Employee Benefits Alert – Summer 2012

    By ESOPs, Benefits & Compensation

    Final Deadline for 401(k) Fee Disclosures: August 30, 2012

    The Department of Labor postponed the date that 401(k) plan sponsors must comply with new fee disclosure rules from May 31, 2012 to August 30, 2012. These rules, introduced in final regulations under the Employee Retirement Income Security Act (ERISA) Section 408(b)(2), require sponsors of participant-directed account plans such as 401(k) plans to provide detailed information about the plan’s procedures for making investment directions as well as a breakdown of the fees charged by each available investment fund.

    The postponement was granted by the Department of Labor in order to allow plan sponsors some additional time to adjust to recent revisions to the final regulations. The three-month delay granted by the Department of Labor leaves little time for plan sponsors to finalize their disclosure materials to comply with the new fee disclosure requirements.

    What Plan Sponsors Need to Know

    Sponsors of 401(k) plans, 403(b) plans, and other plans that permit individual investment direction should be aware that several new categories of information relating to plan investments and fees will now need to be disclosed for the first time. If not already received, plan sponsors should begin to receive detailed fee disclosure information from the plan’s investment providers. This information must be compiled into two separate disclosure statements that are required to be provided to participants on an ongoing basis: an annual disclosure (which must be provided by August 30, 2012), and a quarterly disclosure (the first installment of which must be provided by November 14, 2012).

    Service Provider Fee Disclosures

    The first step toward compliance with the new fee disclosure rules is to obtain information on fees paid to all plan service providers. The new regulations require service providers to provide plan sponsors with detailed information on the services provided to the plan and the total fees paid by the plan, the plan sponsor, or an affiliate thereof. Plan sponsors are responsible for specifically requesting fee information from service providers who fail to provide this information without prompting. Covered service providers include third-party administrators, trustees, investment advisors, accountants, lawyers, consultants, and other similar service providers.

    Annual Disclosure

    The annual disclosure must be provided to participants before they enroll in the plan and at least annually thereafter. This notice will include general plan-related information and plan investment information.

    General plan-related information will fall into three categories. First, the annual notice must include ‘general plan information’ about the structure and mechanics of the plan, such as an explanation of how to give investment instruction, a list of the plan’s investment options, and a description of any arrangement that enables the selection of investments beyond the plan’s designated investments. Second, the notice must describe ‘administrative expenses information,’ which are fees and expenses for general plan administrative services that may be deducted from individual accounts, such as recordkeeping services fees. Third, ‘individual expenses information’ must be included in the annual notice, which are fees and expenses that may be charged to or deducted from the individual account of the participant or beneficiary, based on the actions taken by that participant or beneficiary, such as plan loan fees if applicable.

    Plan investment information will provide the core information about each investment option available under the plan, and will include:

    • For each investment option that does not have a fixed rate of return, such as a mutual fund, the following: specific information on the historical investment performance for one, five and ten-year return periods, the name and returns of an appropriate market-index over the same time periods for comparison, the total annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested, and any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment.
    • For investment options with fixed or stated rates of return: the annual rate of return, the term of the investment, and any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment.
    • An internet website address that provides participants and beneficiaries access to additional information about the investment options.
    • A general glossary of terms to assist participants and beneficiaries in understanding the plan’s investment options, or an internet website address that provides access to such a glossary.

    For the first two items above, the information must be furnished in a chart, or format similar to that provided in the October 2010 rule, so participants and beneficiaries can compare each investment option available under the plan.

    Quarterly Fee Disclosure

    On a quarterly basis, participants must be provided statements showing the dollar amount of the plan-related fees and expenses (whether administrative or individual) actually deducted from their individual accounts, in addition to a description of the services for which the fee was charged. These disclosures may be included in the quarterly account balance statements otherwise required by Section 105 of ERISA.

    Plan sponsors should plan accordingly as a good deal of effort may be required to produce the first round of disclosures. With the administration of 401(k) plans typically outsourced to third-party recordkeepers, plan administrators are advised to ensure that their third-party recordkeeper will prepare these new notices on behalf of the plan, and should review the notices to make sure that they meet all legal requirements. Additionally, the services agreement with the recordkeeper should ideally include indemnification if the recordkeeper fails to comply with the notice requirements. In addition, plan administrators should ensure that they have purchased an appropriate amount of fiduciary liability insurance to protect the administrator in the event of a problem.

    Prepare for Changes in the Federal Capital Gains Tax Rate

    With the current 15% Federal Capital Gains rate scheduled to expire on December 31, 2012, and the unpredictable outcomes of the November elections, ESOP Selling Shareholders should be considering the related tax implications. Very often, many of these Selling Shareholders hold promissory notes due to them from ESOP companies or, sometimes, the ESOP itself. These notes typically carry an interest rate higher than that of bank loans and are payable over several years.

    Furthermore, many of these Selling Shareholders have historically elected installment sale treatment for tax purposes, meaning that payments received after 2012 risk being taxed at a substantially higher rate as Federal Capital Gains tax rates are scheduled to increase dramatically in January 2013 unless legislation is passed in the interim.

    Kaufman & Canoles can work with you to develop a re-financing strategy that could result in:

    • Substantially lowering the ESOP company’s cost of capital.
    • Lowering the risk of increased capital gains rates by bringing forward principal payments of seller notes into 2012.
    • Asset diversification for the Selling Shareholder.

    Supreme Court’s Obama Care Decision May Affect Employers —Be Prepared

    Employers are currently awaiting the decision of the U.S. Supreme Court (the Court) regarding the fate of the Patient Protection and Affordable Care Act (ObamaCare) following oral arguments in March.

    While there has been a lot of analysis of the March oral arguments, we are no closer to knowing the fate of ObamaCare than we were before the oral arguments. Nonetheless, there is much more anticipation of potential change than was expected when the first court challenge to ObamaCare was filed in 2010. Unfortunately, we will not hear from the Court until the middle of summer.

    In the meantime, employers should take preliminary actions to prepare for the eventual decisions. These steps take into account the range of potential outcomes and should position employer group health plans to react timely and appropriately.


    The Court may leave ObamaCare unchanged by upholding its constitutionality and, therefore, on course to take full effect in 2014. Accordingly, employers should continue to address ObamaCare implementation steps for 2012 and beyond, such as the following:

    • summaries of benefits and coverage;
    • Form W-2 health plan reporting;
    • patient-centered outcomes trust fund fee calculations;
    • healthcare spending account limits;
    • analysis of employer mandate implications; and
    • Cadillac Tax design and accounting implications.

    Given the immediacy of these implementation steps’ effective dates, losing several months of work while waiting for the Court’s decisions may jeopardize compliance with ObamaCare for 2012 or 2013.

    Partially Upheld

    It is also possible the Court may only strike down portions of ObamaCare (such as the individual mandate or the Medicaid rules) which will leave unchanged ObamaCare’s provisions applicable to employer group health plans. While such a result will lead to calls for broader changes to shore up or strip away other surviving portions of ObamaCare, the election year realities in Washington may delay any such action until after November. Consequently, employers should continue to take the steps outlined above in the event ObamaCare is partially upheld.

    Struck Down Entirely

    There is a distinct possibility that the Court may strike down ObamaCare in its entirety, particularly if the Court finds that the individual mandate is unconstitutional and that ObamaCare only functions as an indivisible whole. This result will cause immediate turmoil for employer group health plans and require agency guidance in a number of areas. In order to prepare for this possibility, employers may want to address questions that follow:

    • Have you retained the right to change your group health plans?
    • What is the cost and desirability of retaining already implemented ObamaCare provisions for the balance of 2012 or beyond?
    • Do you have adult children in your plans and how do you prepare to allow mid-year coverage changes if such coverage becomes taxable to employees?
    • Can you prepare employee communication material addressing “What’s Next?” issues for the 2012 plan design and operation?
    • What will be the administrative “drop dead” dates for 2013 design changes, administration modifications, and communication projects?
    • Can 2012 medical flexible spending account claims be readjudicated to include over-the-counter drugs or whether or not retiree medical drug claims must be reprocessed to reflect the reversion to prior Medicare Part D rules?
    • What are the accounting consequences and timing issues related to the return to prior Medicare Part D subsidy taxation rules and the unwinding of any Cadillac Tax accounting steps?
    • Can you postpone plans to spend any Early Retiree Reinsurance Program proceeds or Medical Loss Ratio rebates?

    While these preliminary actions may seem daunting, whatever the result of the Court’s decisions, employers should anticipate a period of heightened federal activity associated with ObamaCare.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.