2012 Legal Update On Issues Affecting Retirement Plans

Report
2012 Legal Update On Issues
Affecting Retirement Plans
Church Benefits Association Annual Meeting
Indianapolis, Indiana
November 28, 2012
Danny Miller
Conner & Winters, LLP
1627 I Street NW, Suite 900
Washington, D.C. 20006
L EGISLATIVE A CTIVITY
CHURCH ALLIANCE LEGISLATION
Church Plan Clarification Act (H.R. 4050/S. 3532)
•
Correction of problem relating to application of
controlled group rules to non-QCCOs.
•
Provision to allow transfers between 403(b)(9) and
401(a) plans.
•
Provision to preempt state wage withholding laws,
permitting auto-enrollment for church pension
plans.
•
Remedy for 415 limit problem that applies to 403(b)
defined benefit plans.
•
Provision to clarify the ability of 403(b)(9) plans to
invest in 81-100 trusts.
SECURITIES LAW AMENDMENTS
Stable Value Fund Legislation (H.R. 33)
•
In 2004, the securities laws were amended to
permit church plans to invest in collective trusts.
•
In 2009, counsel for several investment firms
raised a concern about whether the 2004
legislative language works for church 403(b) plans
or for church retirement plans with participants
who are self-employed ministers.
•
Legislation was passed by Congress and signed
into law by President in July.
A new issue has emerged . . .
•
R EGULATORY A CTIVITY
UPCOMING GUIDANCE
• When will revenue procedure updating
Employee Plans Compliance Resolution
System (“EPCRS”) on 403(b) plan corrections
be issued?
• When will revenue procedure on 403(b)
prototype be issued?
Note: These revenue procedures have been “in
clearance” at IRS and Treasury for more than a
year.
PUERTO RICAN PLAN ASSETS
•
Plan with Puerto Rican participants must qualify under
Puerto Rican tax laws.
•
Solutions:
–
Dual qualified plan.
–
Transfer assets to Puerto Rican plan.
•
Transfer creates taxable event for participants. But
Notice 2012-6 provides transition relief through 2012
for transfers from 401(a) qualified plan to Puerto Rican
plan.
•
No transition relief for transfers from 403(b) plans to
Puerto Rican plan.
•
Possible additional solution: 403(b)(9) plan qualified in
Puerto Rico.
HURRICANE SANDY
•
Announcement 2012-44 – IRS relief to plan participants
who have been adversely affected by Hurricane Sandy:
–
Streamlined loan procedures and liberalized hardship
distribution rules
–
Available to participants who live or work in
designated disaster areas; person who lives outside
the disaster area can take loan or hardship
distribution and use it to assist dependent who lived
or worked in the disaster area.
–
Loan or hardship distribution must be made no later
than 2/1/2013.
–
Relief available to 403(b) and 401(a) plans.
FEE DISCLOSURE REGULATIONS
•
Two sets of regulations:
– Disclosures from service providers to plan
(regulations effective July 2012).
– Disclosures from plan administrators to
participants (regulations effective August
2012).
•
•
Regulations apply to ERISA-covered plans only.
Query: Should church plans obtain service provider
disclosures and provide fee disclosures to
participants?
INVESTMENT ADVICE REGULATIONS
•
Final investment advice regulations became effective
December 27, 2011.
•
Two types of exemptions available under regulations:
•
– Fee leveling.
– Computer model.
Conditions applicable to both exemptions include:
– Advice program must be authorized by fiduciary
unrelated to advisor.
– Program must take into account fees and
expenses.
– Annual independent audit required.
– Written disclosure to plan participants required.
INVESTMENT ADVICE REGULATIONS
• Investment advice regulations apply to ERISAcovered plans only
• But what is liability/risk to church plans that
offer investment advice?
– Church plans not subject to ERISA.
– Church plans not subject to securities laws.
– Potential fiduciary liability under state law.
H OUSING A LLOWANCE
HOUSING ALLOWANCE LITIGATION
• Freedom From Religion Foundation v. Geithner
– First Amendment challenge to the income
tax exclusion for minister’s housing
allowance.
– United States filed a motion to dismiss for
lack of standing.
– On August 29, 2012, the District Court
denied the United States’ motion to dismiss,
allowing the case to move forward.
HOUSING ALLOWANCE LITIGATION
• Driscoll v. Commissioner (Tax Court January
2011)
– Minister is entitled to claim housing
allowance for both his primary residence
and vacation home.
– Decision was appealed to U.S. Court of
Appeals for the 11th Circuit, which reversed
lower court decision.
U NCLAIMED P ROPERTY L AWS
UNCLAIMED PROPERTY LAWS
•
Pension plans with missing participants and
beneficiaries who have not filed claims or for whom
there is no available current address – do state
unclaimed property laws apply?
•
Unclaimed property laws require plans to turn over
property to the state for safekeeping until a claimant
appears.
•
Some states have adopted versions of the Uniform
Unclaimed Property Acts while others have not; laws
are constantly changing.
UNCLAIMED PROPERTY LAWS
Uniform Unclaimed Property Act:
•
Covers all “holders” – i.e., institutions that are
“obligated to hold for the account of or deliver or pay to
the owner property subject to the [Act].”
•
Covered property includes:
– Fixed and certain interest in intangible property.
– Amounts due and payable under the terms of an annuity
or insurance policy.
– Amounts distributable from a trust or custodial fund
established under a plan to provide pension or retirement
benefits.
– Property that is “abandoned” or “presumed abandoned.”
UNCLAIMED PROPERTY LAWS
Uniform Unclaimed Property Act
•
Property in pension plan is “presumed
abandoned” 3 years after the earliest of the date
of distribution or attempted distribution, or the
date of the required distribution as stated in the
plan or as may be required by law.
UNCLAIMED PROPERTY LAWS
Compliance issues:
•
Most states require annual report identifying all
abandoned property.
•
Most states require holder of unclaimed property to
turn that property over to the state.
•
Penalties and/or interest can be imposed if the
required report is not filed or the unclaimed property
is not turned over to the state.
•
More states are using “inactivity” as a trigger for
reporting requirement.
DC P LAN L IFETIME I NCOME O PTIONS
PLAN SPONSOR CONSIDERATIONS
•
Fiduciary Liability: Fiduciary liability issues may
arise in selecting providers. ERISA plans may rely
on DOL safe harbor guidance regarding selection
of annuity providers.
•
Vendor Selection: Sponsors must review
information and compare expenses and rate
annuity providers. Sponsors must continue to
monitor selections.
•
Demand & Utilization: Unclear how many
participants will elect annuities; recent indications
are that demand is there. Additional education
and communication will be necessary.
•
Design Options: Sponsors should consider
whether annuities offered within or outside of a
plan.
METHODS FOR PROVIDING ANNUITY OPTIONS
Three basic ways to provide annuity option to
participants:
• Option 1: Retirement board purchases annuity
and is owner of annuity contract; annuity
payments either come from retirement board or
insurance company.
• Option 2: Retirement board purchases annuity
contract and distributes to participant.
• Option 3: Plan distributes participant’s account
balance in form of lump sum and participant rolls
amount over to an individual retirement annuity
(IRA).
ANNUITY OPTIONS INSIDE PLAN
• Fiduciary obligations will apply with respect to
selecting and monitoring products offered under
the Plan under both Options 1 and 2.
Query: What about release and waiver?
• Annuity pricing raises practical problems for Plan
Sponsors because it may be difficult to obtain and
interpret information about annuity returns and
costs.
ANNUITY OPTIONS INSIDE PLAN
• In-plan annuities are subject to “unisex” pricing
(this provides favorable result for women with
longer life expectancy and a disadvantage for
men).
• Contract limits may apply. For example,
annuity provider may have minimum account
balance requirements. If option is not available
to all participants, this may create a problem if
a plan is subject to nondiscrimination rules.
ANNUITY OPTIONS OUTSIDE PLAN
• Sponsor does not endorse or contract with annuity
provider, but provides basic communications to
permit participant to select an annuity option.
• Sponsor may interview and provide information
regarding limited number of providers.
• Only way to completely avoid fiduciary
responsibility in selection of annuity provider is to
make lump sum distribution that the participant
could roll over directly to IRA (Option 3).
TAX IMPLICATIONS
Tax implications if retirement board purchases annuity
contract and distributes directly to participant:
•
401(a) Plans: Regulations specifically permit qualified
plans to purchase annuity contract and distribute it to
participant without the participant being subject to
taxation at time of purchase.
•
403(b) Plans: No similar authorization for purchase of
annuities by 403(b) plan; but 403(b) regulations
relating to purchase of annuities in the context of plan
termination suggest that an annuity purchase and
distribution is treated in manner similar to 401(a)
qualified plan.
•
NQDC Plans: Entire value of the annuity contract is
taxable to the participant at the time of distribution.
HOUSING ALLOWANCE CONSIDERATIONS
Note: There is no guidance on whether housing
allowance designation can be made in the context of
annuity purchase.
• Under Option 1, because annuity contract is still
part of plan, and distributions will be made from
the plan, denominational board should be able to
continue to make annual housing allowance
designations.
HOUSING ALLOWANCE CONSIDERATIONS
•
Under Option 2, it may be possible for retirement
board to make housing allowance designation at the
time it purchases the annuity contract and have that
designation apply over the entire period of
distribution.
•
Under Option 3, it is not clear whether it is possible
to make housing allowance designation with respect
to distributions from IRA where participant has rolled
over lump sum distribution from plan.
Note: Under either Option 2 or 3, 1099-R form issued by
annuity provider will in all likelihood not reflect nontaxable housing allowance.
LIFETIME INCOME OPTIONS
• Recent trend towards offering annuities or
annuity-like investment options in defined
contribution plans.
• Many providers such as Vanguard, Prudential,
Great-West, Financial Engines and others are
offering products.
• Data suggests that even younger workers taking
advantage of annuities when offered.
IRS GUIDANCE
Two Private Letter Rulings Address DC Annuities:
•
PLR 200951039- Addresses certain technical issues
related to required minimum distribution requirements
and qualified joint and survivor annuity rules in context
of both group and individual variable annuity contracts
in a defined contribution plan.
•
PLR 201048044- Addresses guaranteed withdrawals
under a life annuity for purposes of the qualified joint
and survivor rules under 401(a)(11) and 417 of the
Code. The annuity option involved a target date fund
which would automatically be directed to variable
deferred annuity contracts.
IRS GUIDANCE
•
Guidance package issued February 2012 – includes
2 revenue rulings and set of proposed regulations.
•
Guidance is intended to promote increased savings
and retirement income and provide incentives for
participant to take annuity form of distribution.
•
Revenue Ruling 2012-4 addresses technical issues
relating to a rollover from a DC plan to a DB plan.
•
Revenue Ruling 2012-3 provides guidance on the
application of the spousal consent rules if a DC plan
offers an annuity form of benefit.
IRS GUIDANCE
•
•
•
Proposed regulations provide guidance on “qualified
longevity annuity contracts” (“QLACs”).
Requirements for QLAC:
– Premiums cannot exceed lesser of 25% of account
balance or $100,000.
– QLAC can provide for distributions in future (but no
later than age 85).
– Must provide certain death benefit protections for
surviving spouses and nonspousal beneficiaries.
– Contract must specifically say it is a QLAC.
– Insurers would have to provide notices explaining
amount, timing and other features.
If QLAC meets requirements, it is excluded from
determination of RMD.
FIDUCIARY DUTIES
LIABILITY AND EXPOSURE
Potential Liability and Exposure
• Fiduciary liability falls into two categories:
– Liability associated with plan investments; and
– Liability associated with discretionary decisions
regarding plan distributions.
• Plan investment liability exposure is by far the
most significant area of risk in terms of dollar
exposure.
LIABILITY AND EXPOSURE
Fiduciary liability and exposure with respect to plan
investment decisions falls into certain discrete areas:
• Decisions regarding the plan’s investment fund
“line-up” or “menu”;
• Choice of the plan’s default investment option;
• Issues related to participant investment election,
including the decision to offer participant
investment election; and
• Issues related to fees and expenses payable in
connection with plan investments and plan
administration.
LIABILITY AND EXPOSURE
• Fiduciary liability associated with plan
distribution decisions principally arises in
connection with decision to deny a
participant or beneficiary’s claim to
receive all or a portion of his/her benefit.
FIDUCIARY DUTIES – GENERAL RULES
• Church plans are not subject to ERISA.
• Church plans are subject to state fiduciary
laws and the “common law of trusts.”
• Based on “choice of law” rules, the trustee or
trustees of a trust associated with a church
plan are generally subject to the state laws
applicable to trustees chosen in the trust
document.
SOURCES OF FIDUCIARY DUTIES
• The Uniform Prudent Investor Act (“UPIA”)
• Common law of trusts (i.e., fiduciary case
law)
• Uniform Management of Institutional Funds
Act
• Exclusive benefit rule
• State non-profit corporation law
RETIREMENT PLAN FIDUCIARIES
• Although ERISA fiduciary rules do not
apply to church plans, they (or a modified
version of them) are often applied by
church plans as “best practices.”
• But remember . . . If you put a particular
rule in your plan, you have imposed a
contractual obligation on plan fiduciaries
in favor of plan participants. If the plan
provision is not followed, or the standard
imposed is not met, a plan participant has
a contractual claim he/she can make
against the plan.
REDUCING OR ELIMINATING EXPOSURE
Ways to protect against fiduciary liability:
• Fiduciary liability and E&O insurance policies (check to
see who is covered and to make sure limits are adequate
and coverage is sufficiently broad – e.g., not limited to
just ERISA fiduciary claims).
• Indemnification provisions in corporate bylaws.
• Use of experts to assist with investment fund selection
and fulfillment of plan administration compliance
requirements.
• Amend trust agreement to relieve plan fiduciaries from
specific fiduciary liabilities.
REDUCING OR ELIMINATING EXPOSURE
Ways to protect against fiduciary liability (cont’d):
•
Use of an “acknowledgement/release” form to be
signed by participant with regard to vendor or
investment selection by participant (or inclusion of
similar language in participant investment election
forms).
•
Consider making a church plan subject to ERISA.

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