Today’s news is that there is no news on whether there will be an extension of time to comply with the Final 403(b) Regulations. The announcement made by IRS Senior Tax Law Specialist Bob Architect during the IRS’ webcast today was that the Service has received comments requesting an extension and that the IRS will be responding to those comments about the effective date of the Final 403(b) Regulations in some form in the next 2-3 weeks. No hints were given on whether the response would be to extend the January 1, 2009, deadline to comply with the written plan requirement, or that the Service has decided not to extend the deadline.

With just 27 days left in December, I am hoping that the announcement is made sooner rather than later. When the IRS released Notice 2005-95 at the end of December in 2005 extending the deadline for the Automatic Rollover amendment, it felt like administrators who had spent the summer and fall of 2005 diligently getting amendments signed were being punished while their procrastinating colleagues were being rewarded. In 2005, if the announcement had been made in late November or early December, any ill feelings about the extension may have been alleviated. Instead, because the IRS announced the extension past the point when any reasonable plan would have signed the extensino, the only plans able to take advantage of the extension were plans that had made no attempt to comply.

This time, complying with the written plan requirement contained in the Final 403(b) Regulations is a little different because the entire plan industry is now in the position of creating plans to comply with the deadline without the necessary guidance from the IRS. Agent Architect said that guidance will be forthcoming before the end of the December in the form of a proposed revenue procedure and LRMs containing 65-70 pages of guidance and proposed plan language. While it makes perfect sense to extend the deadline so that, in this tight economy, the guidance is released before the plan sponsors spend money for compliance, the IRS still isn’t providing any indication on which way they will go.

Some other items covered during today’s webcast:

- Treas. Reg. 1.414(c)-5 is effective Jan. 1, 2009, and is worth reviewing for the entire tax exempt community, especially for plan sponsors who may be in a controlled group situation. It applies a controlled group determination of who the employer is for the first time to the tax exempt community.

- The model plan contained in Rev. Proc. 2007-71 will not be supplemented or updated to include more sophisticated plan provisions, such as matching contributions or non-elective contributions. In the first half of 2009, the IRS will be opening a pre-approved program for approving prototype and volume submitter plan documents containing these types of provisions. In the second part of 2009, the IRS will be opening a determination letter program for 403(b) plans to review plans which are using sophisticated provisions but are not using a pre-approved prototype or volume submitter plan document. I was really excited to hear this because my firm will be submitting both prototype and volume submitter 403(b) plans as soon as the program opens.

- The EPCRS program is being updated to include a future correction program for 403(b) plans.

- Freezing contributions to a 403(b) plan does not terminate the plan. If a plan freezes contributions but does not terminate by Jan. 1, 2009, the plan is required to comply with the written plan requirement contained in the Final 403(b) Regs. Terminating a 403(b) plans means that the plan is liquidated and distributed in a timely manner. For some plans, because the plan sponsor does not have the power to liquidate and distribute the assets held in individual accounts, it is not possible for the plan sponsor to terminate the plan.

- A plan with only salary deferrals is still required to comply with the written plan requirement of the Final 403(b) Regs.

- The Final 403(b) Regs do not restrict rollovers, and rollovers should not be confused with in-service contract exchanges.

[tag]pension protection act, ppa, 403(b), 1.414(c)-5, IRS, rollovers, ERISA[/tag]

This Cumulative List states that the IRS, when reviewing determination letter applications for Cycle D plans, will not consider any:

“(1) guidance issued after October 1, 2008;
(2) statutes enacted after October 1, 2008;
(3) qualification requirements first effective in 2010 or later; or
(4) statutory provisions that are first effective in 2009, for which there is not guidance identified in this notice.”

This restriction is important to note because it clarifies how to treat the overlap between many of the Pension Protection Act provisions which become first effective on January 1, 2010, and the submission deadline of January 31, 2010. The IRS included a number of PPA provisions on this Cumulative List, and Notice 2008-108 states that all plans submitted in Cycle D will receive a determination letter which covers PPA ’06, even if the deadline for amending under section 11007 of PPA ’06 is after January 31, 2010.

The other interesting provision contained in Notice 2008-108 is that it provides an alternative submission date for Cycle D plans. For Cycle D plans whose first plan year begins on or after January 1, 2009, and ends on or after February 1, 2010, the plan sponsor can defer submission of the plan until Cycle E, which runs from Feb. 1, 2010 to Jan. 31, 2011. The IRS states that this is a one-time-only deferral and all subsequent submissions of Cycle D plans will take place within Cycle D.

[tag]pension protection act, ppa, Cumulative List, Cycle D, Notice 2008-108, ERISA[/tag]

“Accordingly, the legal issue we must resolve is not whether it would be constitutionally permissible under the California Constitution for the state to limit marriage only to opposite-sex couples while denying same-sex couples any opportunity to enter into an official relationship with all or virtually all of the same substantive attributes, but rather whether our state Constitution prohibits the state from establishing a statutory scheme in which both opposite-sex and same-sex couples are granted the right to enter into an officially recognized family relationship that affords all of the significant legal rights and obligatinos traditionally associated under state law with the institution of marriage, but under which the union of an opposite-sex couple is officially designated a “marriage” whereas the union of a same-sex couple is officially designated a “domestic partnership.” The question we must address is whether, under these circumstances, the failure to designate the official relationship of same-sex couples as marriage violates the California Constitution.”

The Court provides an extensive discussion of this issue, and concludes that:

“Accordingly, in light of the conclusions we reach concerning the constitutional questions brought to us for resolution, we determine that the language of section 300 limiting the designation of marriage to a union “between a man and a woman” is unconstitutional and must be stricken from the statute, and that the remaining statutory language must be understood as making the designation of marriage available both to opposite-sex and same-sex couples. In addition, because the limitation of marriage to opposite-sex couples imposed by section 308.5 can have no constitutionally permissible effect in light of the constitutional conclusions set forth in this opinion, that provision cannot stand.”

It is the Court’s focus on the term “marriage” which is interesting from a qualified plan perspective. For as long as I can remember, a great debate has been waged over the plan language on “spouse” and “marriage” due to the federal pre-emption of issues involving ERISA. Marriage is one of those plan areas which is State regulated but has plan document implications because there is no federal pre-emption of marriage. It has remained a hybrid between the two worlds of federal pre-emption and State regulation for ERISA issues.

For example, qualified 401(k) plan documents will contain provisions about how a participant’s account balance will be distributed upon their death. Because it is possible, though unlikely, that a participant could die before receiving a full distribution of the vested portion of their account balance, the Internal Revenue Code contains a provision for a qualified preretirement survivor annuity (QPSA). A carefully drafted 401(k) plan will contain information incorporating this Internal Revenue Code provision regarding a QPSA, and may contain plan language something like this:

“Qualified Preretirement Survivor Annuity. Unless an optional form of benefit has been selected within the Election Period pursuant to a Qualified Election, the vested Account Balance of a Participant who dies before the Annuity Starting Date shall be applied toward the purchase of an annuity for the life of his surviving spouse (a QPSA). The surviving spouse may elect to have such annuity distributed within the 90-day period after the Participant’s death. For purposes of a QPSA, the term “spouse” means the current spouse or surviving spouse of a Participant, except that a former spouse will be treated as the spouse or surviving spouse (and a current spouse will not be treated as the spouse or surviving spouse) to the extent provided under a QDRO.”

While “spouse” in an integral part of the QPSA information for most plans, and plans normally contain an extensive definition section for terms used within the plan, the term “spouse” is a sticking point among pension geeks. One theory is that, since marriage, and therefore who is a spouse, is an integral part of several key components of the plan, the term should be defined in the definitions section of the plan document. A competing theory is that the plan document should sidestep the issue of who is a spouse by omitting the definition of spouse, since marriage, and therefore who is a spouse, is governed by State law, and qualified plan documents are required to comply with ERISA, which is federal.

One problem with including the definition of spouse within the plan document is that each State has its own laws when it comes to marriage and who is a spouse. Try to write a definition of spouse without using the term “marriage” or “married” and see how difficult it becomes. With the California Supreme Court focusing on what the term “marriage” means under California law, and with so many California employers sponsoring qualified plans, there will be a lot of pension geeks flipping through their plan documents this weekend to see how the plan addresses this issue.

[tags]Pension Protection Act, ppa, marriage, spouse, In re marriage cases, California Supreme Court, domestic partner, ERISA[/tags]

Paul Secunda has an interesting post today on the Workplace Prof Blog about IBM reclassifying workers from salaried to hourly. The corporate buzzword for this is “reclassification”, and the story, which originated on NPR Marketplace, also mentions FedEx reclassifying drivers as independent contractors, and Allstate reclassifying agents as independent contractors.

For plan documents, the grandfather of reclassification is Microsoft. Several years ago, Microsoft reclassified employees as independent contractors, and within their plan document, excluded employees classified as independent contractors from becoming participants. Microsoft’s reclassification language spread through qualified plan documents, and is memorialized in IBM’s plan document, as of the January 1, 2005 restated plan, as:

“1.20. “Employee” means an employee of any Employer who receives stated compensation other than a pension, severance pay, retainer, or fee under contract. The term “Employee” excludes any Leased Employee and any person who is included in a unit of employees covered by a collective bargaining agreement that does not provide for his membership in the Plan. Any person deemed to be an independent contractor by any Employer and paid by the Employer in accordance with its practices for the payment of independent contractors, including the provision of tax reporting on Internal Revenue Service Form 1099, shall be excluded from the definition of Employee for all purposes under the Plan, notwithstanding any subsequent reclassification of such person for any purpose under the Code, whether agreed to by the Employer or adjudicated under applicable law.”

Section 1.46 of IBM’s plan document defines “Regular Employee” as:

“1.46. “Regular Employee” means an Employee as so defined by the rules and regulation of his Employer, who is (i) compensated by salary or by commission, or partly by salary and partly by commission, (ii) subject to the Employer’s performance evaluation program, and (iii) employed for an indefinite period.”

Eligibility is contained in Section 3.01 of IBM’s plan document, which states:

3.01. Eligibility

(a) Except as provided in subsection (c), each Employee of an Employer shall be eligible to become a Participant at any time during service as a Regular Employee.

In this type of plan which restricts eligibility to Regular Employees as defined by the plan document, and Regular Employees are defined as employees paid by salary or comission, hourly employees are not eligible to participate in the 401(k) plan. For plan documents, this is the real issue with Reclassification because it can be used by some companies to restrict plan participation.

Once an employee becomes a participant in the plan, they cannot be reclassified out of participating. For reclassified employees, Section 3.04(a) of IBM’s plan states that:

3.04. Effect of Status Change on Participation.

(a) Except as provided in subsection (b), a Participant who

(i) has been employed by the Employer or an Affiliate as a Regular Employee, then

(ii) ceases to be a Regular Employee, but

(iii) remains in the employ of an Employer or an Affiliate

shall continue to be a Participant in the Plan, but shall not be eligible to receive allocations of Deferred Cash Contributions or Matching Contributions, and shall not be eligible to make After-Tax Contributions, while his employment status is other than as a Regular Employee.

And this really is the heart of Reclassification when is comes to qualified plan documents – the reclassification has an impact plan eligibility and on employer contributions into the plan. For participants who are reclassified out of employer contributions, they remain as participants but their accounts will not grow as the employer prospers. The NPR Marketplace story states that IBM reported a 25 percent jump in profits a couple of weeks ago so it is not clear why IBM decided to engage in reclassification.

[tags]Pension Protection Act, ppa, reclassification, IBM, eligibility, independent contractor, NPR Marketplace, Workplace Prof, Paul Secunda, ERISA[/tags]

Common language contained somewhere in most qualified plan documents is the definition of spouse. Within that definition can be the requirement that a participant must be married for a period of one year before the spouse is recognized by the plan as the participant’s spouse. In a recent case from the 5th Circuit Court of Appeals, the interpretation of married for one year was central to the outcome of the claim for benefits.

In Robinson v. New Orleans Employers ILA AFL-CIO Pension Welfare Vacation & Holiday Funds, No. 07-30433 (CA5, March 13, 2008), the 5th Circuit held that the district court properly granted summary judgment for the plan, and affirmed the district court’s decision. The district court’s decision granted summary judgment to the plan, finding that the plan administrator did not abuse his discretion when he applied the plan language in determining that the plaintiff and his spouse were not legally married when the plaintiff retired, and therefore the plaintiff’s widow was not entitled to a 50% Qualified Surviving Spouse benefit after the death of the plaintiff.

The relevant plan language provided a 50% Qualified Surviving Spouse benefit after the death of the participant. To qualify, the plan stated that:

“the Employee must at the time of making the application for same, have been married to the qualified spouse for a period of at least 12 months immediately preceding the Approved Retirement Date.”

The Court also stated, in a footnote, that:

“A person also can be a ‘qualified spouse’ even if the employee and spouse are married for less than one year on the annuity starting date if the spouse is ‘legally married to the Employee on his Annuity Starting Date and for at least a one year period ending on or before the Employee’s death.”

In this case, Mrs. Robinson met neither condition. When the participant took early retirement on August 29, 1983, he was not legally married to Mrs. Robinson. Because they were not married on the Approved Retirement Date, it was not possible for her to meet either condition in the plan to qualify for the 50% Qualified Surviving Spouse benefit, so the plan administrator properly applied the plan language in denying her claim for benefits.

In an equitable world, whether Mrs. Robinson should have qualified for a 50% Qualified Surviving Spouse benefit is another story. When Mr. Robinson died in 2004, she had known him, dated him, lived with him and married him over a 49-year period. According to the 5th Circuit, the Robinsons met in 1955 and dated for many years. In 1978, they moved in together and started living together in Louisiana as husband and wife. Since Louisiana does not recognize common law marriage, they were not considered legally married during the time they were living together. On May 5, 1996, they were legally married in Louisiana. As Mr. Robinson took early retirement on August 29, 1983, they were not actually legally married on the date he retired.

The language in the plan document was derived from the Internal Revenue Code section 417(d), which states:

“(d) Survivor annuities need not be provided if participant and spouse married less than 1 year.

In denying Mrs. Robinson’s claim for benefits despite her 49-year history with Mr. Robinson, the plan administrator did what they were required to do under the language in the plan document and the Internal Revenue Code, whether they wanted to or not.

[tags]Pension Protection Act, PPA, 417(d), spouse, defined benefit, 50% annuity, marriage, ERISA[/tags]

6.05 Except in the case of applications involving master and prototype plans filed on Form 5307 or determination letters for volume submitter plans under section 9.02(2)(d), a complete copy of the plan and trust instrument is required to be included with the determination letter application. All changes made to the most recently approved version of the plan must be redlined or highlighted. An application will be returned as incomplete if it fails to include a copy of the plan that redlines or highlights the changes to the most recently approved version of the plan. The determination letter application must also include a copy of the signed and dated timely good faith EGTRRA amendments, required interim and other plan amendments (even if these amendments are dated earlier than a previous determination letter issued with respect to the plan) to show that the conditions for eligibility for the EGTRRA remedial amendment period as set forth in Notice 2001-42 are satisfied. Also see sections 7.03 and 7.04 for what must be included with applications involving plan amendments.

The penalty for not including a copy of the redlined or highlighted copy of the plan document is that the application will be returned as incomplete.

In a special edition of Employee Plan News issued by the IRS earlier this month, the IRS clarified that Cycle B submissions are not required to submit a redlined plan document. The requirement to include a redlined or highlighted copy of the plan document begins with Cycle C determination letter submissions. Cycle C begins this Friday, February 1, 2008.

[tags]Pension Protection Act, ppa, determination letter, Rev. Proc. 2008-6, Cycle C, Cycle B, IRS, EGTRRA, ERISA[/tags]

One of the reasons I write plan documents for a living is because they are so interesting. Each plan document is like writing a novel, and a good plan document reads like a good novel. The other reason I like writing plan documents for a living is that the IRS requires a plan document for just about every type of qualified retirement, fringe or pension benefit.

Qualified Transportation Fringe Benefits are one of the exceptions to the written plan rule. Treas. Reg. 1.132-9(b), Q&A-6 states:

Q-6. Must a qualified transportation fringe benefit plan be in writing?

Should a qualified transportation fringe benefit plan be in writing – absolutely. Some type of document memorializing what qualified transportation benefits are being provided to employees, which employees are eligible for the benefits, and how they apply for the benefits, makes it much easier to consistently communicate and administer this type of benefit.

[tags]Pension Protection Act, ppa, qualified transportation, 132(f), fringe benefit, ERISA[/tags]

In Section 16.02 of Rev. Proc. 2005-16, the IRS included ESOPs on the list of plans that they will not issue an advisory letter to. This means that, currently, the IRS will not pre-approve ESOP plan documents as volume submitter plans. With each ESOP consisting of an individually designed plan document, summary plan description and trust document, along with any amendments to the plan document and administrative forms required to operate the plan, ESOP plan documents can quickly become internally inconsistent without careful monitoring every time an amendment or restatement is completed.

[tags]Pension Protection Act, ppa, ESOP, employee stock ownership, Rev. Proc. 2005-16, ERISA[/tags]

H.R. 2419, also known as the Food and Energy Security Act of 2007, commonly known as the Farm Bill, contains Section 12512, which is “Participants in government section 457 plans allowed to treat elective deferrals as Roth contributions”. That section states:

(a) In General. Section 402A(e)(1) (defining applicable retirement plan) is amended by striking “and” at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting “, and”, and by adding at the end the following:

“(C) an eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A).”.

(b) Elective Deferrals. Section 402A(e)(2) (defining elective deferral) is amended to read as follows:

“(2) Elective Deferral. The term “elective deferral” means –

“(A) any elective deferral described in sub-paragraph (A) or (C) of section 402(g)(3), and

“(B) any elective deferral of compensation by an individual under an eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A).”.

(c) Effective Date. The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

The Farm Bill was approved by the Senate on December 14, 2007, and is headed to conference committee to reconcile the difference between the House and Senate versions of the bill.

[tags]Pension Protection Act, ppa, roth, 457(b), ERISA[/tags]

The question: Are plans required to provide rollovers to nonspouse beneficiaries?

The answer: Yes No Yes

The reason behind changing the answer from “Yes” to “No” to “Yes” is the revised interpretation the IRS, with a little help from Congress, has provided regarding the plan document impact of new Internal Revenue Code section 402(c)(11).

Effective December 31, 2006, Section 829 of the Pension Protection Act added new Internal Revenue Code section 402(c)(11), which states:

‘‘(11) DISTRIBUTIONS TO INHERITED INDIVIDUAL RETIREMENT PLAN OF NONSPOUSE BENEFICIARY.—

‘‘(A) IN GENERAL.—If, with respect to any portion of a distribution from an eligible retirement plan of a deceased employee, a direct trustee-to-trustee transfer is made to an individual retirement plan described in clause (i) or (ii) of paragraph (8)(B) established for the purposes of receiving the distribution on behalf of an individual who is a designated beneficiary (as defined by section 401(a)(9)(E)) of the employee and who is not the surviving spouse of the employee—

‘‘(i) the transfer shall be treated as an eligible rollover distribution for purposes of this subsection,

‘‘(ii) the individual retirement plan shall be treated as an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)(C)) for purposes of this title, and

‘‘(iii) section 401(a)(9)(B) (other than clause (iv) thereof) shall apply to such plan.

‘‘(B) CERTAIN TRUSTS TREATED AS BENEFICIARIES.—For purposes of this paragraph, to the extent provided in rules prescribed by the Secretary, a trust maintained for the benefit of one or more designated beneficiaries shall be treated in the same manner as a trust designated beneficiary.’’.

The IRS provided guidance in Notice 2007-7, including how to accomplish a rollover to a nonspouse beneficiary. Q&A 14 of Notice 2007-7 stated that a plan was not required to offer a direct rollover of a distribution to a nonspouse beneficiary. Thus, Q&A 14 of Notice 2007-7 provides the “No” answer to the question on whether a plan is required to provide rollovers to nonspouse beneficiaries.

On February 13, 2007, the IRS released a special edition of Employee Plan News devoted to clarifying the provisions of Notice 2007-7 relating to rollovers to nonspouse beneficiaries. It states that:

There has also been a question whether a plan is required to offer a direct rollover of a distribution to a nonspouse designated beneficiary. Pursuant to section 402(c)(11) of the Code and Notice 207-7 Q&A-14, a plan may, but is not required to, offer a direct rollover of a distribution to a nonspouse designated beneficiary.

Congress answered this interpretation of IRC section 402(c)(11) in August of 2007 with the Pension Protection Technical Corrections Act of 2007. Specifically, section 9(e) of both S. 1974 and H.R. 3361, which prompted the IRS to reverse their “No” position back to “Yes” on rollovers to nonspouse beneficiaries.

The IRS then released the 2007 List of Interim and Discretionary Amendments, which included this statement:

§ 402(c)(11) [Discretionary]: PPA ’06 § 829(a)(1) added § 402(c)(11) to allow nonspouse beneficiaries to roll over distributions from a qualified plan to an individual retirement plan. Nonspouse beneficiary rollovers are an optional plan provision for 2007. See, Notice 2007-7. Pursuant to an impending technical correction, nonspouse beneficiary rollovers will be required for plan years beginning on or after January 1, 2008. See, section 9(e) of S. 1974, the Pension Protection Technical Corrections Act of 2007, as introduced in the Senate on August 2, 2007 and section 9(e) of H.R. 3361, the Pension Protection Technical Corrections Act of 2007, as introduced in the House of Representatives on August 3, 2007.

Even though the Pension Protection Technical Corrections Act of 2007 did not become law before the end of 2007, the IRS has not announced a new interpretation of the plan document requirement for rollovers to nonspouse beneficiaries. It remains as last stated by the IRS in the 2007 List of Interim and Discretionary Amendments – rollovers to nonspouse beneficiaries are required for plan years beginning on or after January 1, 2008.

Section 1107 of PPA permits plans to adopt amendments for PPA as late as the last day of the first plan year which begins on or after January 1, 2009, as long as the plan timely operates according to PPA. For rollovers to nonspouse beneficiaries, until the IRS or Congress states differently, plans are required to permit rollovers to nonspouse beneficiaries for plan years beginning on or after January 1, 2008, and can adopt an amendment to include this provision as part of the plan document no later than the last day of the first plan year which begins on or after January 1, 2009.

[tags]Pension Protection Act, ppa, rollovers, nonspouse beneficiary, non-spouse beneficiaries, 402(c)(11), ERISA[/tags]