Defined Benefit Pension Plan Contributions: To 2021 and Beyond

While so many people across the country are looking forward to the end of this calamitous year – believing that 2021 will offer remedies for a global pandemic and an ailing economy, plan sponsors now should be plotting a strategy for the upcoming year and beyond. The Federal Reserve’s recent statement of “lower interest rates for longer” impacts defined benefit plan sponsors as they determine an approach to plan contributions – not just for 2021, but likely the next few years. Navigating a possible multi-year stretch of lower interest rates will be challenging for defined benefit pension plan sponsors, particularly for organizations feeling the effects of a pandemic-induced recession.

Forecast to Move Forward

This is an unusual recession, where the economic impact of the pandemic is varied. A number of industries are suffering, while others are seeing strong growth.  Certain manufacturers, supermarkets and online retailers, video conferencing firms and other companies enabling remote work have reported robust sales in recent months. The hospitality and entertainment industries, auto manufacturers and their suppliers, and numerous sectors of retail and manufacturing industries have been especially impacted through this pandemic.

Steering safely forward will require forecasting and guidance from the plan’s actuaries, and the first discussion with your actuary should focus on how the organization is currently faring. Organizations that have been hurt financially are likely to experience a “double whammy” as the company’s income drops and required contributions to their defined benefit pension plan increase.

Defined Benefit Pension Plan Contributions Forecast Chart

2020 Plan Contributions vs 2021 Cash Flow

Key to the contribution strategy conversation is determining how much the organization can afford to contribute. Some plan sponsors may choose to defer required 2020 plan contributions to January, 2021, while those companies having a good financial year may opt to contribute on the normal schedule, and may also contribute more than the required amount.

The decision to defer 2020 plan contributions, effectively at least doubling their contribution requirements in 2021, should be made only after weighing the pros and cons. Deferring may give the company time to come up with the funds needed, but the deferral may strain the organization’s cash flow with a large lump sum contribution coming due at the beginning of next year and other plan contributions required through 2021. Forecasting the organization’s financial picture is essential and it’s important to get answers to these questions in determining the contribution strategy:

  • When will the company’s cash flow improve?
  • How will our business be affected if another partial shutdown occurs and the economy continues to falter over the next nine months?
  • Should the organization finance its plan contributions now to either accelerate or avoid deferring future funding?
  • If plan contributions are deferred, can the lump sum contribution and other plan contributions be paid later from cash flow, through borrowing, or a combination?
  • Beyond the contribution impact, are there other impacts to the plan or the organization, such as PBGC premiums, by deferring or prepaying the plan contributions?

Look Beyond 2021

For most calendar year defined benefit plans, 2020 contributions will be lower than those required for the 2019 calendar year. Strong asset returns in 2019 resulted in that bit of good news, but plan sponsors should expect contributions to be higher for 2021 and beyond.

Economists are forecasting that the ripple effects of the pandemic on the economy will be widespread, taking several years to fully recover.  In light of an expected gradual recovery and the Fed’s message of ‘lower for longer’ interest rates, plan sponsors should anticipate having to manage their plans through a period of lower investment earnings and higher contributions, and understanding the reasonable range of contributions to expect is important.  Having a five- to ten-year contribution forecast that incorporates the economic outlook for the next several years will provide valuable insight on future contribution levels and help companies develop a longer-term funding strategy.

With low interest rates, plan sponsors have slowed down their annuity purchases from previous years, but some companies may consider offering a lump-sum window to their eligible participants to continue shrinking their obligations for their plans. These de-risking initiatives can create additional costs, so it’s important to understand the impact of these initiatives on future plan contributions before taking action. 

In addition, implementing a lump-sum window, not only needs to be fully explored with your actuarial team and legal counsel, the plan sponsor will also need to fully communicate the offer to participants to achieve the desired results. Support staff should be available to answer questions and assist participants with completing and submitting paperwork, if needed. During the pandemic, support should be virtual through call centers, microsites and other electronic meeting solutions.

Conclusion

As 2020 draws to a close, charting a course for DB plan contributions over the next few years is a wise decision that plan sponsors can make. Forecasting contribution levels, developing a contribution strategy, and implementing the plan are integral to moving forward as we experience “lower rates for longer”. Findley’s actuaries and consultants can offer guidance in developing defined benefit pension plan contribution strategies to navigate the return to normal.

Questions regarding what your plan’s contributions requirements for 2021 and beyond? Contact Tom Swain in the form below.

Published October 8, 2020

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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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Quarterly Contributions: To Delay or Not to Delay. PBGC Premium Savings Either Way

Looking for the silver lining in the clouds hanging over 2020? Through the CARES Act, defined benefit pension plan sponsors have a unique opportunity for significant savings in Pension Benefit Guaranty Corporation (PBGC) premiums. For plan sponsors who pay a PBGC variable premium based on their defined benefit pension plan’s unfunded liability, there are two options for premium savings – for those who have continued to make quarterly payments for the 2020 plan year, and for plan sponsors who expect to delay all 2020 contributions until December 31, 2020.

Quarterly Contributions: To Delay or Not to Delay. PBGC Premium Savings Either Way

Savings for Continuing Quarterly Contributions

Plan sponsors who have continued their 2020 plan year contributions will earn PBGC premium savings by reassigning the 2020 quarterly contributions to the 2019 plan year. Typically, this reassignment is not permitted unless there is an acceleration of the final 2019 contribution (due September 15, 2020 (calendar year)) to the first quarterly due date of 2020 (April 15, 2020 (calendar year)).

The CARES (Coronavirus Aid, Relief, and Economic Security) Act states that 2020 quarterly contribution funding deadlines for defined benefit pension plans have been extended to December 31, 2020. As a result, once the final 2019 plan year contribution is made, the 2020 quarterly contributions can be reassigned to the 2019 plan year. The savings to the variable rate premium is approximately 4.3 percent of the amount of contributions reassigned to the 2019 plan year.1

On September 21, 2020 the PBGC updated its guidance. Plan sponsors are no longer required to have contributions in the plan at the time of certification. While the usual filing due date of October 15, 2020 still applies (for calendar year plans), once contributions are made after that date, the plan sponsor can amend their filing and apply for a refund.

Updated to reflect PBGC Press Release Number: 
20-04

Savings through Delaying 2020 Contributions

A PBGC premium savings option also is available for plan sponsors who have planned to delay all 2020 contributions until December 31, 2020. Similar to above, the PBGC premium is still due October 15, 2020 (for calendar year plans). However, an amended filing can be prepared to receive a refund after the contributions are made by December 31, 2020.

The savings to the variable rate premium, in this case, would be about 4.3 percent of the amount of contributions reassigned to the 2019 plan year.

Choose a Strategy and Save

For example, assume that a plan sponsor has three required 2020 quarterly payments of $250,000. Implementing one of the strategies could bring nearly $32,000 in PBGC premium savings. There is some administrative work required to take advantage of these opportunities, but it’s not overwhelming and likely worth the effort.

The calculation to determine the amount of actual contributions and credit balance elections is complex and differs for each plan. To learn more about how your company’s defined benefit pension plan’s variable PBGC premium could be affected by either of these strategies, contact Larry Scherer in the form below.

Note: This article refers to dates for a calendar plan year, but the strategies also apply to non-calendar plan years.

1 Although the PBGC variable premium rate for 2020 is 4.5 percent of the unfunded pension plan’s liability, the premium saving is approximately 4.3 percent due to interest discounting of contributions.

Updated September 24, 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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Taking Public Sector Retiree Medical To The Next Level

Faced with the sobering reality of more than $1 trillion in unfunded retiree healthcare liabilities, public sector employers across the country are seeking a sustainable retiree health benefit solution. Their shift to relying on retiree health insurance exchanges will not be without challenges or concerns. One solution that is just starting to be used is to work with state legislatures and make benefit changes that allow public sector employees to convert unused sick leave into retiree health insurance credits.

Numerous plan sponsors for public sector organizations may already be using – or contemplating the use of — retiree healthcare insurance exchanges to facilitate purchase of pre-65 individual policies or Medicare supplemental benefits. As public sector employers review this option, they should consider issues that may arise if future cuts are made to retiree medical stipends. What will be the exchange-based solution?

Earlier this year, the Ohio Public Employees Retirement System (OPERS) announced that serious financial pressure will result in significant reductions in stipends for retiree health benefits. The cuts for pre-65 retirees may be as much as $400 per month and will affect retirees including police and fire department pensioners. Although the mandatory retirement age for a public safety officer may be 65, many police officers and firefighters retire well ahead of Medicare entitlement, because of health status and long service.

According to a January 16, 2020 cleveland.com article, the changes will reduce OPERS unfunded healthcare liabilities from $6.2 billion to $27 million. Officials from OPERS said the $11 billion healthcare fund was set to run out of money in 11 years, but with the changes that will be implemented beginning in 2022, the fund will be solvent for 18 years.

In addition to cutting premium subsidies for retirees in 2022, healthcare coverage will no longer be provided through OPERS. Retirees will receive an OPERS subsidy to be used toward the purchase of healthcare coverage through the healthcare marketplace.

public sector employers across the country are seeking a sustainable retiree health benefit solution

Look beyond HSAs

It is evident that there is an acute need for public sector employers to accumulate funds for retiree medical benefits while the plan participant is actively employed. While Health Savings Accounts (HSAs) provide an opportunity for employees to create a nest egg, implementing a qualified high deductible health plan for collectively bargained public sector groups remains a challenge. In addition, these high deductible plans are not immune to problematic healthcare trends, including how high cost specialty drugs can ravage an employer’s (and employee’s) health benefits budget.

An alternative to an HSA, Health Reimbursement Accounts (HRAs) do not need to be paired with a high deductible plan, but the employer contributions are typically modest and easily consumed by out-of-pocket medical, prescription drug, dental and vision expenses. For instance, according to Mercer’s 2018 National Survey of Employer Sponsored Health Plans, the median HRA annual contribution for those with single coverage was just $625.

A better mechanism is needed to establish funds for public sector retiree medical benefits – and the states of New York and Wisconsin may be on the right track. New York’s policy allows eligible state employees to cover some retiree health insurance costs with unused sick leave, while in Wisconsin, the Accumulated Sick Leave Credit Conversion Program allows state employees covered by the State Group Health Insurance Program to convert unused sick leave into credits to pay for health insurance when they retire. The credits cannot earn interest or be used to pay for insurance that is not part of the State Group Health Insurance Program.

Since most employers, public sector and private, are interested in reducing health care liabilities and not subsidizing retirees under their active employee health benefits plan, the Wisconsin approach – with some important tweaks — is an intriguing solution that should be considered in other states.

Retiree medical’s future: Sick leave conversion, HRAs and marketplace options?

First, the decision to convert unused sick leave into health insurance credits should be left to each retiring employee without triggering a taxable event. In 2005, the Internal Revenue Service (IRS) issued Revenue Ruling 2005-24 that allowed employers to use sick leave and vacation conversion programs to fund an HRA, as long as the employees did not have the option to take these converted amounts in cash. Then, in 2007, the IRS issued a Private Letter Ruling (PLR 200708006) indicating the sick leave and vacation conversion arrangement did not result in taxable income if the employer mandates what unused amounts would be converted to cash, contributed to the HRA, or used to pay other benefits.

In other words, the employee has no say in any of these important decisions.

Second, the retiree should not be forced into remaining in their former employer’s group health plan. They should have the ability to shop the insurance marketplace for a plan and medical provider network that meets their needs.

Third, the retiree should be able to decide how to spend the HRA funds. Even the new Excepted Benefit HRA unveiled last year by the Trump administration (where up to $1,800/year may be contributed by the employer) does not allow the HRA to be used to pay premiums for Medicare Parts B or D; individual health insurance (except for short-term limited duration insurance); group insurance coverage (except COBRA); or Medicare supplements or Advantage plans.

Although a traditional HRA or Retirement HRA may allow payment of premiums for Medicare or long-term care insurance; and if using a trust, accept employee/retiree after-tax contributions and accrue interest tax-free, there is still the issue that conversions of unused sick leave must be made on a mandatory basis by the employer. The employee cannot make such an election before retirement.

As state legislatures consider strategies to deal with the ever growing costs of providing retiree healthcare, the option of new legislation that would permit state and local governments to create sick leave conversion programs that would enable their retirees to use those funds to help pay for health insurance purchases on or off an insurance exchange. To give employees more control over the conversion to credits, there would have to be some changes to the employer’s  IRC 125 cafeteria plan.  The approach could provide a more sustainable bridge to Medicare for those public sector employees who retire before age 65.

We are interested in your thoughts about this topic. Please contact Bruce Davis with your comments and questions at Bruce.Davis@findley.com or 419.327.4133

Published March 24, 2020

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Are You Looking for Missing Participants?

The Department of Labor (DOL) continues to focus on missing participants in retirement plans. In recent years, the DOL, in conjunction with the Employee Benefits Security Administration (EBSA), has been auditing retirement plans and reinforcing the actions that plan sponsors must take to locate lost participants and pay the benefits due to them.

“There’s really no more basic fiduciary duty than the duty to operate the plan for the purpose of paying benefits, so falling down here is a serious matter,” explained Preston Rutledge, Assistant Secretary of Labor for EBSA, while speaking at a policy conference. “We can’t just look the other way.”

While formal guidance is primarily directed at terminating plans, DOL auditors still expect sponsors of active, ongoing plans to be routinely searching for missing participants. As mentioned in Pension & Invesments, Plan sponsors under DOL investigation have reported surprising positions taken by some DOL auditors, including:

  • Failure to find a missing participant is a breach of fiduciary duty.
  • A plan which forfeits funds back to the plan until a participant is found is engaging in a prohibited transaction.
  • Sponsors must document their efforts to find missing participants and should try different search methods every year.
missing participants for retirement plans

These Searches Make Sense

Aside from the DOL’s focus, there are a number of practical reasons plan sponsors should address lost participant accounts:

  • There are large amounts of money at issue. In fiscal 2018, the DOL reported recovering $807 million for terminated, vested participants in retirement plans.
  • Missing participants may prevent payment of required minimum distributions (RMDs), which may result in penalties to the employer and participant.
  • Missing participants may prevent payment of death benefits. This is another important reason to maintain up-to-date beneficiary election data.
  • Missing participants may prevent payment of annual cash-out distributions for balances under $5,000. When processed timely, these cash-outs help reduce the number of accounts for which the employer is paying its recordkeeping service.
  • Missing participants may delay plan terminations, requiring another year of audit and governmental filings.

In addition, sponsors should address uncashed checks on a consistent basis to avoid prohibited transactions related to income earned by the trustee on uncashed check accounts. While many recordkeepers and trustees issue periodic reports alerting the sponsor of outstanding checks, the sponsor must conduct an address search or request that those checks be reissued.

Current Guidance

While the retirement industry awaits formal guidance addressing active plans, plan sponsors can refer to prior guidance issued for terminating plans. This guidance offers recommended steps to document attempts to locate missing participants.

The DOL released Field Assistance Bulletin (FAB) 2014-01 listing the fiduciary duties related to missing participants in terminating 401(k) plans (and other defined contribution plans). It requires plan fiduciaries to take all of the following steps to search for missing participants:

  1. Send a notice by certified mail.
  2. Check related plan and employer records.
  3. Contact the participant’s named beneficiary.
  4. Use free internet search tools (such as search engines, public record databases, obituaries, and social media).
  5. If the fiduciary does not find the missing participant during the required steps above, the fiduciary must consider additional search methods that may involve fees (such as, fee-based Internet search services, commercial locator services, or credit reporting agencies). Sponsors may take into account the size of the account balance and may charge associated fees against the account.

Since 2014, other agencies have released similar guidance. The IRS issued a Memorandum in 2017 for when its Employee Plans (EP) examiners should not enforce penalties for missed RMD payments. This memo required the plan to take virtually the same search steps before concluding it would not or could not pay an RMD.

Similarly, when the Pension Benefit Guarantee Corporation (PBGC) expanded its Missing Participants Program to terminating 401(k) plans in 2018, it pointed to the guidance under FAB 2014-01 for its requirement to conduct a “diligent search” before reporting or transferring missing participant accounts to the PBGC.

Handling Small Balances

Many sponsors have adopted distribution provisions to promptly pay out terminated employees with small balances, which can help prevent participants from losing track of their accounts in the first place. The IRS requires balances between $1,000 and $5,000, which are distributed without the participant’s consent, to be rolled into a default IRA. Therefore, most 401(k) plans will only force-pay balances under $1,000 as true cash-out distributions. Even when these cash-outs are paid annually, some of the smallest checks may go uncashed, and end up on the list of “missing participants” to be dealt with another way.

Retirement Clearinghouse, LLC (RCH) recently received approval from the DOL for its Auto-Portability Program, which may help connect participants with their old accounts. This service identifies when an individual with a default IRA has opened a new plan account with a new employer. If the participant does not respond to two letters of notification, RCH then automatically transfers the default IRA into the new plan account. This way, the account follows the participant – even when they take no action. The DOL has given RCH a prohibited transaction exemption (for five years) on fees collected for facilitating rollovers of small balances.

Best Practices

It’s important to be diligent in monitoring the plan for uncashed checks or nonresponsive participants. The DOL has made it clear that this is a fiduciary duty of the plan sponsor. Service providers often can help identify accounts that may need special attention, so sponsors should coordinate efforts to establish proper procedures and designate an individual or team to ensure necessary follow-up efforts are taken

Consider the following questions. Do you:

  • Have a formal procedure for identifying missing participants?
  • Conduct a full plan review for missing participants at least annually? (Consider timing this review with another annual process, such as annual cash-out distributions.)
  • Review uncashed check reports from the trustee? (These are typically made available on a monthly or quarterly basis.)
  • Conduct address searches for returned checks?
  • Document the steps that are taken annually to locate missing participants?

Questions? Contact the Findley consultant you normally work with, or contact Laura Guin, CPC at 615.665.5420 or Laura.Guin@findley.com

Published March 18, 2020

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IRS Issues Proposed Regulations on Hardship Distributions

Just in time for 2019, the IRS has complied with a directive it was given by Congress in the Bipartisan Budget Act of 2018 (BBA 2018) and provided needed guidance on changes to 401(k) hardship withdrawal rules. These changes increase a participant’s access to hardship withdrawals and eliminate some burdensome administrative requirements. The guidance was issued in the form of proposed regulations. However, given the need 401(k) plan sponsors have to address these issues, it is reasonable to assume that the final regulations will not change much. Below is a summary of the guidance.

Deemed Immediate and Heavy Financial Need Safe Harbor

In determining whether a participant has incurred a hardship that would permit a withdrawal from a 401(k) plan, most plans follow the IRS safe harbor rules for determining what constitutes a deemed immediate and financial need. The newly proposed regulations modify this safe harbor list of expenses by:

  • adding “primary beneficiary under the plan” as an individual for whom qualifying medical, educational, and funeral expenses may be incurred. This updates the regulations to include a change made by the Pension Protection Act of 2006 that the IRS did not address in previous guidance.
  • modifying the expense listed in existing regulations that relates to damage to a principal residence that would qualify for a casualty deduction under Code Section 165 to eliminate, for this purpose, the new limitations to casualty loss deduction rules added by the Tax Cuts and Jobs Act, which required that the loss be attributable to a federally declared disaster.
  • adding a new type of expense to the list relating to expenses and losses incurred as a result of certain disasters if the participant’s principal residence or principal place of employment is in a federally declared disaster area.

Special applicability rule. Under a special applicability provision, the revised list of safe harbor expenses may be applied to distributions made on or after a date that is as early as January 1, 2018.

Distribution Necessary to Satisfy Financial Need Safe Harbor

Most 401(k) plans follow the IRS safe harbor rules for determining whether a distribution is necessary to satisfy the participant’s financial need rather than relying on the more complicated facts and circumstances test. Before 2019, IRS guidance provided that plans using this safe harbor had to:

  • require a participant first take out any plan loan that was available, and
  • suspend 401(k) contributions for a period of 6 months after a participant’s hardship withdrawal.

BBA 2018 specifically instructs the IRS to eliminate these two requirements from the safe harbor standard. The IRS responded to this directive by replacing the safe harbor and the facts and circumstances tests with one general standard for determining whether a distribution is necessary to satisfy a participant’s financial need. Under this new general standard:

  • a hardship distribution may not exceed the amount of an employee’s need (including any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution);
  • the employee must have obtained other available distributions under the employer’s plans; and
  • the employee must show that he/she has insufficient cash or other liquid assets to satisfy the financial need. A plan administrator may rely on such representation unless the plan administrator has actual knowledge to the contrary. The requirement to obtain this representation only applies to a distribution made on or after January 1, 2020.

Further information on suspensions – Although BBA 2018 makes the elimination of the 6-month hardship suspension effective January 1, 2019, the IRS clearly recognizes the administrative burden that some plans will face to implement system changes. Therefore, the IRS provides plan sponsors some flexibility in implementing the elimination of hardship suspensions as follows:

  • Plans may be amended to eliminate hardship suspensions on or after January 1, 2019.
  • The plan amendment may provide that all suspensions be immediately lifted (including for participants whose hardship suspension began in the second half of 2018). Alternatively, a plan may require that participants under a 6-month suspension have to complete that suspension period.
  • All plans must eliminate the 6-month suspension by January 1, 2020.

Expanded Sources for Hardship Distributions

The proposed regulations expand the sources of contributions that a plan may make available for a hardship withdrawal. After 2019, the amounts available may include QNECs, QMACs, safe harbor contributions, and earnings on all amounts available (including earnings on elective deferrals), regardless of when contributed or earned. This expansion of sources of funds available for hardship withdrawal is not a requirement. Plan sponsors may want to continue to limit the type of contributions available and whether earnings on those contributions are included.

403(b) Plans

The IRS generally extends these new hardship rules to 403(b) plans while noting that BBA 2018 did not actually amend Section 403(b)(11). Since Congress did not change the 403(b) plan rules, the IRS takes the position it has no authority to make certain changes to 403(b) plan rules. This results in a couple of operational differences between 401(k) and 403(b) plans with respect to these hardship changes:

  • Income attributable to 403(b) plans continues to be ineligible for hardship withdrawals; and
  • QNECs and QMACs that are held in a custodial account are not eligible for hardship withdrawal.

Applicability Dates

The proposed regulations generally apply to distributions made in plan years beginning after December 31, 2018. Certain special applicability rules are discussed above for (1) the safe harbor list of expenses and (2) suspensions.

The elimination of suspensions is the only required change made by these regulations and it must be done by January 1, 2020. The other rules that expand access to hardship withdrawals are optional provisions the plan sponsor can choose to change or leave as they are.

Plan Amendments

The IRS expects that if the proposed regulations are finalized as they have been proposed, plan sponsors will need to amend their plans’ hardship distribution provisions. Revenue Procedure 2016-37 specifies the deadline for amending a disqualifying provision. For example, for an individually designed plan that is not a governmental plan, the deadline for amending the plan to reflect a change in qualification requirements is the end of the second calendar year that begins after the issuance of the Required Amendments List that includes the change. A plan provision that is not a disqualifying provision, but is integrally related to a plan provision that is a disqualifying provision, may be amended by the same deadline applicable to a disqualifying provision. The annual Required Amendments List is generally issued each December.

A plan amendment that is related to the final regulations, but does not contain a disqualifying provision, including a plan amendment reflecting (1) the change to Code Section 165 (relating to casualty losses) or (2) the addition of the new safe harbor expense (relating to expenses incurred as a result of certain federally declared disasters), will be treated as integrally related to a disqualifying provision. Therefore, all amendments that relate to the final regulations will have the same amendment deadline.

Proposed Regulations, Subject to Change

This IRS guidance is in the form of proposed regulations that are subject to change. The IRS has requested public comments on the proposed regulations and will schedule a public hearing, if requested in writing by any person that timely submits written comments.

Questions? Contact the Findley consultant you normally work with or John Lucas at john.lucas@findley.com, 615.665.5329.

Posted November 30, 2018

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Using Actuarial Experience in Managing a Public Pension Plan

For government pension plan sponsors, regular analysis of the plan’s experience is a vital tool in the ongoing financial management of the plan. The experience analysis not only provides monitoring of recent trends, it is the basis for determining the forward-looking assumptions used in the actuarial valuations that measure the plan’s liabilities, funded status, accounting expense, and recommended contributions.

Regular experience analysis identifies emerging trends among the plan’s participants, the plan’s investment performance, and the current economic environment. We’ve seen the following general trends in recent years:

  • During the Great Recession (2008-2010), plan participants’ retirement patterns shifted to later retirement, particularly when there were changes in benefits or coverage under a post-retirement health benefits plan. Participant retirements are returning to historical patterns as the economy improves.
  • Participants are living longer in retirement, but not as much as originally expected. Government workers in public safety positions have not seen the increases in life span that employees in other government roles have experienced (e.g., teachers or general employees). A participant’s income level prior to retirement appears to be a better predictor of life expectancy than job role.
  • Low inflation has changed expectations for future investment performance; many investment advisors believe that the current environment is the ‘new normal’ for long-term inflation.

Monitoring changes in demographic, investment and economic trends is important, because the actuarial model should use the best estimates of future experience (the actuarial assumptions) to ensure integrity in the plan’s financial measurements. All stakeholders of a government entity rely on these measurements, but perhaps the most important is the individual taxpayer. The allocation of plan costs should be fair to current and future generations of taxpayers—which means that the actuarial assumptions used in determining the financial measurements should be the best estimates of expected future events.

The Government Finance Officers Association (GFOA), the Government Accounting Standards Board (GASB), and the actuarial profession have each issued standards regarding appropriate actuarial assumptions.   The GFOA has also published its recommendations on practices to enhance the reliability of the actuarial valuation; among these are regularly analyzing actuarial gains and losses and periodically performing actuarial experience studies.

How Should Plan Sponsors Monitor Actuarial Experience?

The GFOA recommends analyzing actuarial gains and losses with every valuation cycle, typically annually. The details of the experience analysis should reflect the plan’s specific circumstances, with economic and demographic factors analyzed separately, and the experience of more significant assumptions highlighted.

Experience monitoring over shorter periods provides real-time information on emerging trends; continuing the analysis over multiple years adds more value by identifying longer-term trends in pension plan experience. The value of a long-term approach can be seen in the research article ”How Did State/Local Plans Become Underfunded” by the Center for Retirement Research at Boston College. This article details the actuarial experience in the Georgia Teachers’ Retirement System (TRS) over a 12-year period and illustrates how actuarial experience ultimately affected the Georgia TRS.[i]

When Should a Formal Experience Study Be Performed?

Ongoing experience analysis may suggest the need for a more in-depth, formal experience study. The experience study can then be the basis for decisions to modify the plan’s actuarial assumptions. An experience study looks at all of the demographic, investment and economic factors that make up the total experience for the plan. Also, the experience study reviews experience over a longer period (typically three to five years).

Some plan sponsors perform an actuarial experience study regularly while others perform studies as circumstances arise, such as after significant plan events, changes within the government entity, or changes in the economy.

Using the Experience Study in Setting Assumptions

The plan sponsor, guided by their actuary, uses an experience study as a key reference point in making assumptions regarding future experience. Each assumption chosen should reflect a combining of recent experience, experience over a longer period of time, as well as expectations for the future. The actuarial experience study can be used to blend the plan’s experience with national experience tables from the Society of Actuaries, or indicate which national experience tables are most appropriate.

In Perspective

Successful financial management of a public pension plan is a recurring process of financial forecasting based on the best available information. Ongoing experience analysis and experience studies gives the plan sponsor and actuary the needed information to best ensure the integrity of plan financial measurements. The bottom line: this process results in less volatile contributions in the short-term, and provides greater generational equity among taxpayers for the long-term.

Questions to Ask Your Actuary

WHEN WAS THE MOST RECENT ACTUARIAL EXPERIENCE STUDY PERFORMED FOR THE PLAN?
ARE THERE SPECIFIC ACTUARIAL ASSUMPTIONS THAT ARE ON YOUR WATCH LIST FOR FUTURE CHANGES?
DOES THE PLAN HAVE ENOUGH DATA FOR THE EXPERIENCE TO BE RELIABLE (I.E., STATISTICALLY CREDIBLE)?
DO RECENT EXPERIENCE ANALYSES (I.E., GAINS AND LOSSES) INDICATE A NEED FOR AN EXPERIENCE STUDY?

Questions? For additional information about experience analysis and experience studies, contact the Findley consultant you normally work with, or Brad Fisher at Brad.Fisher@findley.com, 615.665.5316.

[i] Alicia H. Munnell, Jean-Pierre Aubry, and Mark Cafarelli, “How Did State/Local Plans Become Underfunded?” State and Local Pension Plans 42 (Center for Retirement Research at Boston College, January 2015). http://crr.bc.edu/wp-content/uploads/2015/01/slp_42.pdf, accessed June 20, 2018.

Posted October 23, 2018

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Co-Fiduciary: The Importance of an Independent Investment Advisor

Fiduciary—it’s a word that keeps retirement plan sponsors up at night. With so much buzz around fiduciary duties in the past few years, organizations, large and small, have moved towards relying on outside organizations to assist with fiduciary responsibilities. One important partner a plan sponsor can lean on is an independent retirement plan investment advisor to ensure your plan is providing quality investments and paying reasonable fees.

 

According to the PLANSPONSOR 2016 Defined Contribution Study, 68% of all plans utilize the services of a financial advisor or institutional retirement plan consultant. Why, you may ask? An independent investment advisor can:

  • Limit liability – per the Department of Labor (DOL), the fiduciary (plan sponsors and their committees) retains the responsibility for selecting and monitoring the investment alternatives that are made available under the plan. By engaging an advisor, you can share that fiduciary duty.
  • Give independent guidance – relying on your recordkeeper’s standard lineup may be a conflict of interest if proprietary funds are included. An advisor can help you avoid this conflict of interest by providing guidance on which funds to include based on objectives, expenses and performance.
  • Provide expertise – usually committees/plan sponsors don’t have the time or expertise in fulfilling the role of investment expert. Hiring an advisor does not eliminate your fiduciary responsibilities, but if you do your due diligence in hiring a reputable advisor, you can rely on their expertise as a co-fiduciary.

What should an advisor do for me?

If you are currently getting investment ‘advice’ through your bundled provider, you may be wondering what exactly you are paying for and why you may need an independent advisor. A good investment advisor will have the experience, client references, and reputation in the retirement plan market and will take a consultative approach to determine and monitor the most appropriate investments for the plans and the participants. You can expect that your advisor will:

  • Provide training regarding what a fiduciary is and what the committee/plan sponsor’s responsibilities are as a fiduciary.
  • Develop and maintain a plan’s Investment Policy Statement (IPS).
  • Select investment funds based on performance, expense, and risk tolerance.
  • Monitor fund performance in compliance with the IPS.
  • Benchmark plan fees.
  • Assist in negotiating fees and optimizing your recordkeeper’s services. By working with advisors that are dedicated to the retirement plan industry, they will add more leverage to the conversation because they know the fees and services your providers may offer their other clients of similar size and demographic.
  • Facilitate committee meetings (including taking minutes).
  • Keep the committee/plan sponsors apprised of
    developments in the retirement plan marketplace
    and trends in plan design and administration.
  • Assist with the participant education and
    communication strategy working in tandem with your
    recordkeeper.

How do I find an advisor?

To find an independent advisor that is a good fit for your plan, a Request for Proposal (RFP) is a good tool to evaluate advisors. RFP questions should be carefully selected to ensure the responses help highlight advisor’s strengths in the areas most important in meeting the committee/plan sponsor’s objectives.

Advisors selected to receive the RFP should be advisors dedicated to the retirement plan industry, have a book of business with plans similar in size to your plan, and have the resources to assist with the level of participant education and communication needed by plan participants. Don’t ever make the final selection based
solely on fees. Fees are commonly negotiated. Once the advisor field has been narrowed, the committee/plan sponsor should select a few advisors to meet in person and hear about their value proposition directly from the advisor’s team. Personality and personal connection are important since you will be sitting across the table from the advisor every quarter.

Questions or interested in finding an advisor for your plan, but don’t know where to start? Contact the Findley consultant you normally work with or contact Kathy Soper at Kathy.Soper@findley.com or 419.327.4106.

Posted September 11, 2018

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