“Accordingly, the legal issue we must resolve is not whether it would be constitutionally permissible under the California Constitution for the state to limit marriage only to opposite-sex couples while denying same-sex couples any opportunity to enter into an official relationship with all or virtually all of the same substantive attributes, but rather whether our state Constitution prohibits the state from establishing a statutory scheme in which both opposite-sex and same-sex couples are granted the right to enter into an officially recognized family relationship that affords all of the significant legal rights and obligatinos traditionally associated under state law with the institution of marriage, but under which the union of an opposite-sex couple is officially designated a “marriage” whereas the union of a same-sex couple is officially designated a “domestic partnership.” The question we must address is whether, under these circumstances, the failure to designate the official relationship of same-sex couples as marriage violates the California Constitution.”

The Court provides an extensive discussion of this issue, and concludes that:

“Accordingly, in light of the conclusions we reach concerning the constitutional questions brought to us for resolution, we determine that the language of section 300 limiting the designation of marriage to a union “between a man and a woman” is unconstitutional and must be stricken from the statute, and that the remaining statutory language must be understood as making the designation of marriage available both to opposite-sex and same-sex couples. In addition, because the limitation of marriage to opposite-sex couples imposed by section 308.5 can have no constitutionally permissible effect in light of the constitutional conclusions set forth in this opinion, that provision cannot stand.”

It is the Court’s focus on the term “marriage” which is interesting from a qualified plan perspective. For as long as I can remember, a great debate has been waged over the plan language on “spouse” and “marriage” due to the federal pre-emption of issues involving ERISA. Marriage is one of those plan areas which is State regulated but has plan document implications because there is no federal pre-emption of marriage. It has remained a hybrid between the two worlds of federal pre-emption and State regulation for ERISA issues.

For example, qualified 401(k) plan documents will contain provisions about how a participant’s account balance will be distributed upon their death. Because it is possible, though unlikely, that a participant could die before receiving a full distribution of the vested portion of their account balance, the Internal Revenue Code contains a provision for a qualified preretirement survivor annuity (QPSA). A carefully drafted 401(k) plan will contain information incorporating this Internal Revenue Code provision regarding a QPSA, and may contain plan language something like this:

“Qualified Preretirement Survivor Annuity. Unless an optional form of benefit has been selected within the Election Period pursuant to a Qualified Election, the vested Account Balance of a Participant who dies before the Annuity Starting Date shall be applied toward the purchase of an annuity for the life of his surviving spouse (a QPSA). The surviving spouse may elect to have such annuity distributed within the 90-day period after the Participant’s death. For purposes of a QPSA, the term “spouse” means the current spouse or surviving spouse of a Participant, except that a former spouse will be treated as the spouse or surviving spouse (and a current spouse will not be treated as the spouse or surviving spouse) to the extent provided under a QDRO.”

While “spouse” in an integral part of the QPSA information for most plans, and plans normally contain an extensive definition section for terms used within the plan, the term “spouse” is a sticking point among pension geeks. One theory is that, since marriage, and therefore who is a spouse, is an integral part of several key components of the plan, the term should be defined in the definitions section of the plan document. A competing theory is that the plan document should sidestep the issue of who is a spouse by omitting the definition of spouse, since marriage, and therefore who is a spouse, is governed by State law, and qualified plan documents are required to comply with ERISA, which is federal.

One problem with including the definition of spouse within the plan document is that each State has its own laws when it comes to marriage and who is a spouse. Try to write a definition of spouse without using the term “marriage” or “married” and see how difficult it becomes. With the California Supreme Court focusing on what the term “marriage” means under California law, and with so many California employers sponsoring qualified plans, there will be a lot of pension geeks flipping through their plan documents this weekend to see how the plan addresses this issue.

Technorati Tags: Pension Protection Act, ppa, marriage, spouse, In re marriage cases, California Supreme Court, domestic partner, ERISA

For calendar year 2009, a high deductible health plan is a health plan with an annual deductible that is no less than $1,150 for self-only coverage or $2,300 for family coverage, and the annual out-of-pocket expenses do not exceed $5,800 for self-only coverage or $11,600 for family coverage. Out of pocket expenses are deductibles, co-payments, and other amounts but not premiums.

Technorati Tags: Pension Protection Act, ppa, HSA, health savings account, 223(g), ERISA

It was Section 508 of PPA which contained the benefit statement requirement. Within Section 508(b), it provided that the Secretary of Labor would develop 1 or more model benefit statements within one year after PPA was enacted, and that those model benefit statements would be written in a manner calculated to be understood by the average plan participant and could be used by plan administrators to comply with the requirements of Section 105 of ERISA. When PPA was enacted on August 17, 2006, the expectation was that the model benefit statements would become available for use no later than August 16, 2007. This did not happen. The DOL has released Field Advisory Bulletin 2006-03 and Field Advisory Bulletin 2007-03 on benefit statements but has not released model benefit statements. The working group, in the report, states that they considered whether to develop a model statement as part of their recommendation, but decided not to because they believed it was beyond the scope of their undertaking.

They did make these recommendations regarding the content, form, and timing of benefit statements:

1. The DOL should convene a task force to develop the content of a model benefit statement. The working group recommended including theh application of IB 96-1 to the benefit statement to clearly communicate the boundaries of information and education which could be included in benefit statements without crossing the “advice” threshold;

2. The DOL should consider establishing a transition period for the content requirements because a substantial number of sponsors do not currently have the data necessary to calculate the accrued and vested benefit information;

3. The assumptions and uncertainties associated with any projection of benefits should be included in the statement;

4. The multi-statement option provided for in Field Advisory Bulletin 2006-3 should be continued in the regulations;

5. The DOL should issue regulations for electronic benefit statements which incorporates the DOL’s safe harbor rules and IRS rules regarding electronic notices;

6. The DOL should review the use of electronic communications for benefit statements and issue regulations appropriate for technology currently in use and participants’ access to it;

7. The DOL should provide longer due dates for defined benefit plan statements which recognize the time it takes to accumulate the information necessary to calculate all participants’ accrued benefits. The DOL should provide a means for obtaining relief from the due dates for those defined contribution plans with non-participant directed assets that cause delays in obtaining complete data because of the timing of determination of plan assets, such as contributions and asset valuation, participant compensation, and other matters inherent in the plan; and

8. The DOL should consider delaying the due date for the initial benefit statement for those defined benefit plans whose provisions do not require the contemporaneous accumulatioin of individual participant dataa to provide them a cost-appropriate period to accumulate the data.

With the working group recommending that the DOL continue to study some of these issues, it is not clear when the model benefit statements might be forthcoming.

Technorati Tags: Pension Protection Act, ppa, benefit statement, DOL, Dept. of Labor, Advisory Council, ERISA

Technorati Tags: Pension Protection Act, ppa, Trucker Huss, Barbara Pletcher, ERISA

Tucked away toward the end of the Pension Protection Act are two sections which made changes to Railroad Retirement. Section 1002 and Section 1003 both became effective on August 17, 2007, one year after the date PPA was enacted. Section 1002 is Entitlement of Divorced Spouses to Railroad Retirement Annuities Independent of Actual Entitlement of Employee, and it states:

(a) IN GENERAL.—Section 2 of the Railroad Retirement Act of 1974 (45 U.S.C. 231a) is amended—

(1) in subsection (c)(4)(i), by striking ‘‘(A) is entitled to an annuity under subsection(a)(1) and (B)’’; and

(2) in subsection (e)(5), by striking ‘‘or divorced wife’’ the second place it appears.

Section 1003 is Extension of Tier II Railroad Retirement Benefits to Surviving Former Spouses Pursuant to Divorce Agreements, and it states:

(a) IN GENERAL.—Section 5 of the Railroad Retirement Act of 1974 (45 U.S.C. 231d) is amended by adding at the end the following:

‘‘(d) Notwithstanding any other provision of law, the payment of any portion of an annuity computed under section 3(b) to a surviving former spouse in accordance with a court decree of divorce, annulment, or legal separation or the terms of any court-approved property settlement incident to any such court decree shall not be terminated upon the death of the individual who performed the service with respect to which such annuity is so computed unless such termination is otherwise required by the terms of such court decree.’’

Just as quickly as Congress added subsection (d) to Section 5 of the Railroad Retirement Act, Congress has decided to delete subsection (d) of Section 5. In Section 11 of the Pension Protection Technical Corrections Act, which is currently pending before Congress, it states:

SEC. 11. AMENDMENTS RELATED TO TITLE X.
(a) AMENDMENTS TO RAILROAD RETIREMENT ACT.—

(1) Section 14(b) of the Railroad Retirement Act of 1974 (45 U.S.C. 231m(b)) is amended by adding at the end the following:

‘‘(3)(i) Payments made pursuant to paragraph (2) of this subsection shall not require that the employee be entitled to an annuity under section 2(a)(1) of this Act: Provided, however, That where an employee is not entitled to such an annuity, payments made pursuant to paragraph (2) may not begin before the month in which the following three conditions are satisfied:
‘‘(A) The employee has completed ten years of service in the railroad industry or, five years of service all of which accrues after December 31, 1995.

‘‘(B) The spouse or former spouse attains age 62.

‘‘(C) The employee attains age 62 (or if deceased, would have attained age 62).

‘‘(ii) Payments made pursuant to paragraph (2) of this subsection shall terminate upon the death of the spouse or former spouse, unless the court document provides for termination at an earlier date. Notwithstanding the language in a court order, that portion of payments made pursuant to paragraph (2) which represents payments computed pursuant to section 3(f)(2) of this Act shall not be paid after the death of the employee.

‘‘(iii) If the employee is not entitled to an annuity under section 2(a)(1) of this Act, payments made pursuant to paragraph (2) of this subsection shall be computed as though the employee were entitled to an annuity.’’.

With the Pension Protection Technical Corrections Act still pending, it is possible that more changes will be made before PPTCA heads to the President for signature.

Technorati Tags: Pension Protection Act, ppa, Railroad Retirement, Pension Protection Technical Corrections Act, PPTCA, ERISA

Kennedy is a case from the 5th Circuit Court of Appeals. In 1971, while employed by DuPont, Kennedy married Mrs. Kennedy. In 1974, Kennedy signed a beneficiary designation form identifying Mrs. Kennedy as his sole beneficiary for plan purposes. Mr. and Mrs. Kennedy divorced in 1994, and Mrs. Kennedy agreed to “be divested of all right, title, interest, and claim in or to … the proceeds therefrom, and any other rights related to any …. retirement plan, pension plan, or like benefit program existing by reason of” Mr. Kennedy’s employment. A QDRO was issued in 1997 providing disbursement instructions for Mr. Kennedy’s employee benefits plans but failed to include disbursement instructions for the DuPont Savings and Retirement Plan.

Mr. Kennedy retired from DuPont in 1998 and died in 2001, without ever executing another beneficiary form replacing Mrs. Kennedy as his beneficiary for purposes of the DuPont Savings and Retirement Plan. Mr. and Mrs. Kennedy’s daughter, Kari, was appointed executrix of Mr. Kennedy’s estate, and sent a letter to DuPont demanding that Mr. Kennedy’s account balance in the DuPont Savings and Retirement Plan be distributed to the estate. Kari Kennedy put DuPont on notice that the estate claimed the funds pursuant to Texas Family Code section 9.302, which generally provides that a spouse’s designation as a retirement plan beneficiary is invalidated by a subsequent divorce. Mrs. Kennedy also made a claim on DuPont for Mr. Kennedy’s account balance, which DuPont paid to her based on the designation of beneficiary signed by Mr. Kennedy. The estate then filed an action to recover Mr. Kennedy’s account balance, and DuPont filed a third-party claim, asserting that if Mrs. Kennedy was not the correct beneficiary, the plan was entitled to have the account balance returned to the plan. The trial court granted summary judgment in favor of the estate, and Mrs. Kennedy appealed.

The 5th Circuit vacated the trial court’s grant of summary judgment in favor of the estate, and rendered judgment for DuPont. The 5th Circuit reasoned that, as a QDRO for the DuPont Savings and Retirement Plan was never submitted to DuPont, and as QDROs are the specific mechanism provided by ERISA for addressing the elimination of a spouse’s interest in plan benefits, and as that mechanism was not invoked, therefore requiring DuPont to recognize the waiver in this situation would conflict with ERISA by determining rights to pension plan benefits in a manner not authorized by the QDRO provisions.

The estate then appealed the 5th Circuit’s decision to the U.S. Supreme Court, and will file their merit brief today. The Court has not set oral argument yet for this case.

Additional Information:

Petition for Cert. filed by the estate and Brief in Opposition, courtesy of SCOTUSblog.

Technorati Tags: Pension Protection Act, ppa, Kennedy, DuPont, QDRO, Supreme Court, ERISA

Section 624(a) of the Pension Protection Act added ERISA section 404(c)(5)(A). It addressed how the plan should invest a participant’s account balance when the participant has failed to provide investment instructions to the plan administrator or plan sponsor. On October 24, 2007, the DOL issued final regulations for ERISA section 404(c)(5) providing that a fiduciary of a plan that complies with the final regulation is not liable for any loss, or by reason of any breach, that occurs as a result of investment in a qualified default investment alternative. The final regulation also described types of investments which qualifies as default investment alternatives. The correcting amendment is effective on April 30, 2008, and applies on or after December 24, 2007.

This correcting amendment to those final regulations address 3 issues. First, a correction is made to the “round-trip” restriction contained in the final regulation. The DOL states that the original “round-trip” restriction was too broad and should not have been included as an example of an impermissible restriction. “Round-trip” restrictions affect a participant’s ability to reinvest in the QDIA for a limited period of time. Second, the DOL is clarifying that a committee comprised primarily of employees of the plan sponsor can manage a QDIA when the plan document names that committee as a named fiduciary. Finally, DOL is changing the final regulation to provide that stable value products or funds must investment primarily in investment products that are backed by state or federally regulated financial institutions, or the principal and accrued interest on the investment products may be backed by contracts issued by such institutions.

Field Assistance Bulletin 2008-03 is written in a Q&A format, addressing issues such as the scope of the QDIA final regulations, the notice requirements, the 90-day limitatino on fees and restrictions, QDIA management and asset allocation, 120-day capital preservation QDIA, and grandfather-type relief for stable value funds.

Technorati Tags: Pension Protection Act, ppa, QDIA, qualified default investment alternatives, 404(c)(5), Field Advisory Bulletin 2008-03, ERISA

Paul Secunda has an interesting post today on the Workplace Prof Blog about IBM reclassifying workers from salaried to hourly. The corporate buzzword for this is “reclassification”, and the story, which originated on NPR Marketplace, also mentions FedEx reclassifying drivers as independent contractors, and Allstate reclassifying agents as independent contractors.

For plan documents, the grandfather of reclassification is Microsoft. Several years ago, Microsoft reclassified employees as independent contractors, and within their plan document, excluded employees classified as independent contractors from becoming participants. Microsoft’s reclassification language spread through qualified plan documents, and is memorialized in IBM’s plan document, as of the January 1, 2005 restated plan, as:

“1.20. “Employee” means an employee of any Employer who receives stated compensation other than a pension, severance pay, retainer, or fee under contract. The term “Employee” excludes any Leased Employee and any person who is included in a unit of employees covered by a collective bargaining agreement that does not provide for his membership in the Plan. Any person deemed to be an independent contractor by any Employer and paid by the Employer in accordance with its practices for the payment of independent contractors, including the provision of tax reporting on Internal Revenue Service Form 1099, shall be excluded from the definition of Employee for all purposes under the Plan, notwithstanding any subsequent reclassification of such person for any purpose under the Code, whether agreed to by the Employer or adjudicated under applicable law.”

Section 1.46 of IBM’s plan document defines “Regular Employee” as:

“1.46. “Regular Employee” means an Employee as so defined by the rules and regulation of his Employer, who is (i) compensated by salary or by commission, or partly by salary and partly by commission, (ii) subject to the Employer’s performance evaluation program, and (iii) employed for an indefinite period.”

Eligibility is contained in Section 3.01 of IBM’s plan document, which states:

3.01. Eligibility

(a) Except as provided in subsection (c), each Employee of an Employer shall be eligible to become a Participant at any time during service as a Regular Employee.

In this type of plan which restricts eligibility to Regular Employees as defined by the plan document, and Regular Employees are defined as employees paid by salary or comission, hourly employees are not eligible to participate in the 401(k) plan. For plan documents, this is the real issue with Reclassification because it can be used by some companies to restrict plan participation.

Once an employee becomes a participant in the plan, they cannot be reclassified out of participating. For reclassified employees, Section 3.04(a) of IBM’s plan states that:

3.04. Effect of Status Change on Participation.

(a) Except as provided in subsection (b), a Participant who

(i) has been employed by the Employer or an Affiliate as a Regular Employee, then

(ii) ceases to be a Regular Employee, but

(iii) remains in the employ of an Employer or an Affiliate

shall continue to be a Participant in the Plan, but shall not be eligible to receive allocations of Deferred Cash Contributions or Matching Contributions, and shall not be eligible to make After-Tax Contributions, while his employment status is other than as a Regular Employee.

And this really is the heart of Reclassification when is comes to qualified plan documents - the reclassification has an impact plan eligibility and on employer contributions into the plan. For participants who are reclassified out of employer contributions, they remain as participants but their accounts will not grow as the employer prospers. The NPR Marketplace story states that IBM reported a 25 percent jump in profits a couple of weeks ago so it is not clear why IBM decided to engage in reclassification.

Technorati Tags: Pension Protection Act, ppa, reclassification, IBM, eligibility, independent contractor, NPR Marketplace, Workplace Prof, Paul Secunda, ERISA

Section 905 is about distributions during working retirement. It is one of my favorite parts of the Pension Protection Act because it was part of Congress re-conceptualizing what retirement age and retirement date should mean to a participant who does not want penalized for continuing to work past normal retirement age. Section 905(b) added Code section 401(a)(36), which states:

(36) Distributions During Working Retirement. A trust forming part of a pension plan shall not be treated as failing to constitute a qualified trust under this section solely because the plan provides that a distribution may be made from such trust to an employee who has attained age 62 and who is not separated from employment at the time of such distribution.

Section 905 applies to distributions in plan years beginning after December 31, 2006.

On May 22, 2007, the IRS released Final Regulations on Distributions from a Pension Plan Upon Attainment of Normal Retirement Age. Within these 4 short pages of regulations, the IRS added Treas. Reg. 1.401(a)-1(b)(3), which states:

(3) Benefit distribution prior to retirement. For purposes of paragraph (b)(1)(i) of this section, retirement does not include a mere reduction in the number of hours that an employee works. Accordingly, benefits may not be distributed prior to normal retirement age solely due to a reduction in the number of hours than an employee works.

Paragraph (b)(1)(i), otherwise known as Treas. Reg. 1.401(a)-1(b)(1)(i), states:

(i) In order for a pension plan to be a qualified plan under section 401(a), the plan must be established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to its employees over a period of years, usually for life, after retirement or attainment of normal retirement age (subject to paragraph (b)(2) of this section). A plan does not fail to satisfy this paragraph (b)(1)(i) merely because the plan provides, in accordance with section 401(a)(36), that a distribution may be made from the plan to an employee who has attained age 62 and who is not separated from employment at the time of such distribution.

The IRS then released Notice 2007-69 to provide guidance these final regulations.

Technorati Tags: Pension Protection Act, ppa, scalia, 401(a)(36), 1.401-1(b)(1), Notice 2007-69, working retirement, phased retirement, ERISA

The correction states:

1. On page 73683, column 3, in the preamble, first paragraph of the column, line 15, the language “reasonably expected to result in a larger” is corrected to read “reasonably expected to result in a smaller”.

§1.411(a)(13)-1 [Corrected]
4. On page 73691, column 1, §1.411(a)(13)-1(d)(3)(ii), line 18, the language “larger annual benefit at normal” is corrected to read “smaller annual benefit at normal”.

5. On page 73691, column 2, §1.411(a)(13)-1(d)(3)(iii)(B), line 9, the language “reasonably expected to result in a larger” is corrected to read “reasonably expected to result in a smaller”.

When these changes are incorporated into the text of the proposed cash balance regulations, the preamble now states:

The proposed regulations use the term statutory hybrid benefit formula to describe the portion of a defined benefit plan that is an applicable defined benefit plan described in section 411(a)(13)(C)(i) or the portion of the plan that has a similar effect. Specifically, the proposed regulations would define a statutory hybrid benefit formula as a benefit formula that is either a lump sum-based benefit formula or a formula that has an effect similar to a lump sum-based benefit formula. For this purpose, under the proposed regulations, a benefit formula under a defined benefit plan has an effect similar to a lump sum-based benefit formula if the formula provides that a participant’s accrued benefit payable at normal retirement age (or at benefit commencement, if later) is expressed as a benefit that includes periodic adjustments (including a formula that provides for indexed benefits described in section 411(b)(5)(E)) that are reasonably expected to result in a smaller larger annual benefit at normal retirement age (or at commencement of benefits, if later) for the participant, when compared to a similarly situated, younger individual who is or could be a participant in the plan. Thus, a benefit formula under a plan has an effect similar to a lump sum-based benefit formula if the right to future adjustments accrues at the same time as the benefit that is subject to the adjustments.

When incorporated into proposed Treas. Reg. §1.411(a)(13)-1(d)(3), it now states:

(d) Definitions–(1) In general. The definitions in this paragraph (d) apply for purposes of this section.

(2) Lump sum-based benefit formula. The term lump sum-based benefit formula means a lump sum-based benefit formula as defined in Sec. 1.411(b)(5)-1(e)(3).

(3) Statutory hybrid benefit formula–(i) In general. A statutory hybrid benefit formula means a benefit formula that is either a lump sum-based benefit formula or a formula that is not a lump sum-based benefit formula but that has an effect similar to a lump sum-based benefit formula.

(ii) Effect similar to a lump sum-based benefit formula. Except as provided in paragraph (d)(3)(iii) of this section, a benefit formula under a defined benefit plan that is not a lump sum-based benefit formula has an effect similar to a lump sum-based benefit formula if the formula provides that a participant’s accumulated benefit (within the meaning of Sec. 1.411(b)(5)-1(e)(2)) payable at normal retirement age (or benefit commencement, if later) is expressed as a benefit that includes the right to periodic adjustments (including a formula that provides for indexed benefits under Sec. 1.411(b)(5)-1(b)(2)) that are reasonably expected to result in a smaller larger annual benefit at normal retirement age (or benefit commencement, if later) for the participant than for a similarly situated, younger individual (within the meaning of Sec. 1.411(b)(5)-1(b)(5)) who is or could be a participant in the plan. A benefit formula that does not include periodic adjustments is treated as a formula with an effect similar to a lump sum-based benefit formula if the formula is otherwise described in the preceding sentence and the adjustments are provided pursuant to a pattern of repeated plan amendments. See Sec. 1.411(d)-4, A-1(c)(1).

(iii) Exceptions–(A) Post-retirement benefit adjustments. Post-annuity starting date adjustments of the amounts payable to a participant (such as cost-of-living increases) are disregarded in determining whether a benefit formula under a defined benefit plan has an effect similar to a lump sum-based benefit formula.

(B) Certain variable annuity benefit formulas. If the assumed interest rate used for purposes of the adjustment of amounts payable to a participant under a variable annuity benefit formula is at least 5 percent, then the adjustments under the variable annuity benefit formula are not treated as being reasonably expected to result in a smaller larger annual benefit at normal retirement age (or benefit commencement, if later) for the participant than for a similarly situated, younger individual (within the meaning of Sec. 1.411(b)(5)-1(b)(5)) who is or could be a participant in the plan, and thus such a variable annuity benefit formula does not have an effect similar to a lump sum-based benefit formula.

(C) Contributory plans. A benefit formula under a defined benefit plan that provides for a benefit equal to the benefit properly attributable to after-tax employee contributions does not have an effect similar to a lump sum-based benefit formula. See section 411(c)(2) for rules for determining benefits attributable to after-tax employee contributions.

The IRS was accepting comments on the Proposed Regulations on Hybrid Retirement Plans until March 27, 2008.

Technorati Tags: Pension Protection Act, ppa, IRS, cash balance, hybrid retirement plan, 1.411(b)(3), ERISA