BNA Pension and Benefits Blog

Interim Amendments for Tax Qualified Plans -- A Mixed Bag

Beginning in the late 1990s, the IRS Employee Plans group spent a great deal of time studying various options for avoiding the enormous workload spikes that arose during the determination letter process in the past and developing the settled upon option -- the staggered remedial amendment period (RAP). As part of this process, IRS EP personnel made a real effort to "partner" with the various stakeholders in the benefits community (ranging from benefits practitioners to prototype sponsors and vendors) to develop a workable, manageable program for all. One of the items that most stakeholders generally opposed during this process was a requirement for annual amendments documenting new law or regulatory changes--which have come to be commonly referred to as "interim" amendments. There was considerable concern about the time/expense that would be required to manage this process in an effective manner (particularly for prototype vendors), as well as the potential confusion and resulting "foot faults" this would likely engender. Instead, it was recommended that these amendments generally be required at the time the plan otherwise had to be submitted for IRS approval. It appeared that IRS officials understood these concerns as discussions concerning interim amendments disappeared from the staggered RAP dialogue--or so we thought. To the surprise of many, the final staggered RAP revenue procedure (originally Rev. Proc. 2005-66; now Rev. Proc. 2007-44) contained specific requirements on interim amendments for all tax qualified plans (including prototypes and the like), the primary motivation being that the plan document must be kept up-to-date throughout the cycle.

In a nutshell, the timing turns on whether the amendment is a "discretionary" one or involves a "disqualifying provision." If it is a discretionary change, the amendment must be adopted by the close of the plan year in which the change is first implemented. On the other hand, if a disqualifying provision is involved, it does not have to be adopted until the later of--

• the due date (including extensions) for filing the employer's tax return for the year in which the applicable RAP began, or
• the last day of the plan year in which the RAP began.

So, how do you tell between a discretionary amendment and one which involves a disqualifying provision? In general, a "disqualifying provision" is one which either--

• results in a failure to comply because of a change in the qualification rules, or
• is integral to a requirement that has been changed (which otherwise would result in a compliance failure).

A discretionary amendment covers everything else. While it is often easy to tell what is a discretionary change versus a disqualifying provision, the lines become blurred when there is new law or regulatory change with optional provisions--and where these fall is not always clear.

The guidance concerning the timing for discretionary amendments has, in some respects, provided some welcome clarity, as we now know that plan sponsors generally have until plan year-end to adopt discretionary changes (for example, a new contribution formula or distribution option). However, I fear that the interim amendment requirements have otherwise given rise to the very problems the benefits community was concerned would happen with interim amendments. To its credit, the IRS has taken some steps to alleviate this. In addition to issuing some clarifying guidance on amendment timing for certain new law changes, it has set up a web page which contains a listing of the 2007 interim amendments (http://www.irs.gov/retirement/article/0,,id=173372,00.html)--although it would be more helpful if an updated list was issued annually much like the agency now does with the list of cumulative changes for each staggered RAP cycle. The IRS has also set up a relatively streamlined and inexpensive application process for certain missed interim amendments under the Employee Plans Compliance Resolution System (Rev. Proc. 2006-27, Appendix F)--which the agency is apparently planning on significantly expanding soon. But are these enough or does the complexity/confusion that the interim amendment requirements have caused outstrip their value? I, for one, am finding that the latter may be true.

How Far Does a Pension Plan Have to Go to Persuade Participants to Make the Decisions that Are Right for Them Individually?

Today's (7/30/2008) Pension & Benefits Daily issue reports on the litigation following the sad death of Mr. Allen Anderson, a hard-working man who died of cancer, Anderson v. Board of Trustees of the Northwest Ohio United Food and Commercial Workers Union and Employers' Joint Pension Fund, N.D. Ohio, No. 3:07 CV 576, 7/28/08.

This is not the usual case of a participant's having been denied treatment or coverage by a hard-hearted insurance company. Rather, when Mr. Anderson's medical leave was about to expire and he asked about his options, the administrator of his pension and welfare plans suggested that he return to work briefly, to renew his entitlement to a limited period of free extended health coverage. He did that, and, as a result, was apparently able to continue receiving the medical care his doctors recommended. However, that meant he did not retire, so he did not elect a pension with a 10-year guaranteed payment feature. Since he was unmarried, no death benefits were payable from the pension plan when he died soon after returning to active-employment status, although life insurance benefits were paid through the welfare plan.

The court held that it was a fiduciary breach for the plan representatives to fail to discuss the option of retiring with a generous death benefit with Mr. Anderson, when he asked about his choices. (It was mentioned, but not discussed, because Mr. Anderson said he was determined to go back to work and beat his cancer.)

I can't figure out whether this is an important decision or an anomaly. As I read the facts, it looks as if this participant was treated with great compassion by the plan representatives, his union and his employer, and they turned themselves inside out to try to accommodate his needs. Yet the court says he was treated "with great iniquity"--maybe the iniquity was the cancer, not the treatment by the plan, but it's amazing that the publication services could read the opinion, drenched as it must have been in the judge's tears.

The court concludes that it was imprudent and a breach of fiduciary duty for the TPA to fail to counsel him to retire with the 10-year continuous and certain pension form, because that would have provided death benefits for his family (he lived with his mother). The judge says that it was ridiculous to believe Mr. Anderson’s repeated brave statements about continuing to work and conquering his cancer, since he was clearly terminally ill.

But, based on the facts recited in the opinion, the judge seems to have reached the wrong conclusion as a matter of fact. If Mr. Anderson had retired, his retiree health insurance would have been inadequate to cover his medical costs. The plan, the union and the employer conspired to prolong his active-participant status so he could keep the health coverage he needed. Mr. Allen made the RIGHT decision, based on their advice, and the court calls it a breach of fiduciary duty.

What am I missing? Would the court have understood it better if the case hadn’t gone on summary judgment? (From the opinion, it does not appear that the court was presented with a dollar comparison of the value of the health insurance to Mr. Anderson personally versus the value of the death benefit to his mother and brother.) Is this case a dramatic extension of the “duty to inform” line of opinions, or just the melodramatic conclusion to a sad end-of-life story?

Another Piece of the Extended Puzzle - Proposed DOL Regulations Reach to General Prudence Rules

Issues relating to fees to service providers have become high-profile issues, with a proliferation of indirect-fee class actions and the inevitable follow-on press reports. These issues have given rise to a four-piece puzzle, with activity regarding (i) regulations under ERISA Section 408(b)(2), (ii) the rules governing Form 5500, Schedule C, (iii) the "404(c)" rules for covered plans with participant-directed investments, and (iv) a number of legislative proposals in Congress.

The issue is clearly front-burner for the DOL, which is trying to proceed with a coordinated new regime that would have a real impact on the quantity and quality of information available to participants. There has already been movement in the first two arenas, with proposed 408(b)(2) regulations and new rules for Form 5500, Schedule C, both of which have been controversial. Congress has proceeded, too, with the proposed Miller bill. The only theater that had remained dark was the one relating to the 404(c) rules.

Section 404(c) is the section that gives plan fiduciaries the opportunity to limit their liability in the case of plans which provide for participant-directed investments and which satisfy the regulatory Section 404(c) requirements. Thus, the DOL had broad discretion to impose such informational requirements as it saw fit under Section 404(c). Showing how much attention it is giving to the question of participant information, though, the DOL took this opportunity to expand the expected scope of its rulemaking and issue rules proposed to apply under ERISA's general prudence rules, whether or not the protection of Section 404(c) is sought. The general prudence rules, like the 404(c) rules, give the DOL a fairly free regulatory hand, as there is no clear limitation on the abilty to add regulatory color on what it means to be proceeding in accordance with general prudence-type considerations.  Thus, the new proposals would generally apply to all plans under which participants have the right to direct investments, even if the plan sponsor is willing to forego Section 404(c) relief. It is clear that that the DOL is making a concerted effort to establish a set of rules that will significantly change the nature of the information that is broadly available to participants in plans where they direct their own investments.

It remains to be seen whether the market will view the balance that has so far been struck by the DOL as being the right one. I expect the comment process regarding this particular piece of the puzzle to be extremely active in terms of submissions on all sides of the market, including participant-advocacy groups, employers, financial services organizations and administrators. One thing seems certain - the old rules, with a much more generic approach to the provision of information, seem eventually to be a thing of the past.

Now the DOL is FAQuing It - Having Fun with "Funds" on the Form 5500

Issues relating to fees to service providers have become high-profile issues, with a proliferation of indirect-fee class actions and the inevitable follow-on press reports.  These issues have generated activity in four theaters: (i) the regulations under ERISA Section 408(b)(2), (ii) the rules governing Form 5500, Schedule C, (iii) the "404(c)" rules for covered plans with participant-directed investments, and (iv) a number of legislative proposals in Congress.  The DOL has moved forward in the first of these two arenas with proposed 408(b)(2) regulations and new rules for Form 5500, Schedule C, which have turned out to be flashpoints in the market for a firestorm of controversy affecting financial services organizations and plan sponsors alike.  Much (but not all) of the controversy has centered around the DOL's attempt to expand certain rules to a variety of types of indirect compensation and, apparently, in some cases, compensation for supposed indirect services, particularly in the context of fees surrounding "investment funds."

On July 14, the DOL issued FAQs intended to help with the administration and implementation of the new 5500 rules.  To its credit, using the efficient FAQ mechanic, the DOL is reacting quickly to a real need in the marketplace for guidance as to how these rules will work.  Putting aside the question as to whether everyone will agree with everything the DOL has done in the FAQs, it was critical that the DOL start to get on the record as to a range of seminal interpretive questions.  (And, thankfully, the FAQs were released almost a full week before the release of the The Dark Knight, so that I could read them without being distracted by what I'm anxiously hoping will be One of the Greatest Movies Ever Made.)

I'm writing here to take note of an arguably arcane but ultimately critical and interesting feature of the FAQs, relating to the nature of what is an "investment fund" for purposes of the new 5500 rules.  It did not go unnoticed by some that the new rules seemed to latch onto the concept of "investment funds" as a major underpinning of when the new indirect-type rules apply; however, the concept appeared to spring suddenly from within the authority, and didn't have a firm express basis is that which had come before.  (Yeah, it's a "lawyer point," I guess, in a group of FAQs with more direct practical implications, but, then again, I'm a lawyer.)  The issue was made more vexing by the fact that the new rules did not tap into the existing regime for look-throughs to investing plans, the so-called "plan asset" regulations (as modified by ERISA as recently amended), but rather went down this new, undefined "investment fund" road.

Thus, the scope of the "investment fund" concept, and by extension the very scope of a substantial portion of the new rules, became subject to something of a cloud right from the get-go.  For example, what is an "investment fund" anyway?  How do hybrid entities, like REOCs (real estate operating companies) and VCOCs (venture capital operating companies) under the "plan asset" regulations fit in?  How does the general "operating company" concept overlay on top of the fund analysis?  These questions, and the lack of any answers (or even discussion) regarding them, resulted in a significant analytical detour right out of the interpretive gate.

Well, Q&A 7 of the new FAQs is packed with a lot of information and goes a long way towards shedding light on how the DOL views these matters.  There is the description by example of what "investment fund" means, where the DOL says in a parenthetical: "e.g., mutual funds, collective investment funds."  (It may not seem like much, but it was more than we had.)  There is the posing of the basic question of whether compensation received in connection with the management of VCOCs, REOCs and other operating companies needs to be reported, and there is the DOL's pithy and straightforward (and, to me, clearly correct and appropriate) answer, "No."  There is the clarification that, notwithstanding the foregoing, fees or commissions received by a manager or adviser in connection with an investment in an operating company could be reportable.  And, underscoring the extent to which the DOL really seems to have created a whole new quasi-"plan asset" framework in the context of the reporting rules, the DOL states: "This answer would not be affected by whether the VCOC, REOC, or other operating company were wholly owned by a plan such that [under the "plan asset" regulations] the assets of the entity would be deemed to be plan assets."

This last nuance indicates that the formalistic approach under the bedrock "plan asset" rules falls, in the reporting context, to what may be a more intuitive analysis.  As a result, essentially all that matters here is whether there is an operating company present effectively to block the look-through, not whether the entity's assets technically are "plan assets." (The need to apply the technical rules to determine whether an entity is a VCOC or REOC (or other operating company) is still present.)  It remains to be seen whether this new conceptual approach will eventually be given application for other ERISA purposes.

The foregoing is just one small aspect of an important set of FAQs, and shows, even standing alone, how interesting the development of the reaction to the fees issue has been and probably will continue to be.  In this regard, note also that, in Q&A 40, the DOL states: "In an effort to address the concerns of both service providers and plans, the Department has decided that, with respect to those employee benefit plans which are dependent on service providers for information necessary to complete the Schedule C, the plan administrator will not be required for 2009 plan year reports to list a service provider on line 4 of the Schedule C [which basically calls for the listing of uncooperative service providers] as failing to provide information necessary to complete the Schedule C if the plan administrator receives from the service provider a statement that (i) the service provider made a good faith effort to make any necessary recordkeeping and information system changes in a timely fashion, and (ii) despite such efforts, the service provider was unable to complete the changes for the 2009 plan year."  Bravo - this relief (which presumably will spawn quite a lot of "statements") is extremely welcome in light of the fact that, as shown above, on even the most basic gateway issues there is a great deal of new concepts, analyses and information to digest.   

Social Investing Revisited?

   There appears to be a continuing debate, with the Department of Labor’s involvement, between the AFL-CIO and the U.S. Chamber of Commerce concerning use of plan assets in proxy voting and shareholder related activities as well as in connection with union organizing campaigns and union goals in collective bargaining negotiations.  The debate takes place in the context of two recently published Advisory Opinions, both issued to the U.S. Chamber of Commerce, one in response to an inquiry by the Chamber as to whether the fiduciary rules of ERISA prohibit the use of plan assets to promote union organizing campaigns and union goals in collective bargaining negotiations (Advisory Opinion 2008-05A) and another concerning whether pension plan assets may be used by plan fiduciaries to further public policy debates and political activities through proxy resolutions that “have no connection to enhancing the value of the plan’s investment in a company”  (Advisory Opinion 2007-07A).

     The DOL’s response in both cases appears to be consistent with earlier Advisory Opinions concerning use of plan assets for what was once described as “social investment.”  Earlier advisory letters on social investing were issued in the 1980s to Gregory Ridella, Chrysler Corp. (AO 88-16A), Jim Ray (July 8, 1988), Mr. Reed Larson (July 14, 1986) and Mr. Ralph Katz (March 15, 1982).  These 1988 opinions state, in general, that fiduciaries, in deciding whether and to what extent to invest in a particular investment, must consider only factors relating to the interests of plan participants and beneficiaries.  A decision to make an investment may not be influenced by non-economic factors unless the investment when judged solely on the basis of its economic value to the plan, would be equal or superior to alternative investments available to the plan.

     The DOL’s responses to the Chamber also represent a further clarification of Interpretive Bulletin 94-2 (concerning a fiduciary’s role in voting proxies) in which the DOL said that an “investment policy that contemplates activities intended to monitor or influence management of corporations in which the plan owns stock is consistent with fiduciary obligations under ERISA where a responsible fiduciary concludes that there is a reasonable expectation that such monitoring or communication with management…. is likely to enhance the value of the plan investment….”  (emphasis added)

     Query:  Has the DOL’s position on shareholder activism and social investment changed since 1988 or are Advisory Opinions 2007-07A and 2008-05A no more than the DOL’s effort to reiterate its earlier positions when asked by the Chamber to reflect on what the Chamber seems to suggest are questionable new AFL-CIO positions concerning the permitted use of assets?

     The issue is important in light of concerns about providing investment education to plan participants and given that there may be a new movement on the part of institutional investors to boycott investments in certain companies and countries.

     See the attached links for the two recent advisory opinions to the Chamber of Commerce and a letter issued by Alan Lebowitz, DOL Deputy Assistant Secretary for Program Operations, to the AFL-CIO (May 3, 2005). https://www.dol.gov/ebsa/pdf/ao2007-07attachment.pdf;    http://www.dol.gov/ebsa/regs/aos/ao2008-05a.html; http://www.dol.gov/ebsa/regs/aos/ao2007-07a.html

What's a DB Plan Administrator/Advisor to Do

Disclaimer:  The comments below represent my own opinion and do not necessarily represent those of my employer or any organization to which I may belong.

Administrators of defined benefit plans and other professionals dealing with them have had a real problem on their hands this year.  2008 is now half over and a significant amount of clear, final guidance on how the Pension Protection Act applies to plans has not been issued.  We have a new law.  Many provisions are effective for the 2008 plan year (some act provisions were effective even earlier).  We really can’t blame the IRS for this because Congress passed the biggest overhaul of pension law since ERISA and then dumped the whole regulatory mess in the lap of the Service.

We have some proposed regulations.  The effective date of the [yet to be issued] final regulations have been put off until 2009.  What are we to do in the meantime?  A “reasonable interpretation” will be acceptable.  This seems to have replaced “good faith reliance”.  At times, “reasonable’, like beauty, is in the eye of the beholder. We can also rely on the proposed regulations.  In the preambles, we have been asked for comments on certain issues that the Service is considering.  Can we rely on this request for comments?  Are administrators, actuaries, and lawyers going to be left holding the bag when final regulations are issued?  What worries me is that what many think is a reasonable interpretation of the language of the law may turn out to be not reasonable when the final rules are in.

My question to this forum is, what have you been doing in 2008 when dealing with your defined benefit plans, especially in two areas:  where no proposed regulations have been issued and where musings in preambles and in open forums by government representatives are disagreed with by practitioners?