Although the winter of 2008 is not quite over, benefit professionals know that it is time for a “spring clean-up.” Federal courts and agencies have not been in hibernation, and their recent actions have altered the framework in which retirement plans operate. Though a full review of recent actions including all Internal Revenue Service (“IRS”) guidance on the Pension Protection Act of 2006 (the “PPA”) is beyond the scope of this article, this WorkCite will help you get started on your “spring tune-up” by examining several important judicial, Department of Labor (“DOL”) and IRS actions from early 2008.
The Supreme Court’s LaRue Decision
On February 20, 2008, the United States Supreme Court handed down a unanimous decision in the case of LaRue v. DeWolff et al., which has implications for over fifty million employees who have assets in defined contribution plans. Following 1985 Supreme Court precedent, the Fourth Circuit had ruled that ERISA Section 502(a)(2) “provides remedies only for entire plans, not for individuals,” and that as a result recovery under that section of ERISA must inure to the benefit of the plan as a whole and not to a particular participant. Using this logic, the Fourth Circuit dismissed a claim against fiduciaries for failure to execute a participant’s investment direction. In LaRue, the United States Supreme Court reversed that decision and ruled that individual participants in defined contribution plans may sue fiduciaries under ERISA to recover their individual losses for breach of fiduciary duty.
The Supreme Court’s “unanimous” decision actually was a 5-justice majority opinion and two separate 2-justice concurring opinions, which agreed with the outcome but disagreed on the reasoning. Although the majority decision was based on ERISA Section 502(a)(2) (which allows recovery for breach of fiduciary duty), the concurring opinion of Justice Roberts and Justice Kennedy pointed out that the better answer would be to base a claim under ERISA section 502(a)(1)(B). That section permits a participant to recover benefits due and to enforce the rights under the terms of the plan, but only permits a participant to sue after exhausting all plan remedies for denial of benefits. The LaRue decision would permit a participant to make a claim against a fiduciary without going through the plan’s normal claim and appeal procedure, and expand the trial court’s review of the action taken by the parties.
LaRue increases the possibility of a fiduciary being sued for failure to follow a plan’s operational terms correctly.
- Individual fiduciaries should consider whether they wish to continue in that role.
- Individual plan fiduciaries should review the indemnification language in the plan, bylaws, and other corporate documents covering the Board of Directors and committees.
- Employers should confirm (1) that fiduciary responsibilities are appropriately allocated to the people who can best handle them, and (2) that in-house fiduciaries are protected to the fullest extent possible.
- Fiduciaries also should review the trust and administrative documents, particularly where a fiduciary may face exposure to liability for participant-directed investments executed by a third-party administrator.
These actions are especially important because the language concluding the majority’s opinion in LaRue is disturbingly broad:
“We therefore hold that although [ERISA] Section 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.”
It is not clear whether this language will be the basis for wide-spread litigation, but fiduciaries must consider the implications of the LaRue opinion when administering retirement plans.
Department of Labor (“DOL”) Activity
In the fanfare of guidance issued by the DOL this spring, two items are particularly noteworthy.
New Guidance on Forwarding Participant Deferrals
First, in proposed regulations released on February 29th, the DOL proposed a seven business day “safe harbor” in which some employers are required to deposit participant contributions to the trust related to a retirement (typically a 401(k)) plan. The DOL released the guidance to provide sponsors of small retirement plans (with less than 100 participants at the beginning of the plan year) with “a higher degree of compliance certainty” in determining the time by which participant contributions must be placed in the trust. The proposed regulation would require qualifying contributions to be deposited in the trust no later than the seventh business day after such contributions are segregated from the employer’s general assets. This seven-day rule also would apply to loan repayments transmitted to the trustee after receipt or withholding by the employer. Failure to follow this rule would result in a prohibited transaction, because the employer would be holding plan assets after the time that such assets should have been placed in the trust.
The DOL requested information from larger employers (who sponsor plans with more than 100 participants at the beginning of the plan year) about the appropriate “safe harbor” for transmitting participant contributions to the related trust. Despite the request for comments, it is unlikely that large employers would be given more time in which to transfer participant contributions. Large employers may contact the DOL individually or through an association to voice an opinion on the proper, reasonable time by which participant contributions from larger employers should be transferred to the trustee.
Fiduciary Responsibility for Collecting Contributions
The DOL also released Field Assistance Bulletin 2008-1, which contains guidance about an ERISA fiduciary’s responsibility to monitor and collect contributions. While remaining consistent with prior ERISA and DOL guidance, FAB 2008-1 was prepared to clarify when named or functional fiduciaries are responsible for making certain that plan contributions are timely made.
The implication of FAB-2001 is simple, but important. A named (or functional) fiduciary that has the authority to appoint a trustee will be liable for plan losses resulting from a failure to collect contributions unless the fiduciary appoints another party responsible for collecting required contributions. According to the DOL, contributions become delinquent when an employer fails to make a required contribution to the plan under the terms of the plan document. The appointed party may be either: (1) a plan trustee with discretionary authority over the plan assets, (2) a directed trustee, or (3) an investment manager. If no other party will accept responsibility for seeing that employer contributions are made properly, the named fiduciary (typically the plan sponsor or an employer committee) retains that duty.
The impact of FAB 2008-1 will vary depending on the relationships between the plan sponsor and service providers. In a plan in which the duty to collect is allocated to a party other than the trustee, the trustee must act to remedy situations where the trustee knows, or reasonably should know, that no party has assumed responsibility for collecting contributions or that required employer contributions are not being made. This most often occurs when a directed trustee does not have the responsibility to collect but may be aware of delinquent employer contributions through its trustee responsibilities. Remedies include telling the DOL or named fiduciary of the breach, advising the other fiduciaries, seeking a plan amendment to conform the plan to actual operations, or seeking court intervention. Since a fiduciary may be sued for a breach of duty, a trustee who knows of the collection problem and fails to act may be liable for plan losses resulting from that failure.
In the introduction to FAB 2008-1, the DOL gave its rationale for the guidance by referring to numerous cases where the plan documents purport to relieve the trustee of any responsibility to monitor and collect plan contributions, a practice that disturbs the DOL. FAB 2008-1 may be the first step in a DOL process to impose greater duties on all trustees, and particularly on corporate trustees, to be proactive in monitoring the flow of required contributions to plans. Viewed in conjunction with the proposed regulation on the time in which small employers must transfer employee contributions to the trustee, the DOL has significantly raised the bar for trustees.
FAB 2008-1 may not be a problem for most fiduciaries. However, any party who is a trustee or other fiduciary to a benefit plan should determine which fiduciary is responsible for collecting and, if necessary, compelling required employer contributions. Given the consequences of failing to monitor the proper flow of contributions, plan sponsors, plan administrators, trustees and other involved parties should also review and document the roles each plays in assuring that the intended funding is placed in the plan.
Internal Revenue Service (“IRS”) Activity
New Guidance on Forms of Distribution
For many years the Internal Revenue Code (the “Code”) has required defined benefit plans and money purchase pension plans to give married participants the right to receive retirement benefits in the form of a “qualified joint and survivor annuity” (“QJSA”). A QJSA is defined as an annuity for the life of the participant with a survivor annuity for the life of the participant’s spouse that is not less than 50% and not more than 100% of the amount of the annuity payable during their joint lives.
The PPA amended the Code to require these plans to offer a special optional form of annuity benefit, known as a “qualified optional survivor annuity” (“QOSA”), as an alternative to the QJSA. In our experience, most defined benefit and money purchase plans provide a QJSA at the 50% level. For these plans, the QOSA alternative would be a 75% continuation benefit to the surviving spouse. Where the plan’s QJSA is greater than 75%, then the QOSA alternative would be a 50% continuation benefit to the surviving spouse. The IRS has recently issued Notice 2008-30, which contains additional details regarding QOSAs.
Some plans provide only the QJSA form of benefit to married participants. These plans will need to be amended to add the applicable QOSA. However, many plans already have an actuarial equivalent, optional form of 2-life annuity benefit that could qualify as a QOSA. Notice 2008-30 provides considerable insight into adding a QOSA feature to an applicable plan document. Here are a few points in the Notice:
- If the plan has an optional form of benefit that meets all of the QOSA requirements, a separate QOSA is not required.
- If the plan has optional forms of benefit, none of which meet all of the QOSA requirements, a separate QOSA must be added.
- No spousal consent is required for a participant’s selection of a QOSA form of benefit.
- The plan’s preretirement survivor annuity death benefit does not have to be based on a QOSA.
- The QOSA is to be treated as an optional form of benefit in participant communications.
- The QOSA requirements apply to annuity payments with starting dates in plan years that begin after December 31, 2007. Thus, plans that are maintained on a calendar year must now offer QOSAs.
- Plan amendments containing QOSA language must be adopted by the end of the first plan year that begins on and after January 1, 2009 (i.e., December 31, 2009 for calendar year plans).
Notice 2008-30 also contains additional information that affected employers should analyze promptly.