Employee Benefits & Executive Compensation Benefits Alert – Fall 2007
IRS Extends 409A Compliance Deadline
The deadline to achieve full compliance with section 409A of the Internal Revenue Code, which provides a complex set of rules governing nonqualified deferred compensation plans, has been extended to December 31, 2008. Previous transition guidance, including proposed regulations published in October 2005 and final regulations published in April 2007, has successively extended the compliance deadline several times in the past.
The latest piece of transition guidance, IRS Notice 2007-86, generally extends the 409A compliance deadline to December 31, 2008. In the interim, plans subject to section 409A must be operated in good faith compliance with the requirements of section 409A as well as previously issued guidance, including IRS Notice 2005-1.
As with amounts deferred for the 2007 taxable year, plan sponsors should be careful to ensure that deferral elections, distributions, and other relevant details of operation are consistent with 409A’s requirements in 2008. Conforming plan amendments must be adopted no later than December 31, 2008.
If you would like additional information and advice concerning the effect of the 409A transition rules on your nonqualified plans, contact one the members of the Kaufman & Canoles employee benefits team.
401(k) Fee Disclosure Initiatives
Recent litigation concerning fees charged by 401(k) investment funds has sparked a surge of interest in ERISA’s investment fee disclosure rules. The courts, the Department of Labor, and Congress are simultaneously pursuing different initiatives to establish the level of disclosure detail about investment fees, including the so-called revenue sharing arrangements that have been the primary focus of fee litigation, that plan sponsors must request from service providers and disclose to participants. The 401(k) Fair Disclosure for Retirement Security Act of 2007 (H.R. 3185), for instance, would, if passed into law, prohibit plan fiduciaries from entering into contracts with service providers unless they have provided a written disclosure statement concerning fees and potential conflicts of interest, and would also require plan administrators to provide participants with a detailed disclosure statement including a fee menu listing information about revenue sharing arrangements and other potential conflicts of interest of plan service providers.
It is likely that these legislative and regulatory developments will result in changes to the fee disclosure rules, although it is too early to discern precisely what form these changes will take. One thing that is clear, however, is that in the current environment, 401(k) fees remain a source of potential legal liability. Sponsors of 401(k) plans can take steps to reduce the chances of being sued or to mitigate the losses that plaintiffs might claim. We recommend that plan fiduciaries:
- Review contracts with plan service providers to discern all fees being charged to plan participants.
- Request a written breakdown from service providers of all fees paid, including revenue-sharing arrangements.
- Periodically compare fees being currently charged to the fees charged in the marketplace for similar products and services (or retain an independent fiduciary or consultant to do so).
- Above all, prepare a paper trail demonstrating that the fiduciaries are aware of the fees being charged and have deemed them reasonable in light of the market.
If you would like to discuss these fee disclosure developments in greater detail, please contact one of the members of our employee benefits team.
Department of Labor Issues Default Investment Guidance
The Pension Protection Act of 2006 established a new type of safe-harbor default investment fund, the Qualified Default Investment Arrangement (QDIA), through which plan assets can be invested on behalf of participants who fail to provide individual investment directions without exposing plan fiduciaries to risk of liability for investment losses. The Department of Labor recently issued final rules defining in detail which funds qualify as a QDIA and what steps plan sponsors must take to avail themselves of fiduciary protection in connection with a QDIA.
Under the DOL guidance, QDIAs are limited to the following types of funds or services:
- Lifecycle or targeted-date funds that include a mix of investments and take into account the individual’s age or retirement date.
- Services that allocate contributions among the plan’s existing investment options to provide an asset mix that reflects the individual’s age or retirement date.
- A balanced fund that includes a mix of investments that takes into account the characteristics of the employer’s group of employees as a whole.
- A capital preservation fund for temporary purposes only (up to the first 120 days of participation).
An additional grandfather rule would extend QDIA status to plan contributions that are defaulted into a stable value fund prior to the effective date of the final DOL rule.
While the QDIA rules are of most interest to sponsors of 401(k) plans that include automatic enrollment features, we advise all 401(k) plan sponsors to speak with their financial advisors about available funds that could qualify as a QDIA. Using a QDIA as the plan’s default fund adds an extra layer of protection against investment-related fiduciary liability.
Changes in Tax Sheltered Annuity Requirements
The Internal Revenue Service has issued final regulations under Code section 403(b) that will affect all tax-exempt employers, state colleges and universities and public schools that provide a 403(b) plan for their employees. The final regulations are generally effective on January 1, 2009 with a few exceptions. Several important changes in the final regulations will require employer action including:
- Written plan documents will be required for all 403(b) plans. The IRS will issue model plan amendments prior to the effective date of the regulations for public schools to adopt.
- Direct transfers from 403(b) accounts are limited to fund sponsors that agree to share information with the plan sponsor. This change is effective as September 24, 2007.
- Nondiscrimination testing for matching of contributions, after-tax contributions and employer non-elective contributions will be done on a controlled group basis using the same rules in effect for qualified plans.
- Salary deferrals will continue to satisfy nondiscrimination by satisfying the universal availability requirement.
- In-service distributions may be made only in the event of a triggering event.
- Plan sponsors subject to ERISA are already required to remit elective deferral contributions to the plan by the earliest date on which it is administratively feasible, but not later than the 15th business day of the following month. For 403(b) plan sponsors not covered by ERISA, 403(b) elective deferral contributions must be remitted to the plan within 15 business days following the month in which these amounts would have otherwise been paid to the participant.
Plan sponsors with questions about implementing these requirements should contact one the members of the Kaufman & Canoles employee benefits team.
Timing of Participant Benefit Statements for Non-Participant Directed Individual Account Plans
Section 105 of the Employee Retirement Income Security Act of 1974 (ERISA) requires the administrator of an individual account plan (such as a 401(k) plan, profit sharing plan, money purchase plan, or employee stock ownership plan) to provide a pension benefit statement to all participants or beneficiaries. If a participant or beneficiary does not have the right to direct the investment of assets in their account, then this statement must be furnished at least once each calendar year.
The Department of Labor issued interim guidance in 2006 stating that the administrator would be in good faith compliance if the statement was issued within 45 days following the end of the calendar year. The Department, recognizing that the 45-day period presented a serious compliance issue for plans that do not provide participants and beneficiaries with the right to direct the investment of assets in their account, relaxed this requirement.
The Department has revised its guidance to provide that plans in which the participant or beneficiary does not have the right to direct the investment of assets in their account will be in good faith compliance with Section 105 of ERISA if pension benefit statements are provided to participants and beneficiaries no later than the date on which the plan’s Form 5500 Annual Return/Report is filed, but not later than the date, including extensions, on which Form 5500 is required to be filed for the plan year.
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 2022.