Qualified Retirement Plans
The U.S. Supreme Court (Court) ruled that insurers that fund benefits and decide benefit claims have a conflict of interest that reviewing courts must consider as a factor in deciding whether the insurer has abused its discretion in denying a claim for benefits. Metropolitan Life Insurance Co. v. Glenn (2008, S.Ct.), 2008 WL 2444796. The case involved a claim for disability benefits where the benefits were insured and claims for benefits were finally determined by MetLife. The Court relied on its earlier decision in Firestone Tire & Rubber v. Bruch, 489 U.S. 101 (1989), in which it held that where an administrator or fiduciary vested with discretionary authority has a conflict of interest, the conflict must be weighed as a factor in determining whether there has been an abuse of discretion. The decision does not provide specific guidance on how such a conflict of interest is to be considered or the weight it should be given.
The U.S. Department of Labor (DOL) has proposed new disclosure rules for participant-directed individual account plans. (73 Fed. Reg. 43014.1) The proposed rules contain a safe-harbor model format. Under the proposal, a fiduciary that accurately completes the model format and distributes it as required by the rules will be deemed to have satisfied the disclosure rules. The proposed rules require disclosure of certain plan and investment-related information, including fees and expenses, for participant-directed account plans. Disclosure in compliance with the proposed rules for participant-directed plans will be mandatory when the rules are finalized. The rules are proposed to be final and effective for plan years beginning on or after January 1, 2009.
Required disclosures are to be provided on or before the date of plan eligibility and at least annually thereafter. Any material change in the information required to be disclosed must be provided within 30 days of the effective date of the change.
In explaining the need for new, required fee disclosures, the DOL noted that an estimated 65 million participants are covered by approximately 437,000 participant-directed individual account plans (including 401(k) plans). These plans give participants the opportunity to direct the investment of nearly $2.3 trillion in assets.
There is a reason your 2007 qualified plan audit is causing new headaches. The American Institute of Certified Public Accountants Statements on Auditing Standards (SAS) 104-11 (SAS 104-11), often referred to as the Risk Assessment Standards, was approved in 2006, effective for audits for periods beginning after December 15, 2006. Qualified plan sponsors are being introduced to the new Risk Assessment Standards in the course of the audits of the 2007 plan years. SAS 104-11 specifically spells out procedures for all auditors to follow and calls for thorough documentation of the audit. Independent auditors of plans previously focused mainly on the financial books, examining whether plan transactions and the balance sheet were accurate. Under SAS 104-11, auditors are required to look beyond the books and judge whether management would be likely to make material misstatements on its financial documents. Under the revised procedures, auditors must search for indications that internal controls are weak or that the business is operating in a difficult investment environment. Auditors are now expected to pay more attention to the possibilities of fraud and the appropriateness of participant loans, hardship withdrawals, and forfeitures.
Recently finalized Internal Revenue Service (IRS) regulations under Code Section 403(b) become effective January 1, 2009. Code Section 403(b) retirement plans may only be offered by certain tax-exempt employers. The new regulations make employers responsible for general compliance with the tax rules under Code Section 403(b), including for plans that are completely voluntary and have no employer contributions. The new rules are complex and burdensome and require that each program have a plan document that complies with the new regulations. Compliance efforts should already be under way.
The IRS issued the 2009 inflation adjustments for health savings accounts (HSAs). For 2009, the annual limitation on HSA deductions for an individual with self-only coverage under a high-deductible health plan is $3,000. The amount for an individual with family coverage under a high-deductible health plan is $5,950.
The IRS has proposed updates to the stock purchase plan rules under Code Section 423. (REG-106251-08) The rules are proposed to be effective as of January 1, 2010 and would apply to any option under an employee stock purchase plan (ESPP) issued on or after that date. The purpose of the proposed rules is to make the existing rules for ESPPs consistent with regulations applicable to incentive stock options granted under Code Section 422. The proposed rules would not impact employee stock purchase plans that do not take advantage of the income tax advantages provided under Code Section 423, primarily the opportunity to purchase shares of employer stock at up to a 15-percent discount from fair market value without incurring taxable income equal to the discount.
The deadline for documentary compliance with Code Section 409A is December 31, 2008. Section 409A establishes requirements for nonqualified deferred compensation plans comparable to Code requirements for tax-qualified retirement plans. If you have any questions or concerns about compliance with Code Section 409A requirements, you should obtain assistance as soon as possible.
Katherine L. Aizawa
Christopher S. Berry
Lloyd J. Dickinson
Gregg H. Dooge
Carl D. Fortner
Robert E. Goldstein
Samuel F. Hoffman
Sarah B. Krause
Harvey A. Kurtz
Belinda S. Morgan
Isaac J. Morris
Greg W. Renz
Leigh C. Riley
Timothy L. Voigtman
Michael H. Woolever
Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.