What’s old is new again: life insurance in profit sharing/401(k) plans

By Jerry Kalish on Posted in 401(k) Plans, Publications


Classic rock bands never go away. They keep on touring, and are rediscovered by new generations of music fans. Kinda like, those classic tax planning techniques that are being rediscovered by new generations of business owners.

One of those oldies, but goodies is buying life insurance through a profit sharing or 401(k) plan. In today’s economy, the reason is obvious. Cash flow, or lack thereof. Here’s a link to our Benefit Briefing that explains how life insurance fits into profit sharing and 401(k) plans in question and answer format.

Picture credit: Knebwort, the "Stately Home of Rock for 35 years".

QDROs: The view from 30,000 feet

By Jerry Kalish on Posted in 401(k) Plans, 403(b) Plans, Cash Balance Plans, Defined Benefit Pension Plans, Public Employee Plans

 

If you’ve been around retirement plans for any length time, you’ll know that the acronym QDRO (one of many in the benefit business) stands for Qualified Domestic Relations Order.

It’s a court order that creates a right for an alternative payee to receive some or all of a participant’s benefits in a qualified retirement plan. It’s one of those exceptions to the Internal Revenue Code’s general rule that prohibits benefits in a qualified retirement from being assigned or alienated.

And it’s up to the Plan Administrator to determine whether a DRO (another one of those acronyms) or Domestic Relations Order issued by a judge pursuant to a state domestic relations law is, in fact, a QDRO. That is, it meets the requirements under federal law. It’s a topic I’ve written about before. (See Dividing Retirement Benefits on Divorce, and What ERISA Has To Say About It.)

Steve Rosenberg in his Boston ERISA and Insurance Litigation Blog gives us some insight on the practical application of ERISA’s QDRO rules in his recent post, Doing The QDRO Shuffle. Steve writes

Here’s a great opinion, out of the United States District Court for the District of Rhode Island, on QDROs, their statutory basis, their purpose, and how they should be structured. Notably, the court weighs in a very sensible manner on the never ending question of whether, under ERISA, the divorce decree at issue must comply exactly with the requirements imposed by ERISA to qualify as a QDRO or whether instead, as in horse shoes, close enough counts. In this circuit, close enough is usually good enough, and courts tend to enforce the divorce decree so long as the court is convinced it can accurately ascertain the intent and purpose of the agreement from the decree, regardless of whether the exact detailed requirements that ERISA imposes to qualify as a QDRO have been met.

The opinion he references is Metropolitan Life Ins. Co. v. Drainville, and he provides us the Lexis site for it: 2009 U.S. Dist. LEXIS 63613.

But the view of QDROs from 30,000 feet is a little bit different. The Houston Chronicle reports that Continental Airlines has sued 9 pilots who filed divorce papers. Continental claims nine pilots used sham divorces as part of a scheme to collect their pensions early.

In a recent lawsuit, the Houston-based airline claims the pilots used sham divorces to collect their pensions early. Continental alleges that the pilots filed divorce papers but continued to live with their spouses and didn’t tell anyone – including their children. Once the divorces were final, the former spouses received rights to the pilots’ pensions and applied for lump-sum distributions, which Continental said were worth as much as $900,000 apiece.

Continental also alleges that after they got the money, the couples remarried. Why? Continental suggests that the pilots were concerned about losing significant parts of their pensions because of the financial difficulties the airline industry was encountering, and that the maximum annual pension guaranteed by the Pension Benefit Guaranty Corp. (PBGC) is far less than a typical airline pilot pension, i.e., 2009 maximum of $54,000 for a 65-year old.

So now what’s a Plan Administrator to do? According to the report, Continental sent copies of the law suit to the Secretary of Labor and the Secretary of the Treasury.

But it’s nothing new. In 1999, UAL Corp, the parent company of United Airlines, asked the Department of Labor (DOL) how a Plan Administrator should treat domestic relations orders the Plan Administrator has reason to believe are “sham” or “questionable” in nature.

The DOL in Advisory Opinion 1999-13A responded by saying that

… “if the plan administrator has received evidence calling into question the validity of an order relating to marital property rights under State domestic relations law, the plan administrator is not free to ignore that information”.

You can read the entire Advisory Opinion here and the DOL’s publication, The Division of Pensions Through Qualified Domestic Relations Orders.

So what’s the answer in situations in which the QDRO is suspect? Let’s use aviation jargon, and just say, let your attorney be the air traffic controller.

Picture credit: Sandkarx via Flickr of Mauna Kea, top to bottom.

It’s Bond. Fidelity Bond … revisited

By Jerry Kalish on Posted in 401(k) Plans, Cash Balance Plans, Defined Benefit Pension Plans, Employee Stock Ownership Plans

Whether your preference is Sean Connery, George Lazenby, Roger Moore, Timothy Dalton, Pierce Brosnan, or now Daniel Craig, the James Bond character has been used in the longest running and most financially successful English language film franchise to date.

The Bond movies started in 1962 with Dr. No. For us ERISA people, our Bond originated in 1974 with the passage of ERISA which required that retirement plans be covered by a fidelity bond.

Here’s our 2009 version as the July 31 Form 5500 filing deadline for calendar year retirement plans rapidly approaches (unless extended).

And, if history is our guide, then there will be retirement plans for which the bonding amount is insufficient, or in some case have have no coverage at all.

So here’s a link to our publication, THE ERISA BONDING REQUIREMENT: What Plan Sponsors Need to Know to Be in Compliance Updated for the Pension Protection Act of 2006. Long title, but I hope the short the Q&A format helps.

It’s ERISA plan audit time again

By Jerry Kalish on Posted in 401(k) Plans, Defined Benefit Pension Plans, Employee Benefit News columns

It’s already the middle of July, and for many retirement plan sponsors Form 5500 will be due by the end of this month unless extended. And if you’re a plan sponsor whose 5500 must include an ERISA audit, selecting a plan auditor is a fiduciary function.

Here is a link to my column in the July  issue of Employee Benefit news about what you need to know about ERISA audits. (Free registration may be required). Employee Benefit news is an employee benefit publication which provides free newsletters, seminars and podcasts from industry experts, and online content for plan sponsors. You can check it out here.

The 401(k) investment maze, What’s it going to take for employees to find their way through it?

By Jerry Kalish on Posted in 401(k) Plans

You remember that classic labyrinth wooden maze game. It’s the toy that has captivated and challenged children and adults for generations. It takes concentration and dexterity to guide the steel ball through the maze to reach the winning position.

Well, this is the 21st Century after all, and some folks from the Cowtown Computer Congress in Kansas City made it into a robotic labyrinth game as pictured above. They plugged an Arduino and two servos into the wooden labyrinth board game, and added some programming and a WiiFit board.  

Kinda like a 401(k) participant managing his or her own account to get to retirement with adequate income. Instead of WiiFit, they’re using employer sponsored investment education programs. Now I don’t know about how the computer folks feel about the results of their project, but 401(k) participants now think that current investment education programs are coming up short.

That acccording to String Financial’s recent study, Market Insights: Helping Tomorrow’s Retirees Better Prepare Today.

String Financial surveyed over 400 defined contribution plan participants in the third quarter of 2008. The respondents’ collective view of educational materials supplied by 401(k) providers and their employers is that they are: 

  • Difficult to understand. 34% of respondents felt the materials included terms or concepts that they did not understand and were not adequately explained;
  • A commodity product:. 41% agreed that the materials do not contain information that could not be easily found elsewhere (19% disagreed);
  • Ineffective. Fewer than 19% of respondents indicated that the educational resources led to changes in retirement planning behaviors or practices.

And in real terms, even worse if you look at how research conducted by DALBAR. For the past 15 years, DALBAR has been issuing a report called the Quantitative Analysis of Investor Behavior (QAIB) that examines the returns that investors actually realize and the behaviors that produce those returns.

I’ll leave the commentary and analysis of the report’s results to the investment experts like our friends at Interlake Capital Management, LLC who in their blog, The Float, wrote, Dalbar 2009: Not Pretty.

Not pretty, indeed. While the S & P 500 earned an average return of 8.41% from 1988 to 2008, the average equity investor earned a mere 1.87%. Some call that 6.54% per year over that time period the cost of uninformed investing, and some call it the cost of going it alone. I call it the cost of inadequate retirement income.

And the answer is? 

Business and ERISA record retention myths

By Jerry Kalish on Posted in 401(k) Plans, Defined Benefit Pension Plans, Posts on SLATE

There a lot of business myths out there. One of the most potentially dangerous is that there is a "7-Year Rule" and a "6-Year Rule" respectively for maintaining business and ERISA records. Both may be guidelines, but not the practical side of record retention.

That’s the topic of my recent post over at my other blog home, Slate’s BizBox blog for small business. Here’s a link to Hang On To Your Records. 

What’s in your 401(k) plan, and what’s it really worth?

By Jerry Kalish on Posted in 401(k) Plans, Audio/Visuals

You may be familiar with the PBS TV series, Antique Road Show. It’s that show that visits various cities in the U.S., and invites people to bring their unusual antiques and collectibles to be valued by appraisers.

But sometimes, things go awry in these situations as shown in the video below – actually an advert for the BBC version of the show in HD.

http://www.youtube-nocookie.com/v/UQHQZkWkEwA&hl=en&fs=1&rel=0&color1=0x2b405b&color2=0x6b8ab6
Hopefully, 401(k) participants who have hard to value assets in their accounts won’t experience the same type of chaos. But there can be serious issues nonetheless.

Let’s start with a definition. Hard to value assets, a/k/a “HVA” – another one of our many ERISA acronyms) include real estate, nonpublicly traded securities, shares in a limited partnership, and collectibles. They’re usually found in self-directed brokerage accounts (“SDBAs” – sorry, another acronym) which I wrote about earlier this year, Self-Directed Brokerage Accounts: Deja Vu All Over Again?

J.P. Morgan’s recent newsletter analyzed the issues and regulatory activity impacting HVAs in their article, Plan investments – Hard to Value Assets. I’ll leave the critical analysis to the experts like Brian Donohue, FSA, the Managing Director of J.P. Morgan’s Compensation & Benefit Strategies.

But there’s an aspect of HVAs that very timely to some of our clients at this time of year. Form 5500 due at the end of this month for calendar year plans unless extended. HVA can impact  “small plans” (those with fewer than 100 participants). These plans are generally exempt from the general requirements under Title I of ERISA that a retirement plan be audited each year by an independent qualified public accountant as part of the plan’s annual report Form 5500.

The exemption is based on the requirement that at least 95% of a small plan’s assets must be “qualifying plan assets” which those assets that can be readily valued. Or in other words, having not more than 5% of HVAs. In such case, the audit waiver can still be met if additional bonding is obtained in accordance with Department of Labor regulations.

And as to who pays the cost of the additional bonding, the Plan Administrator can require that the cost be paid by the participant whose self-directed account  caused the threshold to be exceeded. A policy clearly stated in the plan’s Investment Policy Statement. You do have one, don’t you?

The EGTRRA Restatement Series, Part 4. The Summary Plan Description, electronically speaking

By Jerry Kalish on Posted in 401(k) Plans, 403(b) Plans, Cash Balance Plans, Defined Benefit Pension Plans, EGTRRA Restatement Series

This is the fourth in our EGTRRA Restatement Series, the purpose of which is to help retirement plan sponsors handle the required amendment and restatement of their retirement plans. Last week, I discussed plan document choices.

Today’s post is about the Summary Plan Description ("SPD") and its distribution requirements – electronically speaking. For many retirement plan sponsors the SPD that’s part of the EGTRRA Restatement process may be the first in several years. So for purposes of this post (and brevity), I’ll conveniently cut through all the technical rules about content, timing, etc., and get right to distributing the SPD in the electronic world.

The Department of Labor (DOL) is the federal agency, of course, that has oversight responsibility for complying with ERISA’s reporting, disclosure and fiduciary rules. One of which is that Plan Administrators provide participants and beneficiaries with a copy of the SPD and Material Modifications of the Summary Plan Description (MMSPD) in a manner that is "reasonably calculated" to ensure the actual receipt of the documents.

But in an electronic business environment with email, websites, etc., how do you actually met this requirement. Like many aspects of ERISA that are facts and circumstances based, the regulators provide safe harbors.

The DOL issued safe harbor regulations permitting Plan Administrators to distribute SPD through electronic media as long as certain requirements were met. First issued as interim regulations in April, 1997, the DOL issued final regulations on April 9, 2002. These regulations apply not to just SPDs, but also to permit electronic distribution of COBRA notices, qualified domestic relations orders (QDROs), and qualified medical child support orders (QMCSOs).

Here’s a brief overview of the DOL’s safe harbor rules: First, retirement plan participants must be able to access electronic information as an integral part of their duties, and they must be able to access documents in electronic form anywhere they are reasonably expected to perform work. If not, then they must consent to electronic delivery.

The DOL safe harbor says that

  1. The electronic delivery system must confirm actual receipt of the transmitted information.
  2. The system must protect the confidentiality of participants by incorporating measures designed to designed to stop unauthorized access or receipt of the information.
  3. The electronic version of the document must be consistent with the style, content and format normally required.
  4. Notice of the document’s significance must be provided at the time of electronic delivery.
  5. The participant must be apprised of his or her right to receive a paper copy of the document free of charge upon request.

Note that all along I’ve been saying "distributed" and not just "made available". Thus, just simply posting it on the company intranet, for example, doesn’t meet the distribution requirement. Such was one of the holdings in a recent court case.

What are the consequences of a Plan Administrator to properly distribute an SPD? As with most ERISA disclosure requirements, there’s the potential for substantial financial penalties. It’s one of  those "kids don’t try this at home" ERISA matters. Check with your advisors first.

Next up, to submit or not to submit the Plan to the IRS for a determination letter, that is the question.

You say “independent contractor”, they say “employee”

By Jerry Kalish on Posted in 401(k) Plans, 403(b) Plans, Cash Balance Plans, Defined Benefit Pension Plans, Independent Contractor or Employee, Posts on SLATE

It’s the age-old story: worker classification, or rather misclassification. I wrote about it this past February, Independent Contractor or Employee? Employee Classification Still A High Priority Enforcement Matter.That was about the IRS auditing employers to determine whether those "independent contractors" were actually employees with required tax withholdings and possible inclusion in benefit plans.

I cover the same issue today in my other blog home, Slate’s BizBox Blog, but this time it’s about stepped up enforcement by the states for income tax withholdings and employment taxes. No doubt because of the economy. You can read about it here.

The EGTRRA Restatement Series: Part 3. Plan Document Choices

By Jerry Kalish on Posted in EGTRRA Restatement Series

See larger image.

This is the third in our EGTRRA Restatement Series, the purpose of which is to help retirement plan sponsors handle the required amendment and restatement of their retirement plans. Last week, I discussed the written plan document requirement, Put It In Writing.

Today’s post is about what type of plan document to use. And like the clothes pictured in the closet above, you can buy them off-the-rack or have them custom made.

In ERISA terms, off-the-rack plans are those plans that are pre-approved by the IRS. They can be either Master & Prototype or Volume Submitter.

Master &  Prototype (M&P) consists of a basis plan document and an adoption agreement. The basic plan document contains all the non-elective provisions, and the adoption agreement contains provisions that may be selected by the Plan Sponsor. Any change in the pre-approved plan provisions causes the plan to lose its master or prototype status.

A M&P Plan can either be

  • Standardized which allows only limited choice and is designed to satisfy the coverage requirements of the Internal Revenue Code, or
  • N Non-Standardized which offers additional plan options and more flexibility than a standardized M&P Plan, but does offer the same protection.

Volume Submitter (VS) are also pre-approved by the IRS. A VS in the form of a specimen plan may include an adoption agreement. Once IRS has approved the specimen plan,
employers who adopt the same plan and meet certain conditions will be able to rely on the IRS determination letter.

In contrast, a custom made plan is called Individually Designed (IDP). These are plans that are custom designed to meet the needs of the plan sponsor by providing the maximum amount of flexibility, or are not available through a M&P or VS such as an ESOP or Cash Balance Plan. IDPs must be individually reviewed by the IRS to obtain approval.

Which type of plan document is best? There is, of course, no “best” type of plan document any more that there is a “best” type or retirement plan itself, e.g., profit sharing, 401(k), or defined benefit. It depends on the facts and circumstances of your individual situation and what you are trying to accomplish. But which ever one you select, make sure it fits.

On deck for Friday is the Summary Plan Description requirement.

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