Last Wednesday, Keller Rohrback L.L.P., the lead counsel in numerous ERISA class actions, announced that it was investigating whether several 401(k) providers breached their fiduciary responsibilities by entering into improper fee arrangements with mutual fund companies they selected.

The service providers mentioned were Hartford Financial Services Group, Inc., Lincoln National Corp., and Principal Life Insurance Co.

Keller Rohrback’s investigation closely follows class action suits filled against eight of the country’s largest employers in which the issues common to all involved “excessive fees”. In writing about these law suits last month, I asked, Are newly filed 401(k) class action law suits the wave of the future?

It’s starting to look like the answer is “yes”.

It seems like there is always a deadline to meet in Pensionland.

The next one of which is the December 1 due date for a calendar year plan to distribute a safe harbor notice for 2007. If the notice is timely provided and other conditions met (discussed below), a 401(k) plan is treated as satisfying the discrimination testing. The result, then, is to avoid returning excess contributions to the Highly Compensated Employees (HCEs).

An employer can satisfy the safe harbor requirement in one of two ways. 

1. Contribute at least 3% or more of compensation to all eligible employees. Generally, the 3% contribution must be provided to all employees eligible to make elective deferrals to the plan even if they make no contributions themselves.
    
2. Contribute a matching contribution equal to 100% of the first 3% of elective contributions and 50% of the next 2%. Thus, if every employee contributes at least 5% of compensation, the maximum employer match is 4% of total compensation.

Here are a few key points about safe harbor contributions: 

• No allocation requirement may be imposed, such as a 1,000 hour or last-day requirement.
• The contribution must be 100% vested.
• The 3% contribution can be used to satisfy Top Heavy minimum contribution and can be used towards satisfying the cross-testing gateway for new comparability plans.
   
• The matching contribution can used to satisfy a Top Heavy minimum contribution.
• HCEs can also receive a safe harbor contribution.

Safe harbor plans are not for every employer. The decision to use the safe harbor method should be based on the employer’s objections and plan demographics. 

Well, maybe two out of three in New Jersey.

A think tank in that state, New Jersey Policy Perspective, recommends in a recent report eliminating the state income tax deduction for 401(k) contribution.

The report, IF IT AIN’T BROKE…New Jersey’s Income Tax Makes Dollars and Sense  says that New Jersey’s problems can be solved by increasing the state’s income tax by approximately $1 billion. Half of that increase, or $500 million, would come from eliminating the deduction for 401(k) contributions. This would also, says the report, eliminate an inequity in the way the state treats retirement savings. Here is their reasoning:

The few deductions and exclusions allowed by New Jersey’s income tax code create a more equitable system because more income is taxed and special preferences are minimized. The state’s treatment of retirement income is one of the few exceptions. Those making contributions to 401(k) retirement plans in New Jersey can exclude the amount from their taxable wages, but no deduction from taxable wages is allowed for contributions made to SEP IRAs, Simple IRAs, ROTH IRAs, Federal 457 plans, 403(b) plans, Traditional IRAs, Keoghs and 414(h) plans.

Equity in taxation requires that all taxpayers in similar circumstances be treated alike. Taxpayers would continue to get a federal deduction so there is still incentive to save for retirement.

What’s next? The mortgage interest deduction?

Hat Tip to Randy Bergmann’s Blog.

That’s Larry Brown, recently fired head coach of the New York Knicks, possibly thinking ahead after the just revealed $18.5 million settlement of his employment contact.

Revealed because under the terms of the settlement arbitrated by NBA Commission David Stern there was a non-disclosure clause. Instead, the media was scooped by the Cablevision (owner of the Knicks) Form 10Q filed with the SEC on November 8, 2006.

Coincidentally, Commissioner Stern’s decision about Coach Brown’s severance pay comes at a time when our retirement plan clients are going through a year end amendment process. The process includes that part of the IRS proposed Section 415 regulations that provide plan sponsors the first formal guidance on an employee’s deferral of severance pay.

It’s sometimes difficult to explain – and for clients to understand – technical and arcane “pension-speak” so being able to point to a “for example” helps.

The new guidance says that employees are eligible to contribute post severance compensation to their 401(k), 403(b) or 457 accounts under certain conditions. Post severance payments include sick, vacation and other leave as well as regular pay, commissions, overtime, shift differential pay, and bonuses.

 In order for an employee to defer post severance compensation, the regulations require that:

• The post severance deferral must represent pay that employees would have received, or leave that could have been taken, if they had continued to work.
• The agreement to defer must be initiated prior to the month this compensation would otherwise be paid or made available.
• Post severance pay deferrals must be made within 2½ months after termination of employment or retirement.
• The total amount deferred for the calendar year (normal payroll deferrals plus post severance deferral) cannot exceed the annual maximum limit that is in effect for the calendar year the deferral is made into the plan.
• FICA tax, if applicable, must be deducted from these amounts before deferring into the plan.

The proposed regulations also include an exception for military continuation or differential pay.

Plan sponsors considering whether to permit such deferrals should also consider whether their payroll systems need to be modified to distinguish between pre- and post-severance compensation.

NBA fans may enjoy reading Henry Abbott’s TrueHoop blog. Henry, like me, is also coached by Kevin O’Keefe and his lexBlog assistant coaches.