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Retirement Plan Guidance You May Have Missed Over the Holidays

Employee Benefits Law Alert Amy A. Ciepluch, Sarah L. Fowles

With all attention focused on health care reform and www.healthcare.gov during the last several months, new retirement plan guidance can slip through the cracks. To make sure you don't miss anything, we’re bringing you a wrap-up of a few pieces of retirement plan guidance that were published in December during the holiday season.

Frommert v. Conkright: This case has been winding through the courts for a decade, and the most recent decision highlights the importance of clarity in describing and disclosing defined benefit plan offsets and of including a clear description of benefit calculations in summary plan descriptions. The dispute centers on how a defined benefit formula under a Xerox “floor-offset” retirement plan should be reduced to account for prior lump sum distributions to employees who terminated employment, received lump-sum distributions, and then were re-hired. In this latest decision, the Second Circuit found that the plan administrator used an unreasonable method of reduction because the defined benefit formula calculation would always be lower for a rehired employee who received a lump sum distribution than for a newly hired employee. The court considered the following example:

Employee 1 works at Xerox from 1960 to 1970, leaves the company and takes a lump sum distribution, is rehired in 1980 and continues working at the company until 2005. Employee 2 is newly hired by Xerox in 1980 and continues working at the company until 2005. Both employees have equivalent highest average salaries.

Under the Xerox plan administrator’s approach, even though both employees worked from 1980 through 2005 and had equivalent highest average salaries, Employee 1’s defined benefit would always be lower than Employee 2’s defined benefit due to Employee 1’s prior lump sum distribution. The Second Circuit found the plan administrator’s approach to be unreasonable because the plan did not clearly permit its approach.

Furthermore, the Second Circuit found that even if the plan administrator’s approach was reasonable, the plan violated ERISA’s notice provisions because the SPD’s description of the reduction was overly vague. The plan’s SPD stated that the amount a beneficiary receives “may” be reduced if the beneficiary previously left the company and took a distribution. The court took issue with the ambiguity of the word “may” because the SPD failed to clearly identify the circumstances that result in an offset, was insufficiently accurate and comprehensive, and failed to explain the full import of the reduction.

Q&B Key:

  • If your defined benefit plan contains an offset, review the plan language to make sure the mechanics of calculating the offset are clear and review the SPD to make sure that the offset is clearly described. Consider including an example in the SPD to demonstrate how the offset works.
  • Avoid vague language in SPDs where possible and especially in descriptions of how benefits are calculated.

The obligation to provide clear benefit descriptions to plan participants is just one of the many obligations of a retirement plan fiduciary under ERISA. To help fiduciaries better understand and meet their ERISA obligations, Quarles & Brady is offering an affordable flat-fee fiduciary training package. For more information, click here.

Increased PBGC Premiums: Despite a recent increase in PBGC premiums due to MAP-21, Congress has again increased PBGC premiums pursuant to the Bipartisan Budget Act of 2013, which was signed into law on December 26, 2013. The flat rate will increase from $49 for 2014 to $57 for 2015, $64 for 2016, and $64 indexed for 2017. The variable rate will increase from at least $19 per year to at least $24 in 2015, and to at least $29 in 2016 and 2017. The variable rate cap will increase from $400 indexed to $500 in 2016 and $500 indexed in 2017.

Q&B Key:

  • Plan sponsors may wish to consider reducing the head counts in their pension plans through lump sum windows and annuity purchases.

Pension Plan Nondiscrimination Guidance: As many plan sponsors know, closing a defined benefit (“DB”) plan to new participants (often referred to as a “soft freeze”) can result in failure of the contributions and benefits tests under Internal Revenue Code Section 401(a)(4) of the Internal Revenue Code. This typically results because the remaining participants in the DB plan become more highly compensated over time and the DB plan cannot pass Section 401(a)(4) nondiscrimination testing on an “equivalent benefits” basis when aggregated with a defined contribution (“DC”) plan sponsored by the plan sponsor. A plan sponsor can solve the problem by ceasing all accruals in the DB plan (often referred to as a “hard freeze”), reducing the proportion of highly compensated employees in the DB plan (by expanding participation or eliminating participation for some highly compensated participants), or changing contributions under the plan sponsor’s DC plan to meet certain requirements.

In Notice 2014-5, the IRS provides plan sponsors with a temporary method of satisfying the nondiscrimination in amount requirement under Section 401(a)(4). For plan years beginning before January 1, 2016, plans that previously were not eligible to conduct Section 401(a)(4) testing on an “equivalent benefits” basis by aggregating a DB and DC plan may now be able to do so. To qualify for this relief, the DB plan must have been closed to new participants prior to December 13, 2013 and must either (a) satisfied coverage and nondiscrimination requirements for the plan year beginning in 2013 without aggregating with any DC plan, or (b) be part of an aggregated DB/DC plan for the plan year beginning in 2013 that was primarily defined benefit in character or consisting of broadly available separate plans.

Q&B Key:

  • If your company’s DB plan is soft frozen and failing or in danger of failing the contributions and benefits test under Section 401(a)(4), your company may wish to consult this new guidance to determine whether or not your plan qualifies for this temporary relief.

In-Plan Roth Rollover Guidance: Back in 2012, in-plan Roth rollovers were expanded to enable in-plan Roth rollovers of amounts that are not otherwise distributable under the plan. On December 16, 2013, the IRS issued guidance on in-plan Roth rollovers in light of this expansion.

Among other items, the IRS confirmed that only vested amounts are eligible for an in-plan Roth rollover and a rollover notice is not required if a participant makes an in-plan Roth rollover of an amount that is not otherwise distributable under the plan. Employers may, but are not required to, permit employees to make in-plan Roth rollovers of matching contributions and employer nonelective contributions, and may place certain restrictions upon the types of contributions that are eligible for in-plan Roth rollovers. Amounts rolled over in an in-plan Roth rollover are subject to the same distribution restrictions that applied before the rollover. No withholding is required from the in-Plan Roth rollover, but employees making such a rollover will be subject to additional taxes on the amount of the rollover and may need to separately set aside money to pay those additional taxes.

Q&B Key:

  • If your company has been considering permitting in-plan Roth rollovers but has been awaiting additional guidance, now may be the time to get serious about deciding whether or not to offer in-plan Roth rollovers. Your company may wish to consult with its recordkeeper to address its ability to process in-plan Roth rollovers.

For more information, contact the authors of this alert: Amy Ciepluch at (414) 277-5585 / amy.ciepluch@quarles.com; or Sarah Fowles at (414) 277-5287 / sarah.fowles@quarles.com. You may also contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (312) 715-5079 / marla.anderson@quarles.com; John Barlament at (414) 277-5727 / john.barlament@quarles.com; Alyssa Dowse at (414) 277-5607 / alyssa.dowse@quarles.com; Angie Hubbell at (312) 715-5097 / angie.hubbell@quarles.com; David Olson at (414) 277-5671 / david.olson@quarles.com; Robert Rothacker at (414) 277-5643 / robert.rothacker@quarles.com; or your Quarles & Brady attorney.