Qualified Retirement Plans
Form TD F 90-22.1, the Report of Foreign Bank and Financial Accounts (FBAR) was due to be filed by certain retirement plan fiduciaries (as well as other investors) with the United States Department of the Treasury (Treasury) by June 30, 2009, subject to the possible application of a grace period until September 23, 2009. The FBAR form, used to report foreign bank, securities, or other financial accounts, for reporting 2008 holdings of such accounts was due June 30, 2009. While this form has been in existence for many years, most practitioners have not viewed it as applying to investments in offshore hedge funds. IRS representatives speaking at a conference in mid-June 2009 stated that such investments did trigger the reporting obligation. This conclusion affects all investors, including retirement plans.
One of the idiosyncrasies of the FBAR form is that it is required to be filed not only by the "United States person" holding the asset (e.g., the retirement plan trust that holds the interest in the offshore hedge fund), but also by any United States person who has "signature or other authority" over the account. According to the IRS explanation, this would apply to all of the persons, if any besides the owner, who could direct the foreign institution to distribute the funds.
In the typical retirement plan context, presumably only the trustee would have "signature" authority to direct the foreign institution, so the trustee would be obligated to file FBAR forms both for the trust, as owner, and itself, as a person with signature authority. Of course, one or more individuals at the plan sponsor often would have the authority to direct the trustee with respect to the disposition of such an investment (the "Investment Committee"), and a question arises as to whether the individual members of the Investment Committee have "other authority" over the offshore investment, which also would trigger the FBAR filing requirement for them.
The instructions to the FBAR form and related IRS FAQs state that other authority can exist in a person who has the authority to direct the offshore investment "either directly or through an agent." The question is whether the IRS views the Investment Committee's authority to direct the trustee to sell offshore investments as acting through an agent such that the Investment Committee would be deemed to have other authority. The issue is important, not only because of the penalties for failure to file the FBAR form itself, but also because there is a corollary requirement for any such persons to include certain information on Schedule B of their personal Form 1040 return for 2008 and any applicable prior year.
While the IRS has not yet issued any guidance on this issue, it seems that for an ERISA plan the trustee cannot be viewed as an agent of the Investment Committee. Under ERISA, even a directed trustee has an inherent obligation to refuse to follow directions that would be contrary to the terms of ERISA. For non-ERISA plans, consideration should be given to the terms of the underlying trust agreement and applicable state trust law to determine if the trustee can decline to execute the directions of the Investment Committee.
While the IRS has not extended the June 30, 2009 due date, it has announced a grace period until September 23, 2009 in certain situations. No penalties for late filing will be assessed by the IRS if the form is received by the end of the grace period, the filer reported and paid tax on all applicable taxable income, the filer only recently learned of the FBAR filing obligation and did not have sufficient time to gather the necessary information to complete the FBAR by the June 30 due date, and the filer includes a copy of his/her/its 2008 tax return.
Plan administrators, employers and trustees of plans that invest in offshore funds should carefully consider the extent of the FBAR filing requirements.
The Employee Plans Team Audit (EPTA) program of the IRS is a program of examinations of large employer (more than 2,500 participants) plans by a team of specialists. The IRS has developed some useful tools to assist plan administrators of all sizes in becoming familiar with the issues that are found during EPTA examinations. It may be timely now to focus on compliance details since the IRS has announced an increased focus on enforcement beginning this year.
An IRS official announced that sample language for authorizing required minimum distribution waivers for 2009 will be released shortly. Although it is the 2009 required minimum distributions that are waived, the corresponding amendment is not required to be adopted until the end of the plan year beginning on or after January 1, 2011. The forthcoming guidance also is expected to answer questions about whether the waivers are mandatory or optional. Other announcements made in the same presentation included:
The United States Court of Appeals for the Seventh Circuit has rejected the request for a full panel rehearing of the decision of a three-judge panel of the court in Hecker v. Deere & Co., 7th Cir., No. 07-3605, rehearing denied June 24, 2009. As reported in our March 2009 Employee Benefits Legal News, the three-judge panel decided that the sponsor of a Code Section 401(k) plan had no fiduciary duty to disclose revenue-sharing arrangements to plan participants. Language in that decision suggested that a plan fiduciary might be shielded from fiduciary liability by ERISA Section 404(c) so long as the plan offered an extensive array of investment options. In denying the rehearing, the Court of Appeals made it clear that the decision was based on the specific facts of the case and should not be considered as making a sweeping statement that any plan fiduciary can insulate itself from liability by simply including a large number of investment options in the plan.
A recurring question in these difficult economic times has been whether a cut in pay allows employees participating in a Code Section 125 cafeteria plan to make mid-year changes to their salary reduction elections. The answer is no. A pay cut is not a permitted reason under applicable regulations for a mid-year change, and the employees will need to wait until the enrollment period for the next year to make any changes.
The Treasury secretary announced five principles that he believes will better align compensation practices — particularly in the financial sector — with sound risk management and long-term growth:
Treasury officials presented the administration’s case for regulating executive pay at financial firms at a hearing before the House Financial Services Committee. Their plan includes adoption of “say-on-pay” legislation and a bill to ensure the independence of compensation committees. Say-on-pay legislation would empower the SEC to require nonbinding shareholder votes on executive pay packages. The proposed legislation on compensation committee independence would give compensation committees their own authority and funds to hire independent compensation consultants and outside legal counsel.
The principals and legislative proposals are the administration’s effort to frame the upcoming debate in the U.S. Congress over executive compensation.
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.
Legal News is part of our ongoing commitment to providing legal insight to our employee benefits clients and colleagues. If you have any questions about or would like to discuss these topics further, please contact your Foley attorney or any of the following individuals:
Katherine L. Aizawa
Christopher S. Berry
Lloyd J. Dickinson
Gregg H. Dooge
Casey K. Fleming
Robert E. Goldstein
Andrew D. Gregor
Samuel F. Hoffman
Sarah B. Krause
Harvey A. Kurtz
Gwenn Girard Lukas
Belinda S. Morgan
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Leigh C. Riley
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