DOL Issues Guidance on Lifetime Income Disclosure for Defined Contribution Plans

If you have a really good memory you might recall that way back at the end of last year Congress actually passed a significant retirement bill called the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”). We prepared a brief article about the impact the SECURE Act would have on defined contribution accounts that you can find here.

COVID-19 and the employee benefit issues it has created seems to have overshadowed the SECURE Act, but the folks at DOL apparently remembered that they had been given a task. Section 203 of the SECURE Act amended ERISA to require that individual account balance plans add lifetime income disclosure to at least one participant account statement a year and the DOL was given until December 20, 2020, to provide plan sponsors with guidance on how these disclosures should be provided. The DOL has now released this guidance in the form of an interim final rule (IFR) along with a helpful fact sheet.

DOL Issues Guidance on Lifetime Income Disclosure for Defined Contribution Plans

Let’s Assume

The lifetime income disclosure illustrations are meant to provide participants with some idea of what their account balance would provide as a stream of income at retirement. The IFR provides plan sponsors with a set of assumptions and rules that must be used to prepare illustrations and comply with the disclosure requirements. These include:

  • The calculation will use a point-in-time current value of the participant’s account balance and does not assume future earnings.
  • It is assumed the participant would commence the lifetime income stream on the last day of the benefit statement period after the participant has attained age 67 (Normal Social Security Retirement Age for most individuals). If the participant is already over age 67 his/her actual age should be used.
  • The lifetime income illustrations must be provided in the form of a single life annuity based on the participant’s age and as a 100% qualified joint and survivor annuity presuming that the joint annuitant that is the same age as the participant.
  • Monthly payment illustration calculations will project forward using the current 10-year constant maturity Treasury rate (10-year CMT) as of the first business day of the last month of the statement period.
  • Assumed mortality for purposes of the calculation must be based on the gender neutral mortality table in section 417(e)(3)(B) of the Code – the mortality table used to determine lump sum cash-outs for defined benefit plans.
  • Plans that offer in-plan distribution annuities have the option to use the terms of the plan’s insurance contracts in lieu of the IFR assumptions. For clarification purposes, it is important to note that nothing in the lifetime income disclosure rules require that plans offer annuities or lifetime income options.
  • Plans must use model language provided in the IFR to explain the life-time income illustrations to participants.

Sweet Relief

The concept of lifetime income disclosure has been under consideration by Congress and federal regulators for many years and one concern has always been what would happen if the actual results a participant experiences is not as good as these projections. The IFR addresses this concern by providing that if plan sponsors and other fiduciaries follow the IFR’s assumption and use the model language to comply with the lifetime income disclosure rules those fiduciaries will not be liable if monthly payments fall short of the projections.

Something to Keep in Mind

Plan sponsors and participants should keep in mind that the product obtained as a function of complying with these lifetime income disclosure rules is going to yield something quite different than the results that would be achieved through an interactive projection of a participant’s account.  Many retirement plan vendors and financial planners will utilize projection tools that take into account future contributions and earnings as well as attempting to anticipate potential market fluctuations and interest rate changes rather than simply basing a projection on a static period of time. While a participant may find the figures that would be generated by this lifetime income disclosure useful as a year over year comparative tool the participant should also explore other planning tools for a more complete and robust retirement projection.

Timing & Effective Date

This IFR was publicly released on August 18, 2020, and it is expected to be published in the Federal Register very soon. Interested parties have been given 60 days to comment on what the DOL has set forth. The idea is that the DOL will take the comments it receives and make any adjustments it feels are merited to the guidance and then issue final regulations that will supersede the IFR. The guidance in the IFR will be effective one year after publication in the Federal Register. If you have any questions regarding these topics and updates, please contact John Lucas in the form below.

Published September 3, 2020

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How To Successfully Navigate A DOL ESOP Investigation

“Dear Sir or Madam…our office has scheduled a review of the above captioned plan to determine compliance with the provisions of ERISA.” A formal notice from the Department of Labor (DOL) can bring a sense of unease to any employee stock ownership plan (ESOP) practitioner. However, by developing an understanding of why DOL ESOP investigations occur and familiarizing oneself with the DOL’s audit practices, navigating one will be less ominous.

What Is A DOL ESOP Investigation?

The DOL enforces the federal laws of retirement plans under the Employment Retirement Income Security Act of 1974 (ERISA). ERISA provisions grant the DOL authority to conduct investigations of ESOPs and, unlike those conducted by the Internal Revenue Service (IRS), it has the discretion to investigate and reinvestigate any plan it so chooses. Because ESOPs fall under the governance of ERISA, fiduciary duty is required to those who administer, manage, or control plan assets and any ESOP fiduciary is required to act solely in the best interests of the plan’s participants.

Beginning in 2005, the DOL’s ESOP review project initially focused on the valuation of privately-held employer securities purchased by the ESOP.  Even more so today, ESOP trustees are under continued scrutiny from the DOL regarding this subject matter. The trustee must continually demonstrate due diligence in analyzing the transaction and determine that the valuation procedures considered when authorizing the share purchase result in the trust’s payment of no more than fair market value (i.e. “adequate consideration”). Ultimately, the DOL monitors whether participants are being overcharged for the stock acquired by the plan. Failure of any ESOP trustee to uphold this duty may result in them being held liable for making the ESOP trust whole, as evidenced by an increase of monetary settlements in recent court rulings.

How To Successfully Navigate A DOL ESOP Investigation

Why Was Our ESOP Selected?

Because the DOL does not detail their selection process, understanding why your ESOP is under investigation remains unclear. They commence for various reasons, including through referrals from other government agencies or media sources, via plan participant complaints, through computer generated targeting (e.g. collecting information on Form 5500), or by random audit. Many of the investigations do not occur until after a fiduciary breach occurs and the severity of any infraction will determine any company/civil penalties or criminal proceedings. Additionally, DOL enforcement agencies typically provide little advance notice, so knowing how to respond before an investigation begins is critical.

What Can We Expect?

The formal investigation process begins after receipt of a notification letter from a DOL regional office. This letter requests an abundance of plan documentation, including:

  • Plan and trust document
  • ESOP board minutes and correspondence
  • ESOP allocation report
  • ESOP trust statements
  • Copies of Form 5500
  • ESOP loan documents
  • Payroll data
  • Service provider agreements

This information must be provided to the investigator within a certain deadline, although extensions may be granted. It is good practice for a company to establish a point of contact (i.e. ERISA legal counsel) to help aid in the information exchange process. This helps to avoid disruptions, maintains organization, and ensures all requested materials are reviewed and properly addressed. Once all requested documentation is received, the DOL conducts on-site visits comprised of in-person interviews, including key personnel, plan fiduciaries, and those involved with the day-to-day operations of the ESOP. During this stage, it is crucial that legal counsel represent those being interviewed since they can detail what to expect and inform those interviewed of their rights during the process.

What Happens Next?

At the end of the audit period, the DOL must decide whether to take any further action. This phase of the DOL ESOP investigation may take several months and, during that time period, the DOL may discontinue communication with the contact person. Ideally, an investigation ends with receipt of a “no action” letter, meaning the DOL has found no improprieties during its audit. To the extent that the DOL ESOP investigation uncovers violations of ERISA, they will issue a Voluntary Compliance Letter. The letter generally details the facts gathered by the DOL during the investigation, outlines the violations that they have uncovered, and invites discussions related to the remedy of such violations. The DOL may also insist on entering into a written settlement agreement, of which, civil penalties may be imposed. Should settlement not be amenable to both parties, the DOL may also provide the IRS with their findings, which may impose further penalties or excise taxes.

In summary, one should not underestimate the seriousness of a DOL ESOP investigation or the resulting outcome. In the interest of transparency, the department does provide online access to its enforcement manual, detailing their internal audit guidelines and checklists. With a thorough review of these documents and an understanding of the general steps of an ESOP DOL investigation, any plan sponsor can successfully navigate one.

Questions regarding the process of ESOP investigations? Contact the Findley consultant you normally work with or Aaron Geibel in the form below.

Published August 28, 2020

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COBRA Litigation Risk on the Rise

If you are an employer that is subject to COBRA, you are probably aware that there are significant penalties that the Department of Labor can assess if you fail to offer coverage or give proper COBRA notice to employees or beneficiaries who lose the health coverage that you provide. These penalties are up to $110 per day for each violation, and they can add up quickly. This alone causes most employers and vendors to take COBRA compliance seriously. What you may not know is that these same employees or beneficiaries can also sue you for common and inadvertent COBRA compliance issues.

COBRA Litigation Risk on the Rise

COBRA Lawsuits

Unfortunately, there appears to be a new wave of class-action lawsuits targeting employers who may have used an outdated COBRA notice or maybe did not give clear instructions on where to mail COBRA premiums or really any number of other COBRA compliance violations.

One of the firms filing these lawsuits is ClassAction.com. Visiting their web site you will note a list of common mistakes employers make that can lead to litigation. These mistakes involve more than just missing deadlines in providing a COBRA election notice. The list includes contacting only the employee losing health coverage and forgetting to also contact the covered spouse and dependent children—remember each covered family member has an individual COBRA election right.

The ClassAction.com website also boasts about million dollar settlements recently won on behalf of individuals whose COBRA rights were either violated or not administered properly. This should be a wake-up call for employers to examine their COBRA procedures to ensure full compliance. Given the number of furloughs and lay-offs occurring throughout the U.S. due to COVID-19, this COBRA examination or audit becomes urgent.

Reviewing COBRA Practices

Findley stands ready to assist employers in reviewing their COBRA practices. This can even be in the context of a full ERISA audit. Since many employers outsource COBRA administration to a third party, Findley can also help employers review those administrative agreements and recommend changes to indemnification provisions to protect the employer from the administrator’s failures or omissions.

For more information about auditing COBRA administration and litigation risk, please contact Bruce Davis in the form below.

Published May 29, 2020

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When Duty Calls Your Employees: USERRA and COVID-19

As companies across the country continue to adapt their operations to respond to the COVID-19 pandemic, nearly one million employees may be pulled from their employers to serve the federal government in its efforts to battle the disease. The recent “call up” authorization for up to one million reserve members to active duty is a good reason for businesses to review obligations of the Uniformed Services Employment and Reemployment Rights Act (USERRA).

In late March, President Donald Trump authorized a call up of “elected reserve and certain members of the individual ready reserve of the armed forces.” The call for service of reservists may be for a period of up to two years.

In 1994, USERRA was established to provide certain job protections for uniformed service members and impose employment-related obligations on their civilian employers. All private and public sector employers (including foreign employers doing business in the United States) are subject to USERRA — regardless of the employer’s size. Along with full-time employees, part-time and former employees are covered under USERRA. However, employees who are in positions not reasonably expected to continue indefinitely fall outside USERRA’s protections.

While the employer obligations and employee protections under USERRA have not changed, it’s important for employers to understand the compliance requirements and confirm that the necessary compliance documents and forms are in place. Organizations should also communicate with reserve employees in a responsive manner.

COVID-19 and USERRA

1. An employer cannot delay a service member’s reemployment solely out of concern that the service member’s service in a COVID-19 affected area may have exposed him or her to COVID-19.

In accordance with USERRA, an employer must reemploy Service members returning from service in the Uniformed Service ‘promptly’.  Title 20, Code of Federal Regulations (C.F.R.) 1002.181 states that ‘prompt’ typically means within two weeks of the employee’s application to return to work, unless unusual circumstances exist. In some cases, a reinstatement beyond the typical two-week period may be warranted due to the company’s policy regarding the COVID-19 health emergency as applicable to all employees.

Please also note that the company policy should be broad in scope and intended for all employees traveling to areas with a high risk for exposure to the Coronavirus. If an employer’s policy limiting return to work is focused only on service members, it could be viewed as discriminatory under USERRA. Please see 20 C.F.R. 1002.18 regarding discrimination.

The employer may want to consider “temporarily providing paid leave, remote work, or another position during a period of quarantine for an exposed reemployed service member or COVID-19 infected reemployed service member, before reemploying the individual into his or her proper reemployment position.”

2. An employee may still be laid off or furloughed upon return from their military (including National Guard) service if they would have been subject to that action unrelated to their service.

USERRA at a Glance

USERRA covers:

  • Pension plans covered by ERISA and certain pension plans not covered by ERISA, such as those sponsored by a State, government entity, or church for its employees. However, USERRA does not cover pension benefits under the Federal Thrift Savings Plan (which are covered under 5 U.S.C. 8432b).
  • Group health plans that are subject to ERISA and plans that are not subject to ERISA, such as those sponsored by State or local governments or religious organizations for their employees
  • Multiemployer plans maintained pursuant to one or more collective bargaining agreements between employers and employee organizations

The Protections and Obligations under USERRA are Extensive

Right to Timely Reemployment

When uniformed service members (with five years or less of cumulative uniformed service during the relevant employment period with the civilian employer) leave to perform uniformed service, they must be timely rehired upon their return, assuming “notice to employer” requirements had been met in advance (and no exceptions apply), and provided they were discharged under honorable conditions. It is important to note that notice is not required if “military necessity” prevents the giving of notice; or if the giving of notice is otherwise impossible or unreasonable. In addition, there are exceptions to the five-year requirement.

To qualify for USERRA’s protections, a service member must be available to return to work within certain time limits. These time limits for returning to work depend (with the exception of fitness-for-service examinations) on the duration of a person’s military service.

Right to be Restored

If uniformed service members are eligible to be reemployed, they must be restored to the job and benefits they would have attained had they not been absent due to military service or, in some cases, a comparable job.

Right to be Free from Discrimination and Retaliation

An employer may not discriminate (or retaliate) against a member of the uniformed services due to past, current, or future military obligations. The ban broadly extends to hiring, promotion, termination, and benefits. In addition, an employer may not retaliate against anyone assisting service members in asserting or seeking to enforce their USERRA rights, even if the person assisting them has no service connection.

Health Insurance Protections

If health plan coverage would terminate because of an absence due to military service, they must be allowed to continue their existing employer-based health plan coverage (including dependent coverage) for up to 24 months while in the military, and even if they elect not to continue coverage they must be allowed to reinstate their coverage upon return, and generally, without any waiting periods or exclusions (if one would not have been imposed had the person not been absent for military service) except for illnesses or injuries connected to their military service.

Note: If a service member is on active duty for more than 30 days, military health care is provided to the service member and their eligible dependents. In addition, service members cannot be required to pay more than 102 percent of the full premium for the coverage. If the military service was for 30 or fewer days, the person cannot be required to pay more than the normal employee share of any premium.

USERRA Notice/Poster

Employers, regardless of size, are required to provide to persons entitled to the rights and benefits under USERRA, a notice of their rights, benefits and obligations. Employers may provide the notice “Your Rights Under USERRA” by posting it where employee notices are customarily placed. Employers are also free to provide the notice to employees in other ways that will minimize costs while ensuring that the full text of the notice is provided (e.g., by handing or mailing out the notice, or distributing the notice by e-mail). The poster can be downloaded here from the Department of Labor website.

For a complete list of protections and obligations under USERRA, see A Guide to the Uniformed Services Employment and Reemployment Rights Act on the DOL website.

The DOL offers a USERRA checklist for employers.

To learn more, contact Scott Williamson at Scott.Williamson@findley.com or 615.665.5317 or John Lucas at  John.Lucas@findley.com or 615.429.3279

Published May 13, 2020

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The DOL and the IRS Issue New COBRA Notices and Extensions

Why?

In response to the National Emergency declared by President Trump on 3/1/2020, the DOL’s Employee Benefits Security Administration (EBSA) is taking efforts to help workers who have had a reduction in hours and could be at risk for unnecessary high costs.

What?

COBRA timeframes, Special Enrollment timeframes, as well as Claim Procedure and External Review Process timeframes, have all been extended after the Outbreak Period ends, which is determined to be 60 days after the National Emergency is declared over. As of this writing, the National Emergency has been ordered through 7/25/2020. That means the Outbreak Period would end on 9/23/2020. So essentially, the “Qualifying event” is the date the Outbreak Period ends for these timeframes, not the date of the actual event or loss of coverage.

The DOL and the IRS Issue New COBRA Notices and Extensions

For example, in the case of a termination of employment on 3/15/2020, that employee would have until 11/22/2020 to elect COBRA. Remember, the final date to elect COBRA is a 60 day extension from the end of the Outbreak period. For an employee who previously declined group health plan coverage and had a baby on April 17, 2020, they have a special enrollment period and have until October 23, 2020 (30 days after Outbreak period), to enroll herself and her child in coverage. These extensions are effective back to 3/1/2020.

Who?

The Joint Notice technically applies only to plans subject to ERISA and the Code. However, it appears HHS intends to adopt a policy to extend similar timeframes to non-federal governmental group health plans and insurers. HHS encourages governmental group health plans to provide similar relief.

When?

These extensions are unprecedented, and employers and plan administrators will need to take steps to ensure that participants understand the new rules. Employers and plan administrators may want to consider supplementing and modifying COBRA forms, special enrollment notices, and summary plan descriptions, to reflect these extensions.

Although it is not required, we feel it is the responsibility of the plan administrators to notify plan participants and their beneficiaries of their COBRA rights. Below you can find model notices from the DOL, along with an FAQ, that you can use to help communicate with your employees. You should work with your COBRA vendor to help notify plan participants that would be eligible. Please note that providing these notices will NOT necessarily protect you from potential COBRA related litigation.

COBRA model notices

Frequently Asked Questions

For more information or questions regarding how these notices and extensions could impact your organization, contact Dave Barchet at Dave.Barchet@findley.com or 216.875.1914 or Blake Babcock at Blake.Babcock@findley.com or 216.875.1904

Published May 8, 2020

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Benefit Plans Get Disclosure and Filing Relief in COVID-19 Emergency

On April 29th, the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) issued EBSA Disaster Relief Notice 2020-01 (Notice) to provide employers with additional relief as they make their way through the national emergency due to the Novel Coronavirus Disease (COVID-19) Outbreak. The guidance applies to employee benefit plans, employers, labor organizations, and other plan sponsors, plan fiduciaries, participants, beneficiaries, and service providers subject to ERISA from March 1, 2020 until 60 days after the announcement that the national emergency is over, or such other date announced by the DOL. Additional guidance can be found in  29 CFR Parts 2560 and 2590 and 26 CFR Part 54.

The Notice was a coordinated effort of the Department of Labor’s EBSA, the Internal Revenue Service (IRS) and the Department of Health and Human Services (HHS). Specifically, HHS intends to exercise enforcement discretion and extend timeframes (similar to those announced by EBSA) applicable to group health plans and health insurance issuers offering coverage as to group health plans, their participants, beneficiaries and enrollees. HHS is also urging states and health insurance issuers offering coverage as to group health plans to operate in a manner consistent with the Notice.

Benefit Plans Get Disclosure and Filing Relief

Extension of Deadlines

Specifically, the Notice extends the time for furnishing benefit statements, annual funding notices, as well as other notices and disclosures (e.g. summary plan descriptions, summaries of material modification) required by Title I of ERISA, provided that the efforts to issue such notices and disclosures are made in good faith. The Notice specifies that an employee benefit plan and the plan fiduciary will not violate ERISA for failing to timely furnish a notice, disclosure, or document that must be furnished between March 1, 2020 and 60 days following the announced end of the COVID-19 national emergency.

Expansion of Electronic Delivery of Notices or Disclosures

The DOL specifies that acting in good faith includes use of electronic means of communicating with plan participants and beneficiaries if the plan fiduciary reasonably believes that participants and beneficiaries have effective access to such electronic communication means as email, text message and continuous access websites.

Relief for Deadlines in ERISA’s Claims Procedures

For group health plans subject to ERISA or the Internal Revenue Code, the additional time gives employers, participants and beneficiaries additional time to comply with certain deadlines affecting COBRA continuation coverage, special enrollment periods, benefit claims, appeal claims and the external review of certain claims.

For disability, retirement and others plans subject to ERISA’s claim procedures, participants and beneficiaries are given additional time to comply with deadlines for benefit claims and the appeal of denied claims.

Specific Areas of Relief in the Notice

The Notice provided specific guidance in connection with plan loans and distributions, participant contributions and loan repayments, blackout notices, Form 5500 and Form M-1 filings.

Form 5500 and Form M-1 Filings

Relief for Form 5500 and PBGC deadlines was described in Findley’s article Filing Extension to July 15th for Approaching Form 5500 and PBGC Deadlines. The deadlines for Form M-1 filings required for multiple employer welfare arrangements (MEWAs) and certain entities claiming exception (ECEs) are extended for the same period of time as the Form 5500 filings.

Plan Loans and Distributions

The Notice provides relief to an employee pension benefit plan that fails to follow procedural requirements for plan loans or distributions provided in the plan’s provisions. The relief is conditioned on the following factors:

  • The failure is solely attributable to the COVID-19 emergency;
  • The plan administrator’s efforts to comply with the requirements are made in good faith;
  • The plan administrator makes reasonable efforts to correct any procedural deficits as soon as administratively practicable (e.g. obtaining missing documentation).

The relief for verification requirements is limited to those proscribed by Title I of ERISA. The relief does not extend to statutory or regulatory requirements under the jurisdiction of the IRS, such as spousal consent requirements.

Participant Loan Repayments and Contributions

Currently, amounts withheld from a participant’s wages by the employer for contributions or plan loan repayments are considered plan assets that must be forwarded to the plan on the earliest date on which those amounts can reasonably be segregated from the employer’s general assets. In any event, the amounts cannot be forwarded to the plan later than the 15th business day of the month following the month in which the amounts were paid to or withheld by the employer. In this Notice, DOL announces that it will not take enforcement action with respect to a temporary delay in forwarding those contributions and loan repayments, as long as such delay is attributable to the COVID-19 emergency. Employers and service providers must act as soon as administratively practicable, and in the interest of the employees, to forward the delayed amounts.

Blackout Notices  

Currently, the administrator of an individual account plan is required to provide 30 days’ advance notice to participants and beneficiaries whose rights under the plan will be temporarily suspended, or restricted by a blackout period. The advance notice is triggered by a period of suspension or restriction of more than three consecutive business days on a participant’s ability to direct investments, obtain loans or other distributions from the plan. An exception to the advance notice requirement is provided when the inability to provide the notice is due to events beyond the plan administrator’s reasonable control. In this Notice, DOL announces that it will not take enforcement action with respect to a temporary delay in providing required blackout notices, including those required to be provided after the blackout period begins. The currently required written determination by a fiduciary for blackout notices will not be required during the COVID-19 emergency.

General ERISA Fiduciary Guidance

In this Notice the DOL provides that the guiding principle for plans must be to act reasonably, prudently, and in the interest of the covered workers and their families, including making reasonable accommodations to prevent the loss of benefits or undue delay in benefits payments. Plans should minimize the possibility of individuals losing benefits because of a failure to comply with the deadlines discussed above. The DOL’s approach to enforcement will emphasize compliance assistance and include grace periods and other relief where appropriate.

Questions? Please contact the Findley consultant you regularly work with or Sheila Ninneman at Sheila.Ninneman@findley.com, or 216.875.1927

Published on May 1, 2020

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Coronavirus Crisis Workforce Reduction Can Adversely Affect Retirement Programs

The coronavirus pandemic continues to ripple across the country and many organizations face several unprecedented, difficult decisions surrounding their workforce and the use of cash. While payroll-reducing strategies may be necessary during this time of substandard revenue, they may also present other costs or hurdles in the company’s pension, retiree medical, and retiree life insurance programs. Significantly changing employee demographics can trigger unexpected accounting, cash flow, and compliance issues that could be an unwelcome surprise given current market conditions.

State mandated stay-at-home orders not only reduce the ability for consumers to purchase, but also the need for employees to produce. For many industries, this means downsizing workforces and payroll at record levels via layoffs, furloughs, reductions in force, and salary cuts. However, in this time where management decisions are focused on the best positioning of their organization from “crisis” to “rebound” mode, it is important that pension and retirement programs are not placed on the back burner. 

Coronavirus Crisis Workforce Reduction Can Adversely Affect Retirement Programs

Identify and Prepare for Potential Consequences

A proactive analysis of an organization’s workforce reduction program, as well as the group of employees impacted, may help identify and prepare for the impact of some of these potential unintentional consequences due to coronavirus:

Curtailment Accounting Under U.S. GAAP

Curtailment accounting may be initiated when more than 5-10% of the plan’s active participants are impacted by a workforce reduction event such as layoffs or forced termination, or a reduction or elimination of future benefit accruals. The curtailment impact is an immediate recognition of a portion of unrecognized prior service costs and could also prompt an interim re-measurement at the time of the event, likely unfavorable given the current market environment. Curtailment accounting can increase the “below the line” expense for accounting for pension, retiree medical, and retiree life insurance plans under U.S. GAAP.

Settlement Accounting Under U.S. GAAP and Cash Concerns for Pension Plans Offering Lump Sums

Settlement accounting is set into motion when lump sum payouts exceed the service cost and interest cost components of net periodic pension cost during the fiscal year. This may be increasingly likely as laid off participants may access their pension benefits for their own financial security. The settlement impact is an immediate recognition of unrecognized gains and losses, and similar to curtailments, could also cause an interim re-measurement at the time of the event. 

In addition, while payroll reducing strategies may be advantageous for cutting current expenses, pension plans that offer lump sums upon termination could end up in a situation where the plan requires more cash in the future. Paying an increased number of lump sums to participants could force the pension plan to raise cash by selling equities at a time when the market is significantly depressed. Selling equity at market lows may inhibit the pension plan’s ability to recover in the long term. 

Benefit Enhancements and Plant Shutdown Liability under PBGC and ERISA

Benefit enhancements and plan shutdown liability may be triggered when either a facility closure impacts more than 15% of the plan sponsor’s active participants benefitting in any pension or defined contribution plan; or if the pension plan document provides for special shutdown benefits in any size closure. Special, enhanced shutdown benefits that can increase pension plan liability and plan costs may be required to protect employees close to retirement if defined in the plan document. In addition, the Pension Benefit Guaranty Corporation (PBGC) may require special reporting and accelerated cash contributions under ERISA 4062 for some underfunded pension plans. The PBGC also may require a special report under ERISA 4043 if the number of active participants is significantly reduced for any reason.

Vesting Enhancements under IRS Partial Pension Plan Termination

A partial pension plan termination may occur when more than 10-20% of the plan’s active participants are impacted by closing a facility or division, or from any higher turnover due to economic factors. Partial pension plan termination requires the plan sponsor to grant immediate vesting eligibility or face Internal Revenue Service (IRS) disqualification in the pension plan. This is ultimately an IRS decision based on facts and circumstances and might be avoided if the reduction is structured to furlough (not typically a formal separation) rather than permanently terminate employees. 

Increased Liability and Cash Requirements for Unfunded Retiree Medical Plans

Eliminating participants who are retirement eligible can lead to a spike in retiree medical claims costs and liabilities. Unfunded retiree medical plans “pay as you go” and do not have back-up trust assets to use toward claims in the event more participants begin retiree medical plan benefits sooner than expected. Retiree medical plans with early eligibility may be responsible for benefits over a much longer period than expected at a time when rates charged by insurers may also be increasing. Together, plan sponsors may see increased claim costs in 2021, as well as higher liability and net periodic benefit costs in fiscal 2021.

IRS Compliance Concerns Related to Passing Pension Plan Non-discrimination Testing

There is a likelihood for increased difficulty in obtaining favorable non-discrimination testing (NDT) results when there is a significant change in the demographics of the plan’s active employees. For example, NDT results will be less favorable when non-highly compensated employees (NHCEs) are forced to terminate at higher rates than highly compensated employees (HCEs) and also when salaries for NHCEs are reduced at higher levels than HCEs. Alternatively, workforce reductions impacting HCEs at higher rates could improve testing results.

Violation of Union Agreements and Debt Covenants

While not tied exclusively to workforce reductions, any decision that deviates from normal practice has a potential to violate established agreements with union contracts and debt covenants. Keep in mind, relief permitted by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) may not be permitted under current arrangements.

Minimum or Variable Interest Credit Rates for Cash Balance Plans

While interest crediting rates have already been set for most cash balance plans with calendar plan years, if low interest rates persist it could mean a significant drop in the crediting rate for 2021, possibly requiring the minimum interest crediting rate to apply. In addition, plans using variable interest crediting rates may see negative returns, making non-discrimination testing more difficult.   

Seek Guidance

The bottom line is this: the coronavirus crisis continues to evolve and any workforce strategy decision should be pursued with guidance from your actuary, auditor, or legal counsel. Early analysis may help your company prepare for retirement program concerns that may arise from implementation of the selected cost-saving payroll strategy. Contact your Findley consultant to discuss any workforce reduction program you may be considering to ensure all relevant issues are addressed.

Questions? For more information, contact the Findley consultant you normally work with, or contact Debbie Sichko at debbie.sichko@findley.com, or 216.875.1930

Published April 13, 2020

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Coronavirus Market Volatility and Pension Plan Contributions

The Coronavirus (COVID-19) pandemic’s impact on your family, friends and economy continues to unfold daily. Interest rates are down, and the equity markets are depressed and have been highly volatile. This economic situation will cause revenues of many plan sponsors to stagnate, which will drain cash reserves, and likely lead to layoffs. This is another “perfect storm” for the pension plan, which if the markets don’t normalize, will lead to much higher required pension contributions in the upcoming year. 

When revenues drop significantly, organizations will struggle to meet current and future funding obligations, as well as pay for essential plan operation services.

Seeking Federal Relief

Congress continues to work on additional funding relief and has recently released several changes impacting defined benefit plans.  However, additional relief measures may be contained in possible Phase 4 coronavirus legislation by early April. This relief will likely delay the impact of the current economic situation and allow plan sponsors to make lower contributions than they would have otherwise, but it likely will not permit sponsors to eliminate their long-term obligations. In other words, it will delay the impact of the current market conditions in hopes that the market will rebound after the coronavirus is under control. 

The Consequences for Late Contributions

If at all possible, plan sponsors will want to adhere to the required deadlines for contributions, both the quarterly requirements and any additional amount required by the final due date (8-1/2 months after the end of the plan year). This table shows the consequences for delayed quarterly contributions:

Contribution TimingPenalties
Less than 30 days lateInterest penalty at effective rate plus 5%
More than 30 days lateInterest penalty at effective rate plus 5%
Notification to PBGC**
More than 60 days lateInterest penalty at effective rate plus 5%
Notification to PBGC (due once contribution at least 30 days late)**
Notification to all plan participants

*Approximately 10% payable to the Trust as additional required contributions
**Generally, there is a waiver of the notification for late or missed quarterly contributions if the plan has less than 100 participants.  However, regardless of the size of the plan, the PBGC must be notified if a final minimum required contribution is missed.

Plan sponsors must meet the total required plan year contribution by the final due date, which is 8-1/2 months after the end of the plan year. There is no grace period for this contribution. Organizations that miss this deadline will experience:

  • Disclosure of an unpaid minimum on the U.S. Department of Labor’s Form 5500
  • Interest and penalties beginning immediately
  • An excise tax of 10% of the missed contribution, which is payable on the due date of the final contribution (for plans with a calendar plan year, the deadline for the final 2019 plan year contribution is September 15, 2020 and the deadline for the final 2020 plan year contributions is September 15, 2021), with interest accruing until paid. This tax is paid to the IRS and cannot be paid from plan assets.

Funding Waiver Requests

Organizations that experience temporary business hardship due to the Coronavirus’s (COVID-19) impact on the economy may consider applying to the Internal Revenue Service (IRS) for a funding waiver. However, under current law, it is generally cost prohibitive for smaller plans. The IRS user fee is approximately $30,000, which does not include the cost to prepare the request. Also, the waiver does not eliminate the required contribution, but merely allows you to amortize the payment over five years.

The application process for a funding waiver is onerous as organizations must provide extensive information about the company’s financial condition, the pension plan, as well as share details about executive compensation arrangements. In addition, notifications of the waiver request must be sent to plan participants, and the company must consider comments they receive from participants. The IRS also coordinates with the PBGC as it reviews funding waiver requests, seeking analysis and recommendations from the PBGC.

Maintaining Pension Plan Operations

For organizations whose cash flow is being dramatically impacted by the steps being implemented to fight the coronavirus, there are ways to continue essential services of the plan. Fees for most plan operations can be paid from plan assets. Essential services of the plan include:

  • Initiating new retirements or payments to beneficiaries
  • Paying lump sum benefits
  • PBGC insurance premiums
  • Plan audits
  • ERISA counsel services including plan documents and amendments
  • Government form filings
  • Actuarial counseling services
managing pension plan operations during coronavirus market volatility

It’s important to remember that this is a one-year deferral of the cash expense since fees paid from plan assets are generally added to the following year’s minimum required cash contribution. Consult with your ERISA counsel about paying any fees from plan assets as services that are essential to the employer, but not the plan, are generally not payable from plan assets.

Other Ways to Reduce Contributions?

For plan sponsors who deposited contributions in excess of minimum requirements in the past, a prefunding balance or a carryover balance may be available to be used to offset all, or a portion of, a future contribution requirement. A formal election to create or add to the prefunding balance must be made, and there still may be time to do this related to last year’s contribution.  

Plan sponsors with cash flow concerns may consider options of freezing benefits or reducing benefits in order to reduce future contributions. If participants are currently earning new benefits (i.e., your plan is not currently frozen) an organization may be able to amend the plan to eliminate (i.e. freeze) or reduce benefits before they are earned in 2020.

This may not eliminate the required contribution for 2020, but it will reduce it by the value of the benefits that were expected to be earned. However, in order to freeze or reduce the current year’s benefit, the organization must amend the plan before any participant completes the required number of hours during the plan year (typically 1,000 hours, but varies by plan design). 

Freezing or reducing plan benefits requires a plan amendment and a participant notification. Plans with at least 100 participants require at least a 45-day notice before benefits can be reduced or eliminated. Plans with less than 100 participants only require at least a 15-day notice period. For plan sponsors who are considering reducing 2020 plan year benefits, time is of the essence to amend your plan and distribute the proper notification within the timing guidelines.

Eliminating or reducing plan benefits is a tough decision. There are issues other than cash contributions to consider before making a move, including possible financial statement impact (i.e., ASC715 curtailment expense, if applicable) and human resource/employee relations implications.

Questions regarding contribution options for your defined benefit pension plan, contact the Findley consultant you normally work with, or Keith Nichols at KeithNichols@findley.com or 724.933.0631 or Wesley Wickenheiser at Wesley.Wickenheiser@findley.com or 502.253.4625

Published March 26, 2020

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Breaking Down the Secure Act – Required Minimum Distributions

Benefits experts are still poring through the SECURE Act’s various mandated provisions, optional provisions, and effective dates, some of which may be retroactive. This series of articles will break down the implications that the Act has for existing tax-qualified retirement plans. This article will focus on the Act’s impact on required minimum distributions (RMDs) for both defined benefit and defined contribution plans. Related articles will address (1) changes that impact 401(k) and other defined contribution plans only, (2) changes for defined benefit plans only; and (3) other changes to the retirement plan landscape.

Remedial Amendment Period

Plan sponsors generally have until the last day of the 2022 plan year to adopt amendments that reflect the Act’s required revisions.  For calendar year plans the last day is December 31, 2022. Governmental plans have until the 2024 plan year to amend. Remember that operational compliance is still required during the period from the effective date for the Act’s required changes and the date the plan is amended.

Delay of Lifetime RMDs – MANDATORY

Prior law: Distributions from an eligible employer retirement plan must be made by April 1 of the calendar year following: (a) the calendar year in which the participant turns age 70-1/2, or (b) for a participant who is not a 5% owner, the calendar year in which he or she terminates employment after age 70-1/2.

Under the Act: The required age for RMDs is raised from 70-1/2 to 72. Participants who are not 5% owners and who work beyond the required age for RMDS, under the Act still don’t trigger RMDs until the calendar year in which they retire. The Act did not change the way in which 5% owners are determined. In addition, post-death distributions to a participant’s surviving spouse are not required to begin before the calendar year in which the participant would have obtained age 72 (formerly 70-1/2). 

Effective date: The new age applies to employees who turn age 70-1/2 after December 31, 2019; that is, for those born after June 30, 1949. For those born on or before June 30, 1949 (already obtained age 70-1/2 prior to January 1, 2020), the prior law applies.

What to do and when: Plan sponsors should work with their service providers to track two populations: those born on and before June 30, 1949 (for whom age 70-1/2 is the RMD trigger date), and those born after that date (for whom age 72 is the RMD trigger date). Distributions of RMDs for the latter population therefore need not begin until April 1 of the calendar year following the year they attain age 72.

This change to tax-qualified retirement plans will necessitate updates to distribution forms, SPDs, 402(f) notices, and participant communications.

Post-Death RMDs are accelerated – MANDATORY

Prior law: In general, distributions are permitted to be paid annually over the beneficiary’s life expectancy. In general, if the participant died before RMDs began, distributions could be made at various times, provided the entire account was distributed by the end of the fifth year following the participant’s year of death.

Under the Act:  Following the death of the participant, distributions must generally be made by the end of the 10th calendar year following the year of death. The determination of the 10-year period is presumably calculated in the same way that the 5-year period was calculated. Payments can be made over the beneficiary’s life expectancy provided the beneficiary is an “eligible designated beneficiary”, which can be the surviving spouse, a disabled/chronically ill individual, a minor child of the participant or a beneficiary no more than 10 years younger. Prior rules still apply to a beneficiary that is not a “designated beneficiary”.

Effective date: The rule regarding the acceleration of post-death RMDs is effective for deaths that occur after December 31, 2019. Special delayed effective dates apply to collectively bargained and governmental retirement plans. 

What to do and when: Sponsors of tax-qualified retirement plans should be working with their service providers to implement these rules now.

This change will impact beneficiary designation forms, distribution forms, SPDs and other participant/beneficiary communications.

Special Note for Defined Benefit Pension Plans

The Act does not change actuarial increases required by Internal Revenue Code 401(a)(9)(C).  For individuals who continue working and choose to retire late, a defined benefit plan must provide actuarial increases beginning at age 70-1/2.  

General Thoughts

Commentators anticipate IRS guidance to provide self-correction relief for plans that fail to implement the new rules correctly during the remedial amendment period and clarify the Act’s impact on current regulations. Tax-qualified plan sponsors considering an amendment prior to the remedial amendment deadline, for the sake of clarity for itself and its service providers, may want to wait to see how further guidance may affect that amendment.

Questions? Please contact the Findley consultant you regularly work with or Sheila Ninneman at Sheila.Ninneman@findley.com, or 216.875.1927.

To learn more about the passage of the Secure Act and changes to retirement plans, click here

Published March 19, 2020

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Year-End Spending Bill includes the SECURE Act and other Retirement Plan Changes

Featured

With the passage of the 2020 federal government spending bill less than a week before Christmas, Congress has gifted us with the most significant piece of retirement legislation in over a decade. This newly enacted legislation incorporates the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) that was overwhelmingly passed by the House of Representatives earlier this year but never considered by the Senate. The spending bill even has a few additional retirement-related tidbits that were not part of the SECURE Act.

Here are some of the key changes:

Frozen Defined Benefit Plan Nondiscrimination Testing

Currently- Defined benefit plans that were frozen to new hires in the past and operate with a grandfathered group of employees continuing to accrue benefits have ultimately run into problems trying to pass nondiscrimination or minimum participation requirements as the group of benefiting employees became smaller and normally higher paid. This problem for frozen defined benefit plans has been around for a while and the IRS has been providing stop-gap measures to deal with it every year.

Effective as of the date of enactment of this legislation and available going back to 2013 – plans may permit the grandfathered group of employees to continue to accrue benefits without running afoul of nondiscrimination or minimum participation rules so long as the plan is not modified in a discriminatory manner after the plan is closed to new hires. This special nondiscrimination testing relief also extends to:

  • defined benefit plans that close certain plan features to new hires,
  • defined contribution plans that provide make-up contributions to participants who had benefits in a defined benefit plan that were frozen.

Increasing the 10% Limit on Safe Harbor Auto Escalation

Currently – a safe harbor 401(k) Plan with automatic enrollment provisions cannot automatically enroll or escalate a participant’s contribution rate above 10%.

Effective for Plan Years beginning after Dec. 31, 2019 – the 10% cap would remain in place in the year the participant is enrolled but the rate can increase to 15% in a subsequent year.

Simplifying the Rules for Safe Harbor Nonelective 401(k) Plans

Currently – All safe harbor plans must provide an annual notice prior to the beginning of the year that provides plan details and notifies employees of their rights under the plan. Also, any plan sponsors that want to consider implementing a safe harbor plan generally must adopt the safe harbor plan provisions prior to the beginning of the plan year.

Effective for Plan Years beginning after Dec. 31, 2019 – the notice requirement for plans that satisfy the safe harbor through a nonelective contribution has been eliminated. Also, sponsors can amend their plan to become a nonelective safe harbor 401(k) plan any time up until 30 days prior to year-end. The safe harbor election can even be made as late as the end of the next year if the plan sponsor provides for at least a 4% nonelective contribution.

Open Multiple Employer Plans (Open MEPs)

CurrentlyMultiple employer plans (MEPs) are legal and actually quite common, but a couple of limitations have stunted the development of a concept called open MEPs. An open MEP is a situation where the employers within the MEP are not tied together through a trade association or some common business relationship. In 2012 the DOL issued an Advisory Opinion provided that a MEP made up of unrelated employers that did not have “common nexus” must operate as a separate plan for each of these unrelated employers and not as a single common plan. This advisory opinion took away much of the perceived advantages of operating an open MEP. Additionally, the IRS has followed a policy that provides if one employer within the MEP makes a mistake, that the error can impact the qualified status of the entire plan; this is known as the “one bad apple” rule, this policy is clearly a negative selling point for any plan sponsor that might consider signing up to participate in a MEP.

Effective for Plan Years beginning after Dec. 31, 2020 – the “common nexus” requirement and the “one bad apple” rule are eliminated. The new open MEP rules provide for a designated “pooled plan provider” that would operate as the MEPs named fiduciary and the ERISA 3(16) plan administrator. The open MEP will be required to file a 5500 with aggregate account balances attributable to each employer. These changes are expected to create a market for pooled plans that will offer efficient retirement plan solutions to smaller plan sponsors.

Required Minimum Distribution Age Now 72

Currently Required Minimum Distribution from a qualified plan or IRA must begin in the year the participant turns 70 ½.

Effective for Distributions after 2019, with respect to individuals who attain 70 ½ after 2019. – This is a simple change to age 72 for computation purposes, but note the effective date means that if the participant is already subject to RMD rules in 2019 they remain subject to RMDs for 2020 even though the person may not be 72 yet. Also, plan sponsors should be aware that distributions made in 2020 to someone that will turn 70 ½ in 2020 will not be subject to RMD rules and therefore would be eligible for rollover and subject to the mandatory 20% withholding rules.

Increase Retirement Savings Access to Long-Term Part-Time Workers

Currently– Plans can exclude employees that do not meet the 1,000 hours of service requirement

Effective for Plan Years beginning after Dec. 31, 2020 – Plans will need to be amended to permit long-term part-time employees who work at least 500 hours over a 3 year period to enter the plan for the purpose of making retirement savings contributions. The employer may elect to exclude these employees from employer contributions, nondiscrimination, and top-heavy testing.

Stretch IRAs are Eliminated

Currently– If Retirement plan or IRA proceeds are passed upon death to a non-spouse beneficiary; the beneficiary can set up an inherited IRA and “stretch” out payments based upon the beneficiary’s life expectancy. Depending upon the age of the beneficiary and the size of the IRA this strategy potentially provided significant tax advantages.

Effective for distributions that occur as a result of deaths after 2019 – Distributions from the IRA or plan are generally going to need to be made within 10 years. There are exceptions if the beneficiary is (1) the surviving spouse, (2) disabled, (3) chronically ill, (4) not more than 10 years younger than the IRA owner or plan participant, or (5) for a child that has not reached the age of majority, the ten year rule would be delayed until the child became of age.

Increased Penalties for Failure to File Retirement Plan Returns and Other Notices

Current Penalty Structure:

Failure to file Form 5500$25 per day maximum of $15,000
Failure to report participant on Form 8955-SSA$1 per participant, per day maximum of $5,000
Failure to provide Special Tax Notice$10 per failure up to a maximum of $5,000

New penalty structure:

Failure to file Form 5500$250 per day maximum of $150,000
Failure to report participant on Form 8955-SSA$10 per participant, per day maximum of $50,000
Failure to provide Special Tax Notice$100 per failure up to a maximum of $50,000

Other Retirement Plan Changes Effective for Years Beginning After December 31, 2019

  • Phased retirement changes – defined Benefit Plans can be amended to provide voluntary in-service distributions begin at age 59 ½, down from the current age 62 requirement.
  • Start-up credits – the cap on tax credits that small employers (up to 100 employees) can get for starting up a new retirement plan has gone up from $500 to $5,000.
  • Auto-Enroll credits for small employers – small employers can get an additional $500 tax credit for adopting an automatic enrollment provision.
  • More time to adopt a plan – currently a qualified plan must be adopted by the end of the employer’s tax year to be effective for that year. The new rule will permit a plan to be adopted as late as the due date of the employer’s tax return for the year.
  • Plan annuity provisions – in recognition that defined contribution plans typically do not offer lifetime income streams two changes have been added to encourage in-plan annuity options.
    • A fiduciary safe harbor standard that if followed, would protect plan sponsors from potential liability relating to the selection of an annuity provider.
    • Plans may permit tax-advantaged portability of lifetime income annuity options from one plan to another.
  • 403(b) changes include providing a mechanism for the termination of a 403(b) custodial account and clarification that non-qualified church controlled organizations (e.g. hospitals and schools) can participate in Section 403(b)(9) retirement income accounts.
  • Penalty free distribution for birth or adoption expenses – up to $5,000 could be distributed from a defined contribution or 403(b) plan to cover costs relating to birth or adoption of a child.
  • Special tax penalty relief and income tax treatment for distributions for qualified disaster distributions from qualified plans up to $100,000.  Additionally, plan sponsors can permit the $50,000 participant loan limit to be increased to $100,000 with increased repayment periods for participants that suffered losses in a qualified disaster area.

Other Changes with a Delayed Effective Date

  • Lifetime income disclosure – this provision will require a defined contribution plan to provide all participants with an annual statement that discloses the projected lifetime income stream equivalent of the participant’s account balance.  This requirement will become effective for benefit statements furnished one year after applicable DOL guidance has been issued that will be necessary to provide the prescribed assumptions and explanations that will be used to create this disclosure.
  • Combining 5500 – IRS and DOL have been directed to permit a consolidation of Form 5500 reporting for similar plans. Defined contribution plans with the same trustee, same-named fiduciary and same plan administrator using the same plan year and same plan investments may be combined into one 5500 filing. This is scheduled to begin no later than January 1, 2022, for 2021 calendar plan year filings.

What to Do Now

Obviously the SECURE Act is bringing a lot of changes to retirement plans. Many of the operational aspects to this new retirement legislation will need to be implemented immediately, in particular, tax withholding related items that will change in 2020 will necessitate plan sponsors and their recordkeepers act immediately to review tax withholding and distribution processes. Plans do have until the end of the 2022 plan year to adopt conforming amendments to their documents. The amendment deadline is the 2024 plan year for governmental plans.

If you have any questions about the SECURE Act and this new retirement plan legislation we encourage you to contact the Findley consultant you normally work with, or contact John Lucas at 615.665.5329 or John.Lucas@findley.com.

Published December 23, 2019

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