Year-end ERISA fidelity bond reminder

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

Last July, I asked the question will Form 5500s reveal outdated fidelity bonds or retirement plans without bonds at all. That was prior to the July 31st due date (unless extended) for calendar year retirement plans required to file Form 5500 for the 2007 plan year. And, I noted, as in the past, there will be a number of plan sponsors who have to indicate on the 5500 thay they have outdated fidelity bonds or none at all.

Since the fidelity bond requirement is high up on the Department of Labor’s compliance priorities, it’s not a great leap to assume that the Department of Labor monitors this item on Form 5500.But 2007 was then, and this is now. It’s not too late to meet the bonding requirements for 2008 which are:

  • All persons, including fiduciaries, who handle funds or other property of an employee benefit plan (“called plan officials”) have to be bonded unless they are covered by an exemption.
  • Each plan official is required to be bonded for at least 10% of the amount he or she handles, but in no event less than $1,000.
  • The maximum bond amount required under section 412 with regard to any one plan is $500,000 per plan official, or $1 million per plan official in the case of a plan that holds employer securities.

The Department of Labor recently issued Field Assistance Bulletin No. 2008-04 to address the fidelity bonding questions that its investigators frequently confront during their examinations of ERISA plans. The issues are presented in a question-and-answer format consisting of 42 frequently asked questions (FAQs) covering:

  1. ERISA Fidelity Bonds
  2. Exemptions From The Bonding Requirements
  3. Funds Or Other Property
  4. Handling Funds Or Other Property
  5. Form And Scope Of Bond
  6. Bond Terms And Provisions
  7. Amount Of Bond

An ERISA fidelity bond is not the same thing as fiduciary liability insurance which is not required by law.  That’s a topic for my next post in which I’ll discuss in an FAQ format. 

403(b) Crunch Time Series signing off (for now)

By Jerry Kalish on Posted in 403(b) Crunch Time Series, 403(b) Plans

Last month, my blogging buddy, attorney Bob Toth, and I started the 403(b) Crunch Time Series to help 403(b) plan sponsors get ready for the January 1, 2009 effective date for the IRS final 403(b) regulations. We had intended to have the series run until year end, but only got to #6 before the IRS last Friday issued IRS Notice 2009-3 (see Plop plop, fizz fizz, oh what a 403(b) relief it is: IRS Notice 2009-3).

The clock starts ticking again, but 403(b) plan sponsors aren’t home free. While the plan document requirement has been extended to December 31, 2009, plan sponsors must be mindful that

  1. The 403(b) plan sponsor must have a written plan document retroactive to January 1, 2009;
  2. During 2009, the plan sponsor mus operate the plan in accordance with a reasonable interpretation of Section 403(b), taking into account the final regulations; and
  3. Before the end of 2009, the plan sponsor must make its best efforts to retroactively correct any operational failure during the 2009 calendar year to conform to the terms of the written Section 403(b) plan, with such correction to be based on the general principles of correction set forth in the IRS’ Employee Plans Compliance Resolution System (EPCRS).

Here’s Bob’s take on what “relief” really means.

The relief is very welcome, but advisors and employers need to know what it REALLY means. It DOES NOT mean there is a delay in the compliance rules, it merely delays the requirement that a plan document be signed by January 1. When you think about it, the plan document was the most manageable of the new 403(b) risks that the employers were facing. This does not delay the requirement that the employer monitor contribution limits, loans and distributions. It only means that the plan document outlining all of this doesn’t have to be in place until the end of next year. It buys time to do that in a sane way.

Probably the biggest relief is the ability to use a “reasonable interpretation of 403(b) taking into account of the regulations.” I read this as meaning that you have the ability to figure out a reasonable answer to the tough technical questions for which we have few answers, based upon the statute itself-using the regs as a guideline. This will help immensely when trying to figure out what contracts will be “grandfathered” and in determining what a distribution will be when terminating a plan.

All in all, a very helpful act by the IRS which helps provide a way through some of the ambiguity created by the regs and various other pronouncements by the IRS.

 But what happens if 403(b) plan sponsors don’t meet the requirements of the regulations. Then there’s the above-mentioned IRS’ Employee Plans Compliance Resolution System (EPCRS) which allows plan sponsors to correct certain errors in employee retirement plans, in some cases without having to notify the IRS. The advantage to correcting retirement plans in this way is, or course, to allows participants to continue receiving tax-favored retirement benefits and protects the retirement benefits of employees and retirees.

There are three levels of correction programs in EPCRS:

  1. The Self-Correction Program (SCP) permits a plan sponsor to correct insignificant operational failures in plans such as qualified plans, 403(b) plans, SEPs or SIMPLE IRA plans without having to notify the IRS and without paying any fee or sanction. In many instances, a plan sponsor may correct significant operational failures without notifying the IRS and without paying a fee or sanction.
  2. The Voluntary Correction Program (VCP) allows a plan sponsor, at any time before an audit, to pay a limited fee and receive the IRS’s approval for a correction of a qualified plan, a 403(b) plan, SEP or SIMPLE IRA plan.
  3. The Audit Closing Agreement Program (Audit CAP) allows a sponsor to correct a failure or an error that has been identified on audit and pay a sanction based on the nature, extent and severity of the failure being corrected.

EPCRS was recently updated and expanded in Revenue Procedure 2008-50. The IRS continues to make it easier to use so that more plan sponsors will make submissions under EPCRS instead of waiting for an IRS audit to discover plan failures. and with no disrespect intended, 403(b) plan sponsors will get to know EPCRS better.

Here’s a link to the entire 179 page PDF version of Revenue Procedure 2008-50.

Plop plop, fizz fizz, oh what a 403(b) relief it is: IRS Notice 2009-3

By Jerry Kalish on Posted in 403(b) Plans

The Internal Revenue Service provided relief to 403(b) plan sponsors today in the form of  Notice 2009-3. The Notice states that the IRS will not treat a 403(b) plan as failing to satisfy the requirements of Section 403(b) and the final regulations during the 2009 calendar year, provided that:

  1. On or before December 31, 2009, the plan sponsor has adopted a written  403(b) plan that is intended to satisfy the requirements of  403(b) (including the final regulations) effective as of January 1, 2009;
  2. During 2009, the plan sponsor operates the plan in accordance with a reasonable interpretation of Section 403(b), taking into account the final regulations; and
  3. Before the end of 2009, the plan sponsor makes its best efforts to retroactively correct any operational failure during the 2009 calendar year to conform to the terms of the written Section 403(b) plan, with such correction to be based on the general principles of correction set forth in the IRS’ Employee Plans Compliance Resolution System (EPCRS).

Sounds all good, right? Not necessarily. Here’s what my blogging buddy, attorney Bob Toth, who has extensive 403(b) experience has to say about it:

Here’s What It Does Do

It looks like it gives us leeway until the end of next year in dealing with some of the more difficult areas of the regs and of Revenue Procedure 2007-71. It may well mean that a plan termination can be effective if it distributes custodial accounts (because that what a reasonable interpretation of 403(b) would allow);

It allows us to adopt a reasonable interpretation of what is a grandfathered contract and what is not, helping us finally to apply some measure of reasonableness to Rev. Proc. 2007-71. We can more easily figure out what contracts plans will be responsible for and what they won’t;

And, on the "dark side", reminds us that this relief is conditioned on operational failures occurring in 2009 being fixed using EPCRS principles by the end of 2009-which can be burdensome.

Here’s What it Doesn’t Do

The Form 5500 rules, complete with auditing requirements do not go away. How will the auditor now test for compliance with the plan document?

The employer STILL has responsibility for making sure that that the compliance rules are complied with. So, all those employers who consolidated because of their responsibilities, made good choices. It was not the plan document requirement which drove their efforts: it was, and still is, the new employer obligations.

I believe the bottom line is that this is helpful, as it relieves employers from the risk of disqualification because of the lack of a plan document. But the plan document risk was really the most manageable risk brought on by these new rules. The most significant risk did not go away-the requirement that the employer be responsible for compliance. It is unlikely that the IRS will view as reasonable (in most instances) a reliance on employee representations for compliance. 

Here’s a link to IRS Notice 2009-3.

Out of sight, out of mind: the funded status of public employee pension plans

By Jerry Kalish on Posted in Public Employee Plans

See full-size image.

While media and investor attention has been totally focused on the market meltdown, the funded status – or lack thereof, of public employee pension plans has been escaping attention. And attention there should be, because it affects all of us taxpayers in our respective states.

And it’s one of those complicated issues that the mainstream media won’t or can’ t seem to get their hands around and heads into. t I wrote about it last August in my post, Dilbert (and others) on public employee pension funding,  In that post, I mentioned two bloggers who are right on top of this issue in their respective states:

  • Jack Dean writes about public employee plans in California. He edits Pension Watch. He also edits PensionTsunami.com, a project of FACT — the Fullerton Association of Concerned Taxpayers. FACT’s primary focus is on California’s public employee pensions and the state’s funding issues.
  • John Bury writes about New Jersey public employee plan in his blog, NJ Voices. John’s one of us. That is, he’s in the retirement plan business. He’s an Enrolled Actuary with his own firm in Montclair, New Jersey.

And while Jack and John are regular reads for me through my RSS reader, it was a recent study  that got my attention. Robert Novy-Marx and Joshua D. Rauh, both of the University of Chicago Graduate School of Business, co-authored the study for the National Bureau of Economic Research (NBER), The Intergenerational Transfer of Public Pension Promises (summary by Matt Nesvisky).  

Their study indicates that the extent to which public pensions are underfunded has been obscured by governmental accounting rules, which allow pension liabilities to be discounted at expected rates of return on pension assets. Specifically, their abstract says:

The value of pension promises already made by US state governments will grow to approximately $7.9 trillion in 15 years. We study investment strategies of state pension plans and estimate the distribution of future funding outcomes. We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.

Let me repeat the last sentence of the abstract again for emphasis: Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.

Hat tip to Dave Baker at BenefitsLink.

Picture above is oil on canvas, 54" x 76", by the artist Jung Hee Lee-Marles, who was born in Seoul, South Korea and now lives in Ottawa, Canada.

403(b) Crunch Time Series #6: Timing of Depositing Employee Contributions

By Jerry Kalish on Posted in 403(b) Crunch Time Series, 403(b) Plans

This is the sixth in our 403(b) Crunch Time Series, the purpose of which is to help 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations. On Monday, Bob Toth , our guest blogger, discussed 403(b) Service Agreements: “Harmonizing” the 403(b) Plan.

Now it’s my turn, and today’s post is about the Timing of Depositing Employee Contributions.

So let’s start with the rules before the final regulations. Hard to imagine in today’s environment, but the employer actually had until the end of the year as permitted by an old 1967 IRS Ruling,  Revenue Ruling 67-69. So to take the extreme example, if the employee had his or her salary reduced in January, the employer did not have to forward the contribution to the 403(b) provider until December.

Now for the first time, non-ERISA 403(b) plans will have to transfer employee money to the 403(b) plan within a strict time frame. In essence, the ERISA timing rules are effectively extended to cover all 403(b) plans. The final regulations require that plan sponsors transmit all contributions to 403(b) plans to the vendor as soon as is administratively feasible. The IRS considers that to be within 15 business days following end of month in which contributions are withheld from pay.

For plans subject to ERISA, there will not be any changes. The Department of Labor which oversees this matter requires that for “large plans” (those with 100 or more participants) employee contributions must be transmitted to the investment provider by the earlier of

  • 15 business days following the month in which the amount was withheld from the employee’s pay, or
  • The earliest date on which it is administratively feasible to remit the contributions.

But what about “small plans” (those with less than 100 participants. On February 28, 2008, the Department of Labor (DOL) announced that employee contributions to a "small" retirement plan (one with less that 100 participants) will be deemed to be made in compliance with the law if those amounts are deposited with the plan within 7 business days of receipt or withholding.

The DOL said in its announcement that the department would not accuse a plan sponsor of an ERISA violation while the proposal is being finalized if 401(k) contributions are deposited within the 7-day time limit. Sounds reasonable doesn’t it? Well, maybe not according to Bob Toth and his Partner Nick Curabba and in their blog post, A Potentially Dangerous ‘Safe Harbor’. They caution that:

As with any safe harbor, of course, the seven-day safe harbor could easily become the expected standard practice. We might even expect future investigations by the Department to focus on whether contributions were forwarded within seven days, rather than attempt to determine when assets were reasonably segregable. In other words, everything outside of the safe harbor could become dangerous waters for plan sponsors.

And what happens if these time frames are not met? That’s a topic for another time.

That’s it for now. The afore-mentioned Bob Toth will be back next  Friday to discuss Church 403(b)(9) Retirement Income Accounts.

403(b) Crunch Time Series #5: 403(b) Service Agreements: “Harmonizing” the 403(b) Plan

By Jerry Kalish on Posted in 403(b) Crunch Time Series

This is the fifth post in our 403(b) Crunch Time Series, the purpose of which is to help 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations. I’ve been joined by Bob Toth as a guest blogger. Bob, a Partner in the Baker & Daniels law firm, has over 25 years experience advising 403(b) plans and service providers.

On Wednesday before the Thanksgiving Holiday, I discussed The Change in 403(b) Universal Availability. Now it’s Bob’s turn, and here’s his post on 403(b) Service Agreements: “Harmonizing” the 403(b) Plan.

We are now rushing toward year’s end, and all the challenges that it brings in getting some sort of minimal compliance structure in place which will enable 403(b) plan sponsors to meet the demands of the new regulations. The biggest of these challenges seems to be coming from the mundane (though some wags may call it the "inane"!). The regs have created so many new moving pieces that we find ourselves spending an inordinate amount of time organizing the detailed work which is necessary to make it all work.

What is becoming clear is that the most critical operational document (besides, of course, the plan document) is something we have rarely seen in the past: the 403(b) service agreement. It seems to me that it is only through this sort agreement that you can really hope to develop and manage some sort of sane compliance scheme. It is the way to "harmonize", if you will, the often disparate parts and sometimes contradictory parts of your new 403(b) system.

The key to this service agreement is for it to specifically identify which party will be specifically responsible for which specific task (get the sense that specificity is the key?). My approach to plan documents has been the polar opposite, as I attempt to draft with very broad strokes. But with service agreements, the only way to hold anyone accountable for the variety of tasks involved is to make sure all parties involved fully understand the task for which they will be held responsible.

Be careful with these agreements-do not make the mistake of using a standard 401(k) service agreement and merely "change numbers". The compliance work that needs to be done is often spread between a number of different parties, and financial services may often be handled separately.

Be careful also about compliance with security laws, as that is not the responsibility of the employer.

And finally be careful with Information Sharing Agreements (ISA)-often times they are actually service agreements, containing much more than merely information sharing rules. Combining ISAs with service agreements can actually be a very good idea, but vendors will need to make sure they are consistent with other agreements they sign with any employer, and employers need to make sure they understand the nature of the agreement being signed.

That’s it for now. On Wednesday, I’ll be back with Timing of Depositing Employee Contributions.

401k safe harbor for 2009? Maybe yes, maybe no

By Jerry Kalish on Posted in 401(k) Plans

It’s that time again. The 401(k) safe harbor notice requirement of December 1 is fast approaching.  And if you’re a plan sponsor still undecided about whether you want to have a Safe Harbor 401(k) plan for 2009 because of economic uncertainties next year, then you can take advantage of a safety value that’s permitted by the regulations.

Instead of distributing a Safe Harbor notice that guarantees the 3% contribution regardless of its subsequent financial condition, an employer can provide a “conditional notice” at least 30 days before the start of the plan year.

The notice would state that the employer may give a safe-harbor contribution for the following year. And then no later than 11 months later, the employer must provide another notice indicating that the Safe Harbor has been elected and the 3% contribution will be made for that year.

That’s for the 3% Safe Harbor contribution across the board. But what about the Safe Harbor match: can it be stopped during the plan year? The answer is yes by providing a notice to the employees at least 30 days before the contributions are to be stopped.

And here’s two important matters that are part of this discussion:

  1. There must be the proper plan documentation.
  2. The 401(k) discrimination tests must be provided for the entire plan year.

Actually, there’s one more important consideration – your employee’s expectations. Go beyond the formal notice requirements when communicating with your employees.

Graphic above by YES NO MAYBE, a London-based streetwear / urban clothing label that was "born of its creator’s indecisiveness."

403(b) Crunch Time Series, #4: The Change in 403(b) Universal Availability

By Jerry Kalish on Posted in 403(b) Crunch Time Series, 403(b) Plans

This is the fourth in our 403(b) Crunch Time Series, the purpose of which is to help 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations. On Monday, Bob Toth , our guest blogger, wrote about Terminating Tax Deferred Annuity Plans.

Now it’s my turn, and today’s post is about the Change in 403(b) Universal Availability.

The rules have changed for those employers who have excluded certain classes of employees from making elective deferrals to their 403(b) plans. Those employers now must check their plans before January 1, 2009 to make sure they are excluding properly.

Technically, the regs changed the Universal Availability rules. These are the rules that an employer must follow to determine which employees can and cannot be excluded from making elective deferrals to a 403(b) plan. Note that employer contributions are still subject to the discrimination rules under Section 401(m) and 401(a)4 of the Internal Revenue Code.

The current IRS interpretation of the Universal Availability rules go all the way back to Notice 89-23, issued by the IRS in 1989. That Notice permitted the following classes of employees to be excluded:

  • Nonresident aliens with no US source income
  • Employees eligible to defer to a 401(k) or 457(b) plan of the same employer
  • Employees who will not make at least a $200 deferral per year
  • Employees who are expected to work less than 20 hours per week
  • Students performing services under a work-study program,
  • Employees whose normal work week is less than 20 hours
  • Employees covered by a collective bargaining agreement
  • Visiting professors
  • Individuals who make a one-time election to participate in a governmental plan
  • Certain employees affiliated with a religious order who take a vow of poverty

The final regulations revoked several of the previous exclusions that were provided in Notice 89-23. The following four groups can no longer be excluded from making salary deferrals:

  • Employees covered by a collective bargaining agreement.
  • Visiting professors
  • Individuals who make a one-time election to participate in a governmental plan
  • Certain employees affiliated with a religious order who take a vow of poverty.

The final regulations also require that all eligible employees be given an “effective opportunity” to participate in the plan. This means that on an annual basis, employers should not only review their new employees to determine compliance with the Universal Availability rules, but are also required to provide to their employees another “effective opportunity” to participate notice.

It’s a little more complicated than that in practice so here are a few suggestions to help meet the new compliance requirements:

  1. Make sure the plan document has the new exclusion rules.
  2. Identify all employees eligible to participate.
  3. Provide employees with a written notice when they are hired and at least once a year about their eligibility to participate.
  4. Conduct employee educational sessions that review the plan provisions and available investment options.

That’s it for now. Bob will be back on Monday with 403(b) Service Agreements: “Harmonizing” the 403(b) Plan. Have a happy and safe Thanksgiving holiday,

403(b) Crunch Time Series #3, Trouble Terminating Tax Deferred Annuity Plans

By Jerry Kalish on Posted in 403(b) Crunch Time Series, 403(b) Plans

This is the third post in our 403(b) Crunch Time Series, the purpose of which is to help 403(b) plans get ready for the January 1, 2009 compliance deadline for the new Internal Revenue Service regulations. I’ve been joined by Bob Toth as a guest blogger. Bob, a Partner in the Baker & Daniels law firm, has over 25 years experience advising 403(b) plans and service providers.

On Friday, I discussed Complying With The 403(b) Contribution Limit. Now it’s Bob’s turn, and here’s his post on Trouble Terminating Tax Deferred Annuity Plans.

Okay, okay, so I thought I would lighten the load some by trying a bit of alliteration with the "traditional" term for 403(b) contracts: the Tax Deferred Annuity (the "TDA"). Whether or not the alliteration works is one thing, but its pretty clear that many terminations may not work well.

The new regulations are causing advisors and employers alike to take pause and to assess whether or not its worthwhile to continue with their current 403(b) arrangements. Many are seriously considering terminating the 403(b) plan and replacing them (where possible) with a 401(k) plan.

Pretty straightforward, you would think, eh? After all, the regs allow for the termination of 403(b) plans, terminations which then become distributable events. The whole deal seems simple enough. The problem, however (as always seems to be the case with 403(b) plans), is in the details.

The rules require that all of the assets of the plan be distributed upon termination in order for the termination to be effective. IRS spokesmen have said that this distribution must occur within a 12 month period following the action terminating the plan. To facilitate this, the regs actually recognize that a terminating distribution can be in the form of a fully paid annuity contract. Sounds simple enough? Just terminate the plan, notify the insurance carrier to either distribute a fully paid annuity contract or to take the employer’s name off of its files, and life is good.

Well , the IRS has complicated matters by taking the position that custodial accounts-in spite of statutory language apparently to the contrary- will not be honored as annuity contracts for termination distribution purposes.

Making matters even worse, Bob Architect, the IRS’ Senior Tax Law Specialist and the resident expert on 403(b) plans, has recently stated that even a conversion of group annuity contracts to individual contracts may not even be recognized upon termination as being valid. As Bob Stevenson, a Partner in the Stevenson Keppleman Associates ERISA law firm in Ann Arbor, MI said in a letter to his clients, "it may be that Mr. Architect spoke out of confusion."

All of this confusion has a real, practical effect: If a 403(b) plan has custodial accounts (or the type of annuity contracts to which Mr. Architect refers) within them, and the employer has no right to distribute the assets upon termination, AND some employees refuse to take a distribution of the cash from the contract, then the plan has never been terminated.

If the plan has not been terminated, then there has been no distributable event. If there has been no distributable event, any rollover to an IRA or another plan for those who HAVE taken a distribution will fail. Those attempted rollovers will become taxable because no distributable event has occurred. This sounds pretty draconian, but this is what happens.

So step carefully if you are attempting to terminate a 403(b) plan and distribute the assets. Check with the vendors to see if their contracts allow terminating distribution, and how it will be done. Without that kind of groundwork, you could be making a very expensive mistake for plan participants.

Thanks, Bob. Look for #4 in our 403(b) Crunch Time Series on Wednesday when I’ll be talking about The Change in 403(b) Universal Availability.
 

LexBlog