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Fully Discretionary Match Meets Definitely Determinable Benefit Rule

An advisor asked:  “I read recently in a TPA’s annual letter that there is a new mandate to provide a written disclosure of the match formula in years where a plan makes a discretionary match. Can you provide some details?”    

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from California is representative of a common inquiry related to a discretionary matching contribution in a 401(k) plan.

Highlights of the Discussion

Sponsors of 401(k) plans that utilize pre-approved plan documents are facing an IRS-mandated, cyclical restatement process (“Cycle 3 Restatement”). Every six years, plan providers must update their 401(k) documents for recent law and regulatory changes and file them with the IRS for pre-approval (or re-approval). In turn, employers who use these documents must adopt an updated pre-approved plan, in this case, no later than July 31, 2022 (IRS Announcement 2020-07).

There are new requirements with this restatement for businesses that elect to apply a fully discretionary matching contribution formula (i.e., where the rate or period of the matching contribution is not pre-selected) in their pre-approved plans. With respect to these fully discretionary matching contributions, the IRS made it clear to document providers that their documents must satisfy the “definitely determinable benefits” requirement of Treasury Regulation Section 1.401-1(b)(1)(i), which states a plan must provide a definite predetermined formula for allocating the contributions made to the plan. Consequently, any pre-approved document with discretionary matching contributions will have to include language that complies with the definitely determinable mandate, and adopting employers will have to

  1. Provide the plan administrator or trustee written instructions no later than the date on which the discretionary match is made to the plan describing
  • How the discretionary match formula will be allocated to participants (e.g., a uniform percentage of elective deferrals or a flat dollar amount),
  • The computation period(s) to which the discretionary matching formula applies; and, if applicable,
  • A description of each business location or business classification subject to separate discretionary match formulas.
  1. Provide a summary of these instructions to plan participants who receive an allocation of the discretionary match no later than 60 days following the date on which the last discretionary match is made to the plan for the plan year.

The first year for which this communication is required is the plan year following the year the employer signs the restatement.

Example:

ABC, Inc., restates its calendar year 401(k) plan in 2021—even though it could wait until as late as July 31, 2022. Based on this timing, the communication is first due for the 2022 plan year.  If ABC Inc., completes making the 2022 matching contribution April 1, 2023, then the deadline to provide the participant communication is May 30, 2023.

As part of a prudent governance process, plan sponsors should work with their pre-approved document providers and recordkeepers to review their procedures surrounding their plans’ matching contributions to ensure compliance with these new requirements. Some pre-approved document providers have sample communication language available for plan sponsors who give discretionary matching contributions.

Conclusion

Pre-approved defined contribution plans are in a restatement cycle that must be completed by July 31, 2022. Employers that use a pre-approved plan and give a fully discretionary matching contribution must satisfy additional participant communication requirements to satisfy the definitely determinable benefit requirement of treasury regulations.

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Foreign Corporations and Controlled Groups

An advisor asked: “I just discovered that two U.S. companies that I work with are owned by a common parent company that is foreign. Should I be concerned?”    

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Pennsylvania is representative of a common inquiry related to a controlled group of employers.

Highlights of the Discussion

It is possible that because of the common parent company (despite being a foreign entity), the two U.S. subsidiaries could be part of a controlled group of businesses, which would impact the operation of their retirement plans. It would be prudent for the owners of the companies to seek a legal determination on controlled group status.

Under Internal Revenue Code Section (IRC §) 414(b) a controlled group of businesses exists when any two or more entities are connected through common ownership in a parent-subsidiary, a brother-sister, or a combination of the two controlled groups. For this purpose, entities could be foreign. The code section references the definition of controlled group that appears in IRC §1563(a) alone (and not subsection (b), which would have allowed the exclusion of foreign corporations). Tax court case Fujinon Optical, Inc., v. Commissioner, 76 T.C. 499 (1981) and others support the finding that U.S. businesses related only through a common foreign parent could be a single employer for purposes of IRC §414(b).

It is important to determine whether a group of businesses is a “controlled group” because the IRS requires that all employees of companies in a controlled group be treated as employed by a single employer for qualification requirements of IRC §§ 401 (general qualifications), 408(k) (simplified employee pension or SEP plans), 408(p) (saving incentive match plan for employees or SIMPLE plans], 410 (minimum participation standards), 411 (minimum vesting standards), 415 (limits on benefits and contributions), and 416 (top-heavy determination).

Conclusion

The IRS’s controlled group rules pull in foreign entities with common ownership in U.S. businesses. This may catch some U.S. subsidiaries off guard. Controlled group status has several ramifications for the involved businesses’ retirement plans. Because an accurate controlled group determination is critical, businesses should seek guidance from their legal advisors.

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Are Plan Committee Members Fiduciaries?

An advisor asked: “Can an individual member of a 401(k) plan committee have personal fiduciary liability?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Indiana is representative of a common question on plan committee members.

Highlights of the Discussion

  • A plan committee member may be a plan fiduciary and, consequently, held personally liable to the plan if he or she is granted or exercises discretion in the operation or administration of a retirement plan that is subject to the Employee Retirement Income Security Act of 1974 (ERISA).
  • According to the Department of Labor (DOL) Interpretive Bulletin 75-5, if the governing plan documents state the plan committee controls and manages the operation and administration of the plan and specifies who shall constitute the plan committee (either by position or by naming individuals to the committee), then such individuals are named fiduciaries of the plan pursuant to ERISA §402(a) (see page 212 of linked document).
  • A number of court cases have found that a plan committee member may be a functional fiduciary of the plan because of his or her actions and subject to personal liability if he or she exercises discretion in the administration of the plan Gaunt v. CSX Transp., Inc., 759 F. Supp. 1313 (N.D. Ind. 1991).
  • Pursuant to ERISA §409 (see page 250 of linked document):

Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries … shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.

  • Having a committee charter may help mitigate fiduciary liability for the committee members by carefully outline the members roles and responsibilities. Please see our Case of the Week 401(k) Plan Committee Charter for best practices.

Conclusion

A plan committee member may be a plan fiduciary and, consequently held personally liable to the plan for losses resulting from fiduciary breaches.  Having a committee charter may help mitigate fiduciary liability for the committee members.

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Voluntary Fiduciary Correction Program and PTE 2002-51

A financial advisor asked:  “Prohibited Transaction Exemption (PTE) 2002-51 exempts certain transactions that are corrected under the DOL’s VFC Program from the 15 percent IRS penalty pursuant to IRC §4795.  What is the definition of transaction?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in California is representative of a common question on the Department of Labor’s (DOL’s) Voluntary Fiduciary Correction (VCP) Program.

Highlights of the Discussion

The DOL’s VFC Program allows plan officials to voluntarily correct 19 specific transactions that are prohibited under the Employee Retirement Income Security Act of 1974 (ERISA). These 19 prohibited transactions are typically subject to an IRS excise tax under IRC §4975 of 15 percent. Prohibited Transaction Exemption (PTE) 2002-51 provides relief from the IRS excise tax for six of the 19 transactions.

The six transactions that can be exempt from the IRS penalty are

  1. The failure to timely transmit participant contributions to a plan and/or loan repayments to a plan within a reasonable time after withholding or receipt by the employer;
  2. The making of a loan by a plan at a fair market interest rate to a party in interest with respect to the plan;
  3. The purchase or sale of an asset (including real property) between a plan and a party in interest at fair market value;
  4. The sale of real property to a plan by the employer and the leaseback of such property to the employer at fair market value and fair market rental value, respectively;
  5. The purchase of an asset (including real property) by a plan where the asset has later been determined to be illiquid as described under the Program in a transaction which was a prohibited transaction, and/or the subsequent sale of such asset to a party in interest; and
  6. Use of plan assets to pay expenses, including commissions or fees, to a service provider for services provided in connection with the establishment, design or termination of the plan (settlor expenses), provided that the payment of the settlor expense was not expressly prohibited by a plan provision relating to the payment of expenses by the plan.

There is an important time constraint associated with utilizing the PTE. A business can only take advantage of the relief for a transaction once every three years. Assume a business has multiple failures to transmit participant contributions. The DOL has informally commented that multiple occurrences of delinquent deposits over more than one pay period can be treated as one transaction if the pay periods are close together in time and the delinquencies are related to the same cause.

EXAMPLE 1:

The employee responsible for payroll at Better Late Than Never, Inc., resigned, and the company is having a hard time replacing her. As a result, over the next few pay periods Better Late Than Never is late in depositing employee contributions to its 401(k) plan. The DOL would count the multiple delinquencies as one transaction because they all are related to the same cause.

Example 2:

Random, LLC, misses the deferral deposit deadline in December 2020, and in March and June of 2021. Each delinquency is for a different reason (e.g., power outage, switching payroll providers, sick employee). Because there is no common cause, the missed deposit deadlines cannot be treated as one transaction for purposes of the three-year timeframe.

Conclusion

The DOL’s VFC Program allows plan officials to voluntarily correct 19 specific prohibited transactions. (PTE) 2002-51 provides relief from the IRS excise tax for six of the 19 transactions. A business can only take advantage of the IRS excise tax relief for a transaction once every three years.

For more information, please refer to the following

Frequently Asked Questions of the VFC Program

VFC Program Class Exemption

 

 

 

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Plan Termination and Successor Plans

A financial advisor recently asked:  “What is the successor plan rule and to which plans does it apply?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Ohio is representative of a common question on plan termination and successor plans.

Highlights of the Discussion

  • The successor plan rule of IRC 401(k)(10)(A) and Treasury Regulation Section (Treas. Reg. § 1.401(k)-1(d)(4)(i)] provides that a 401(k) plan which is terminated cannot distribute participants’ elective deferrals if the employer maintains or establishes a “successor plan” (a.k.a., an alternative defined contribution plan) within a certain period of time following the termination.
  • A similar rule exists for 403(b) plans in Treas. Reg. §1. 403(b)-10(a)(1).
  • When a 401(k) or a 403(b) plan is terminated, a successor plan would be one that exists at any time during the period beginning on the date of plan termination and ending 12 months after all the assets from the terminated plan are distributed.
  • The successor plan rule was created to prevent employers from circumventing the age 59 ½ early distribution restriction that applies to salary deferrals by simply terminating a 401(k) [or 403(b)] plan to allow for withdrawals and immediately establishing a new successor plan.
  • Consequently, a terminated 401(k) plan could not be replaced by another 401(k) plan within the waiting period. Similarly, a terminated 403(b) plan could not be replaced by another 403(b) plan within the waiting period. (But if an employer terminates its 403(b) plan, it may set up a 401(k) plan with no waiting period if it is otherwise eligible to do so, and vice versa.)
  • For a 401(k) plan, treasury regulations state that the following defined contribution plans are not considered as successor plans: a(n)
    1. Employee stock ownership plan (ESOP),
    2. Simplified employee pension (SEP) plan,
    3. Savings incentive match plan for employees (SIMPLE) IRA plan,
    4. 403(b) plan, or
    5. 457(b) or (f) plan (Treasury Regulation 1.401(k)-1(d)(4)(i)].
  • There is one more exception. Plans that otherwise would be considered a successor plan are not if at all times during the 24-month period beginning 12 months before the date of plan termination, fewer than two percent of the employees eligible to participate in the 401(k) [or 403(b)] plan at the time of its termination are eligible to participate in the new defined contribution plan.

Conclusion

The successor plan rules prevent 401(k) plans and 403(b) plans that are terminated from distributing employee salary deferrals as a result of the termination if the employer maintains or establishes a successor plan within the allotted timeframe. The definition of successor plan is important.

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When Are Retirement Assets Protected from Creditors?

An advisor asked: “Can you give me a refresher on the creditor protection rules for retirement plan assets at the federal and state levels?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Minnesota is representative of a common question on creditor protection for retirement plan assets.

Highlights of the Discussion
• The level of creditor protection for retirement plan assets depends on

1) the type of plan assets, and

2) whether the owner of the assets has filed for bankruptcy and, if not, the governing laws of the state with jurisdiction over the assets.

• The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), effective October 17, 2005, clarified the level of creditor protection for retirement plan assets when the owner has filed for bankruptcy.

Bankruptcy
• BAPCPA amended Section 522 of the Bankruptcy Code to exempt from a debtor’s bankruptcy estate retirement assets that are held in

– IRC Sec. 401(a) plans (e.g., 401(k), defined contribution and defined benefit plans);
– 403(b) plans,
– Traditional IRAs (up to $1 million of contributory assets, indexed periodically),
– Roth IRAs (up to $1 million of contributory assets, indexed periodically),
– Simplified employee pension (SEP) plans,
– Savings Incentive Match Plans for Employees (SIMPLE) plans,
– Church plans,
– Governmental plans,
– Multiemployer plans,
– Eligible 457(b) plans of state and local governments and IRC Sec. 501(c)(3) tax-exempt organizations and
– IRC Sec. 501(a) plans of tax-exempt organizations.

• Eligible rollover distributions under IRC Sec. 402(c) retain the unlimited bankruptcy protection given to them while held in the exempt retirement plan if they are contributed to another eligible retirement plan within 60 days of distribution. Earnings on the rollover assets are protected as well.

Nonbankruptcy
• In nonbankruptcy situations, assets held in ERISA plans are fully protected under the anti-alienation provision of the law [see Section 541(c)(2) of the Bankruptcy Code pursuant to Patterson vs. Shumate, 504 U.S. 753 (1992) and Section 206(d)(1) of ERISA].
• The protection of IRA assets (including rollover amounts) from general creditors of the IRA owner in nonbankruptcy situations falls under applicable state law, with many states—but not all—providing some level of exemption. (Link to State Government Websites for more information)
• Keep in mind that any qualified retirement plan or IRA (including traditional, Roth, rollover, SIMPLE or SEP plan IRAs) may be subject to an IRS tax levy.

Conclusion
The amount of creditor protection for retirement assets depends on whether the investor has filed for bankruptcy or not, and the type of retirement savings arrangements involved. For specific situations, individuals should consult legal counsel.

 

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Cybersecurity and Retirement Plans—What’s the Latest?

Can you bring me up to speed on what cybersecurity standards apply to qualified retirement plans?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Massachusetts is representative of a common question on what the Department of Labor (DOL) has to say about cybersecurity and retirement plans.

Highlights of the Discussion

Cybersecurity has been a growing topic of importance in the retirement services industry for years. The Bartnett v Abbott Labs et al  court case in 2020 (although later dismissed), along with other cases, have heightened the concern for fiduciary liability related to such breeches. From a historical perspective, there is an understanding under DOL    Regulation Section 2520.104b-1(c)(i)(B)   and other pronouncements related to the electronic delivery of plan information that a plan sponsor must ensure the electronic system it uses keeps participants’ personal information relating to their accounts and benefits confidential.

Most recently, the DOL on April 14, 2021, issued three cybersecurity directives for retirement plans: one for plan sponsors, one for plan recordkeepers and one for plan participants:

  • Tips for Hiring a Service Provider: This piece helps plan sponsors and fiduciaries prudently select a service provider with strong cybersecurity practices and monitor their activities, as required by ERISA
  • Cybersecurity Program Best Practices: This piece assists plan fiduciaries and record-keepers in their responsibilities to manage cybersecurity risks by following these steps.
  1. Have a formal, well documented cybersecurity program.
  2. Conduct prudent annual risk assessments.
  3. Have a reliable annual third-party audit of security controls.
  4. Clearly define and assign information security roles and responsibilities.
  5. Have strong access control procedures.
  6. Ensure that any assets or data stored in a cloud or managed by a third-party service provider are subject to appropriate security reviews and independent security assessments.
  7. Conduct periodic cybersecurity awareness training.
  8. Implement and manage a secure system development life cycle (SDLC) program.
  9. Have an effective business resiliency program addressing business continuity, disaster recovery, and incident response.
  10. Encrypt sensitive data, stored and in transit.
  11. Implement strong technical controls in accordance with best security practices.
  12. Appropriately respond to any past cybersecurity incidents.
  • Online Security Tips: This piece offers plan participants and beneficiaries who check their accounts online basic rules to reduce the risk of fraud or loss.

This trifecta of DOL guidance comes on the heels of two recommendations to the DOL from a February 2021 Government Accountability Office (GAO) report to: 1) formally state whether it is a fiduciary’s responsibility to mitigate cybersecurity risks in defined contribution plans and to 2) establish minimum expectations for addressing cybersecurity risks in defined contribution plans. But despite the release of these three directives, presently, there is no comprehensive federal regulatory regime covering cybersecurity for retirement plans.

Other Sources of Guidance to Consider

The American Institute of CPAs (AICIPA) has developed and maintains a cybersecurity risk management program for use by plan auditors, which includes a Systems and Organizations Controls (SOC) protocol intended to help plan sponsors in creating a strong cybersecurity framework .  This Q&A, “Cybersecurity and employee benefit plans: Questions and answers,” provides an overview of the resources.

The ERISA Advisory Council issued a report in 2016 entitled, “Cybersecurity Considerations for Benefit Plans.” The ERISA Advisory Council suggested the DOL raise awareness about cybersecurity risks and provide information for developing a cybersecurity strategy specifically focused on benefit plans. “The Report” put forth considerations for the industry for navigating cybersecurity risks. The considerations relate to the following three key areas. Please refer to the report for more details.

  1. Establish a strategy
  • Identify the data (e.g., how it is accessed, shared, stored, controlled, transmitted, secured and maintained).
  • Consider following existing security frameworks available through organizations such as the Nation Institute of Standards and Technology (NIST), Health Information Trust Alliance (HITRUST), the SAFETY Act, and industry-based initiatives.
  • Establish process considerations (e.g., protocols and policies covering testing, updating, reporting, training, data retention, third party risks, etc.).
  • Customize a strategy taking into account resources, integration, cost, cyber insurance, etc.
  • Strike the right balance based on size, complexity and overall risk exposure.
  • Consider applicable state and federal laws.
  1. Contracts with service providers
  • Define security obligations.
  • Identify reporting and monitoring responsibilities.
  • Conduct periodic risk assessments.
  • Establish due diligence standards for vetting and tiering providers based on the sensitivity of data being shared.
  • Consider whether the service provider has a cyber security program, how data is encrypted, liability for breaches, etc.
  1. Insurance
  • Understand overall insurance programs covering plans and service providers.
  • Evaluate whether cyber insurance has a role in a cyber risk management strategy.
  • Consider the need for first party coverage.

The Report concludes with an appendix entitled, Employee Benefit Plans:  Considerations for Managing Cybersecurity Risks (A Resource for Plan Sponsors and Service Providers).

State laws are another consideration. Each state has different laws governing cybersecurity concerns that may come into play. Unfortunately, many retirement plans cover multiple states or retirees who have moved out of state.

Conclusion

As fiduciaries of their retirement plans, the DOL requires plan sponsors to ensure the electronic systems they authorize for use in the administration of their plans keeps participants’ personal information relating to their accounts and benefits confidential. While currently no comprehensive cybersecurity protocol for retirement plan administration exists at the federal level—we do have a series of guidelines, suggestions and best practices.

 

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Are Governmental Plans Exempt from ERISA?

“I have a colleague that says governmental retirement plans are exempt from ERISA and one that says they are not. Can you settle the argument? Are retirement plans maintained by governmental entities exempt from ERISA?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Wisconsin is representative of a common question on the Employee Retirement Income Security Act of 1974 (ERISA) and retirement plans maintained by governmental entities.

Highlights of the Discussion

  • Yes and no; both answers are partially correct. ERISA consists of five sections or “Titles:”
    • Title I: Protection of Employee Benefit Rights
    • Title II: Amendments to the Internal Revenue Code Relating to Retirement Plans
    • Title III: Jurisdiction, Administration, Enforcement; Joint Pension Task Force, Etc. and
    • Title IV: Plan Termination Insurance
  • Generally, governmental retirement plans are fully exempt from Titles I and IV of ERISA. Those titles cover fiduciary duties, reporting and disclosure requirements, and termination insurance from the Pension Benefit Guaranty Corporation [ERISA Secs. 4(b)(1) and 4021(b)(2)].
  • A few of the provisions of Title II of ERISA apply to governmental plans. Title II relates to the portion of ERISA that amended the Internal Revenue Code and includes certain plan qualification requirements like limits on plan contributions.
  • Governmental plans are subject to Title III of ERISA, which contains procedures for co-coordinating enforcement efforts between the Department of Labor and Treasury Department.
  • While governmental plans are exempt from the federal fiduciary requirements of Title I of ERISA, they are subject to any fiduciary requirements imposed by applicable state laws. For example, California Government Code Section 53213.5 applies fiduciary standards and responsibilities to plans of governmental entities that essentially mirror those fiduciary standards and responsibilities in Title I of ERISA. Similarly, Florida imposes a federal-like fiduciary standard on plan officials under Florida Statute 112.656.
  • Other state statutes have fiduciary provisions that may be different than federal fiduciary rules. A sponsor of a governmental plan must be familiar with the fiduciary standards of its state, as well as other state laws that may affect the operation of its plan.

Conclusion

As a rule, retirement plans of governmental employers are exempt from the federal fiduciary requirements imposed under Title I of ERISA, as well as the plan termination insurance requirements under Title IV.  However, it is important for plan sponsors and others who may have discretionary authority over governmental plans to consider any fiduciary requirements and other legal requirements under applicable state law.

 

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Five-Part Test Involves Reasonable Understanding

“Can you give me real-world insight into the five-part test the Department of Labor (DOL) will apply for determining whether an advisor or firm is giving fiduciary investment “advice?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in North Carolina is representative of a common question on what constitutes investment advice.

Highlights of the Discussion

To determine whether investment guidance rises to the fiduciary level of investment advice, the DOL and IRS will apply the following five-part test (see PTE 2020-02  and IRS FAQs on PTE 2020-02. If the answer is “yes” to all five of the following test questions, and the advisor receives payment for the advice, he or she is an investment advice fiduciary, and would have to follow a prohibited transaction exemption (PTE) (e.g., PTE 2020-02) to receive payment for the advice.

Five-Part Test Questions

Consideration:  Authorities will consider written statements disclaiming any element of the five-part test but the disclaimers will not in and of themselves be determinative of fiduciary status. Firms and investment professionals cannot use written disclaimers to undermine reasonable investor understandings.

Yes No
1.    Will the advisor render advice to the plan, plan fiduciary, or IRA owner as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property? 

 

Consideration:  Advice could include a recommendation to an investor to conduct a rollover. A recommendation to roll assets out of a retirement plan is advice with respect to moneys or other property of the plan and, if provided by a person who satisfies all of the requirements of the five-part test, constitutes fiduciary investment advice.

2. Will the advice be given on a regular basis?

Considerations:  Whether advice to rollover assets from a workplace retirement plan to an IRA constitutes advice “on a regular basis” depends on whether the advice

·         Is a single, discrete instance;

·         Occurs as part of an ongoing relationship; or

·         Occurs at the beginning of an intended future ongoing relationship that an individual has with an investment advice provider.

3. Is the advice given pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner?

Consideration:  When making a determination on this question, the DOL intends to consider the reasonable understandings of the parties based on the totality of the circumstances.

4.  Will the advice serve as a primary basis for investment decisions with respect to plan or IRA assets? 

Consideration:  The recommendation need only be “a” primary basis for investment decisions—not necessarily “the” primary basis for investment decisions—before it would deem to satisfy this prong of the five-part test.  If the parties reasonably understand that the advice is important to the investor and could affect the investor’s decision, that is enough to satisfy the primary basis requirement.

5.  Will the advice be individualized based on the particular needs of the plan or IRA?

Consideration: Put another way, is the advisor making an individualized recommendation to an investor upon which he or she will rely on to make an investment decision? Here again, the DOL will look at the reasonable understandings of the parties based on the totality of the circumstances.

 

Conclusion

Although the DOL’s five-part test for fiduciary investment advice may seem straightforward, there are important subtleties that come into play.  The DOL will consider the reasonable understandings of the parties based on the totality of the circumstances.

 

 

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What Makes a Plan an Electing Church Plan?

“I discovered a church that has been filing a Form 5500 for its retirement plan even though it is not required to do so (it intends to be a non-electing plan). Will the IRS categorize the plan as an ‘electing church plan’ because of the Form 5500 filings?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in California is representative of a common question for plans maintained by churches.

Highlights of the Discussion

Fortunately, the IRS has taken the position that a church plan cannot be inadvertently categorized as an “electing church plan” [i.e., one that elects to have certain rules under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC) apply as if the plan were not a church plan]. The plan administrator must make a formal election under Treasury Regulation 1.410(d)-1(c) in order to be treated as an electing church plan. The election is irrevocable.

There are two methods of election and both involve the plan administrator executing a written statement that indicates 1) the election is made under IRC Sec. 410(d) and 2) the first plan year for which it is effective. A plan administrator could either attach the written statement to the

  • Form 5500 it files for the first plan year for which the election is to be effective

OR

  • Determination letter application for a qualified IRC Sec. 401(a) plan.

If an election is made with a written request for a determination letter, the election may be conditioned upon issuance of a favorable determination letter and will become irrevocable upon issuance of such letter.

If the church plan is a qualified defined benefit plan, the plan administrator must also notify the Pension Benefit Guaranty Corporation (PBGC) of its election for PBGC insurance to apply [ERISA § 4021(b)(3)].

Conclusion

A bona fide church plan cannot accidently become an electing church plan, subject to ERISA and the IRC as any other qualified retirement plan would be. The plan administrator must execute a written statement that is either attached to a Form 5500 filing or determination letter application.

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