Recent Developments in Employee Benefits and Executive Compensation
Department of Labor Renews Proposal for Rules Effecting 401(k) Plan Investment Advice
The Department of Labor (“DOL”) recently issued proposed regulations designed to implement the exemption from the prohibited transaction provisions of the Employee Retirement Security Act of 1974 (“ERISA”) and the Internal Revenue Code (“the Code”) for “eligible investment advice arrangements” added by the Pension Protection Act of 2006 (“PPA”). Under the exemption, qualified transactions related to providing individualized investment advice to retirement plan participants and beneficiaries under an “eligible investment advice arrangement” are exempt from the prohibited transaction provisions of ERISA and the Code. To qualify for the exemption, a “fiduciary adviser” must provide advice to a participant or beneficiary through either a level-fee arrangement (meaning the fee does not vary based on the investment product that is selected) or a computer-model arrangement (meeting specified requirements) and the “fiduciary adviser” must ensure that specified disclosure and other requirements are met.
The new proposed regulations substantially mirror regulations that were issued, delayed, and ultimately withdrawn in 2009. On January 21, 2009, the DOL first published final rules pertaining to exempted advice provided to plan participants and beneficiaries. During the comment period, the DOL received 28 comment letters. Many of the commentators contended that the final rules raised significant issues of law and policy and noted that they should be withdrawn. With the change in administrations, the DOL determined that the issues highlighted by the commentators were sufficient to warrant withdrawal. On November 20, 2009, notice of the withdrawal of the final rules was published in the Federal Register.
Despite the similarity to the withdrawn regulations, the new regulations contain a few key differences. These differences include:
- Elimination of Class Exemption: In response to the numerous comments that questioned whether an included class exemption could effectively prevent advice from being tainted by conflicts of interest or self-dealing, the DOL eliminated the class exemption that provided alternative ways to provide exempted advice.
- Clarification of Fee-Leveling Requirement: A fiduciary adviser is strictly prohibited from receiving any payment that varies based upon a participant’s investment choices. The proposed regulations apply the fee-leveling requirement to both the entity retained to provide investment advice and to its employees, agents, and representatives.
- Computer Model Limitation: All computer models must be designed and operated in a manner that avoids recommendations that inappropriately distinguish among investment options within a single asset class on the basis of a factor that cannot confidently be expected to persist in the future. The proposed regulations note that differences such as fees and expenses or management style are likely to persist, while differences in historical performance are less likely to persist.
Provided that the fee leveling or computer model threshold requirements are met, the proposed regulations would exempt the following from being considered as a prohibited transaction:
- providing investment advice to a participant or beneficiary regarding any security or property available as a plan investment;
- acquiring, holding, or selling a security, or other property available under the plan as an investment pursuant to the investment advice; and
- the direct or indirect receipt of fees and other forms of compensation by a “fiduciary adviser” (or an affiliate) resulting from providing the advice.
The DOL will accept comments on the proposed regulations until May 5, 2010.
Deadline to Adopt Restated Retirement Plan Documents Rapidly Approaching
Employers with pre-approved defined contribution Master and Prototype retirement plans (“M&P plans”) or Volume Submitter retirement plans (“VS plans”) must adopt restated plan documents by April 30, 2010. The requirement to adopt restated plans ensures that employers are in compliance with the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”). M&P plans (the kind marketed by banks, mutual funds, insurance companies, or other financial institutions) and VS plans are plans that have been pre-approved by the IRS prior to being marketed to employers. The restated plans must be adopted by the April 30th deadline to ensure eligibility for retroactive corrections and reliance. Although a failure to meet the April 30th deadline could result in adverse tax consequences to the retirement plan and its participants, plan sponsors may thereafter attempt to correct a failure under the IRS’s Voluntary Correction Program. Employers should also strongly consider filing the restated plan documents with the IRS by April 30, 2010 in order to obtain a determination letter. While not specifically required, determination letters provide employers with a number of significant benefits.
DOL Issues Final Regulations Governing Requirement that Multiemployer Pension Plans Furnish Information Upon Request
On March 2, 2010, the DOL’s Employee Benefits Security Administration (“EBSA”) issued final regulations implementing a new disclosure requirement for multiemployer pension plan administrators. The new requirement was added to ERISA by the Pension Protection Act of 2006 (“PPA”). Plan participants or beneficiaries, employee representatives, and any employer obligated to contribute to a multiemployer pension plan are now entitled to a copy of certain actuarial, financial, and funding-related documents. Following a written request, plan administrators have 30 days to furnish the requested information. Plan administrators may impose a charge to cover the costs of providing the information, but recoverable costs are limited to the lesser of the actual costs for the least expensive means of reproduction or 25 cents per page, plus mailing or delivery costs. Plan administrators are not required to furnish more than one copy of the same document to a single requester within a 12-month period. Finally, plan administrators may refrain from providing information that the administrator reasonably determines to be either “individually identifiable information” regarding a participant, beneficiary, employee, fiduciary, or contributing employer or “proprietary information” about the plan, a contributing employer, or an entity that provides services to the plan. Ultimately, it is EBSA’s intention for the new regulations to permit participants, beneficiaries, representatives, and contributing employers to be able to monitor a plan’s funding and financial status more effectively and provide greater opportunities for stakeholders to take appropriate action when necessary.
New Self-Reporting Requirements and Taxes for Failure to Satisfy COBRA and Other Federal Group Health Plan Mandates
As of January 1, 2010, sponsors of group health plans are required to self-report failures to satisfy COBRA requirements and other federal group health plan mandates and may be subject to excise tax penalties. Prior to January 1, 2010 the IRS did not require plan sponsors to report noncompliance. Under the new requirements, however, a plan sponsor must submit an IRS reporting form by the due date for filing a federal income tax return (without extensions) for the year in which the failure occurs. In addition, plan sponsors may be subjected to excise tax penalties. The amount of the excise tax varies, according to the type of violation, and is subject to per plan and per year limitations. The excise tax penalty will be excused (1) if the entity did not know, or with reasonable diligence would not have known, of a failure; (2) where a failure that is the result of a “reasonable cause” as opposed to “willful neglect” is remedied within 30 days; and (3) where a failure can be retroactively cured in a way that results in the beneficiary being placed in a financial position which is comparable to that which would have existed had a failure not occurred. A failure to properly self-report or pay excise taxes may result in further penalties and interest.
Notice: The purpose of this newsletter is to review the latest developments which are of interest to clients of Blank Rome LLP. The information contained herein is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.