interest one step removed from the employer, where the plan administrator is not the employer but a professional insurance company who is evaluating claims for benefits as well as paying those benefits under a contractual relationship with the employer.

Glenn was a participant in her employer’s disability plan. She was diagnosed with a heart condition called severe dilated cardiomyopathy, and applied for disability benefits under the plan. MetLife approved her benefits for the initial 24 month period under the plan language which provided that she qualified for benefits under the terms of the plan if she could not perform the material duties of her own job. MetLife then referred her to a law firm who assisted her in applying for, and receiving, federal Social Security benefits. Under the terms of the plan, MetLife was entitled to reimbursement of benefits paid from her Social Security benefits, so when she was approved for retroactive Social Security benefits, her entire retroactive amount was paid to MetLife and the attorneys MetLife referred her to with Glenn receiving none of that award. The decision of the Administrative Law Judge, in approving the Social Security benefits, found that Glenn could not perform her own job and also was unable to perform any jobs for which she could qualify.

To continue receiving benefits, the plan required that after the initial 24 month period, Glenn had to meet a stricter standard of being incapable of performing not only her own job but also incapable of performing the material duties of any gainful occupation for which she was reasonably qualified. Despite medical reports to the contrary, and also contrary to the finding of the Administrative Law Judge which MetLife had materially benefited from, MetLife denied Glenn benefits for this extended period, finding that she was capable of performing full time sedentary work.

Glenn sought restoration of her benefits, first through administrative review and then by bringing a lawsuit against MetLife in federal district court. The federal district court ruled in favor of MetLife. Glenn appealed to the Sixth Circuit Court of Appeals, which found MetLife’s conflict of interest in this case troubling, and who reversed the decision of the district court and remanded the case back to the district court. MetLife then appealed to the U.S. Supreme Court.

The Supreme Court found nothing improper in the way in which the 6th Circuit conducted its review, and affirmed the 6th Circuit’s decision in this case. In making that determination, the Court discussed all four principles from Firestone. The majority opinion, written by Justice Breyer and joined by Justices Stevens, Souter, Ginsburg and Alito, is clearly troubled by MetLife’s conduct in this case, and in the potential financial motivation MetLife may have had in its’ decision to deny Glenn’s benefits. I wonder if the difficulty in completing a sentence at oral argument has come back to haunt MetLife with this opinion. Or it might be that MetLife’s behavior toward Glenn spoke louder than words to the Court when it came to deciding this case.

I’ve been working on a book about plan documents and divorce. This decision may not look that significant, but I think this decision will be viewed in hindsight as cutting the gordian knot if it results in divorcing the act of administering plans and evaluating claims for benefits from the act of paying those benefits, not that such a change is needed except in Glenn-type situations.

Additional information:

A New Firestone Drill: MetLife v. Glen, Andrew L. Oringer, BNA’s Pension & Benefits Blog;

Holding Pat and Satisfying No One: The Glenn ERISA Conflict of Interest Decision, Paul M. Secunda, Workplace Prof Blog;

MetLife Decision Handed Down - Supreme Court Affirms the Sixth Circuit, Roy F. Harmon III, Health Plan Law;

MetLife v. Glenn Decided!, Brian S. King, Brian King’s ERISA Blog;

The Supreme Court’s Ruling in MetLife v. Glen, Stephen Rosenberg, Boston ERISA & Insurance Litigation Blog - yes, Stephen, I do wish the Supreme Court would have asked before releasing this opinion today. Where were they last week when nothing happened in Planland so I spent the week proofreading my Cycle C ESOP/KSOP plan document and working on my DBK plan document. Today, I was finally able to confirm that the President signed the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) Act (affects the definition of comp in plans); the IRS released more cash balance-related regulations, the Court also released the opinion in Kentucky Retirement Systems v. EEOC; and my teenage daughter is holding a sleepover tonight.

Technorati Tags: Pension Protection Act, ppa, MetLife, Glenn, Firestone, Paul Secunda, Stephen Rosenberg, Supreme Court, 6th Circuit, conflict of interest, ERISA

At what point does a member of a corporation’s board of directors qualify as an “outside director” of purposes of Code section 162(m)(4)(C)(i) after serving as an interim chief executive officer? The IRS answered this question today in Rev. Rul. 2008-32.

In Rev. Rul. 2008-32, the IRS addresses the situation where a CEO suddenly resigns, and the corporation’s Board of Directors hires one of the directors to serve as Interim CEO while the corporation hunts for a CEO. The IRS’ analysis is short and to the point:

“The determination of whether an individual is or was an officer is based on all of the facts and circumstances in the particular case, including without limitation the source of the individual’s authority, the term for which the individual is elected or appointed, and the nature and extent of the individual’s duties. Director A was in regular and continued service from January 7, 2008 through December 11, 2008. Company X did not employ Director A for a special and single transaction and Director A did not merely have the title of officer. Instead, Company X employed Director A for an indefinite period to serve as interim CEO with the full authority vested in that office. Accordingly, under the facts and circumstances analysis, Director A was an officer of Company X.”

Rev. Rul. 2008-32 holds that under these facts, a member of the board of directors who serves as an interim chief executive officer is not an “outside director” for purposes of Code section 162(m)(4)(C) and Treas. Reg. 1.162-27(e)(3). The underlying question for the corporation was the tax treatment of the $1 million base salary compensation plan provided to Director A for serving as the interim CEO as well as Director A particating in Company X’s executive bonus plan, which pays a percentage of base salary. Code section 162(a)(1) provide a deduction for a reasonable allowance for salaries and other compensation for personal services actually rendered. Code section 162(m)(1) provides that for a publicly held corporation, no deduction is allowed for remuneration which exceeds $1 million with respect to any covered employees. If Director A is a covered employee, then no deduction for Company X above the $1 million in remuneration. If Director A is not a covered employee, then Company X may have a deduction for remuneration paid to Director A above $1 million.

Company X contends that Director A is an “outside director” and therefore is not a covered employee, thus they get the deduction. IRS responds with Rev. Rul. 2008-32 that Director A is a covered employee based on their analysis, and thus no deduction above $1 million in remuneration.

Technorati Tags: Pension Protection Act, ppa, Interim CEO, 162(m)(1), 162(a)(1), outside director, ERISA

The American Bar Association’s Section on Taxation has sent their recommendations for guidance to be included in the 2008-2009 IRS Priority Guidance List. Their list of items is reasonable and highlights a few items which are sorely needed. Their guidance recommendations for employee benefits are:

1. Nonqualified programs/executive compensation
a. Guidance on section 409A(b) funding rules.

b. Correction programs under section 409A.

c. Proposed Regulations on the application of a substantial risk of forfeiture under section 457(f).

d. Proposed Regulations implementing the changes to section 6039 reporting requirements made by section 403 of the Tax Relief and Health Care Act of 2006.

2. Tax-qualified plans
a. Proposed Regulations on the backloading issues addressed in Rev. Rul. 2008-7.

b. Guidance on permissible benefits under a qualified defined benefit pension plan (in follow-up to Notice 2007-14).

c. Guidance on permissible mid-year changes to a section 401(k) plan with “safe harbor” contributions.

d. Updated safe harbor explanation under section 402(f).

3. Health and other employee welfare benefit plans
a. Update section 105(h) Regulations.

b. Guidance on (i) calculating COBRA premiums for defined contribution (DC) health plans and (ii) application of COBRA generally to non-FSA DC health plans.

None of these recommendations are surprising. Many of them are housekeeping items which seem to sit on the backburner because Congress has been so active changing the Code sections 401 through 501 over the last 3 years.

Technorati Tags: Pension Protection Act, ppa, IRS Priority Guidance List, American Bar Association, ERISA