Qualified Retirement Plans
The U.S. Department of Labor (DOL) grants transition relief from Form 5500 annual reporting for 403(b) plans (Field Assistance Bulletin 2009-2). In late 2007, the DOL published Form 5500 revisions and related final regulations generally effective for plan years beginning on or after January 1, 2009, which significantly changed the annual reporting requirements for 403(b) plans. The new rules require “large” ERISA-covered 403(b) plans (generally plans sponsored by certain tax-exempt employers with 100 or more participants) to file audited financial statements with their Form 5500, much like the requirement for 401(k) plans.
Since the publication of the new rules, employers have expressed concerns that compliance would be very difficult, if not impossible, due to the historical treatment of 403(b) plans as a collection of individual contracts that involve very little, if any, employer involvement. In response to these concerns, the DOL has issued transition relief that provides that an employer does not need to treat annuity contracts and custodial accounts as part of a 403(b) plan for purposes of its Form 5500 if: (1) the contract or account was issued to a current or former employee before January 1, 2009; (2) the employer ceased to have any obligation to make contributions (including employee salary reduction contributions) and, in fact, ceased making contributions to the contract or account before January 1, 2009; (3) all of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer; and (4) the individual owner of the contract is fully vested in the contract or account. In addition, the DOL indicated that it will not reject a Form 5500 on the basis of a qualified, adverse, or disclaimed opinion if the accountant expressly states that the sole reason for such limitation in the opinion was because such pre-2009 contracts or accounts were not covered by the audit or included in the plan’s financial statements. The transition relief applies to 2009 and all future years.
The United States Court of Appeals for the Ninth Circuit ruled that ERISA invalidates an indemnification agreement in Johnson v. Couturier, No. 08-17369. The defendants in the case were officers and directors of a 100-percent-ESOP-owned company that was being liquidated. The defendants also served as trustees of the ESOP. Prior to the liquidation, the defendants approved a buyout of the former president's deferred compensation agreements for an amount that ended up equal to about 65 percent of the company’s liquidation value. ESOP participants sued the defendants claiming that they breached their fiduciary duties when they approved the buyout. In order to provide for their defense, the defendants sought an advance of their attorneys’ fees from the liquidation proceeds. An arbitrator had held that they were entitled to the indemnification based upon their indemnification agreement with the company in their capacity as officers, directors, and employees of the company and California state law.
The court upheld an injunction preventing the company from making the advance. The court held that, in this case, the indemnification agreements were subject to ERISA’s prohibition of indemnification of a fiduciary by the plan for a breach of fiduciary duty. The basis for the court’s ruling is not entirely clear, but the court held that while ERISA fiduciary standards generally do not apply to business decisions made by the directors relating to corporate salaries, the ERISA standards should apply when an ESOP fiduciary also serves as a corporate director or officer and the fiduciary participates in a decision in which the fiduciary could directly profit. In addition, since the corporation was liquidating, any amount paid for indemnification would directly reduce what could be distributed to ESOP participants. Since ERISA prohibits an ESOP from indemnifying out-of-plan assets for a breach of fiduciary duty, the court held that indemnification would be prohibited under these equivalent circumstances.
The decision is troubling for 100-percent-ESOP-owned companies (and perhaps for those with lesser percentage ownership ones as well) because it is not at all clear when, if ever, officers, directors, and employees of such companies will be entitled to claim the type of indemnification common in businesses today. The DOL brief in the case appears to argue that indemnification of an ERISA fiduciary breach is not permitted from corporate assets that are effectively treated as plan assets where the plan owns a substantial portion of the company.
The United States Court of Appeals for the Tenth Circuit ruled that the elimination of a lump-sum death benefit did not violate ERISA’s “anti-cutback rule.” ERISA’s anti-cutback rule provides that, with limited exceptions, accrued retirement plan benefits may not be reduced or eliminated by a plan amendment. Retirement-type subsidies and early-retirement benefits are considered accrued benefits protected by the anti-cutback rule.
In Kerber v. Qwest Pension Plan, No. 08-1387, the court held than an employer did not violate the anti-cutback rule when it amended its pension plan to eliminate certain lump-sum death benefit payments. The plan provided for a lump-sum death benefit payable to a participant’s beneficiary upon the participant’s death. However, the plan allowed participants to elect to receive a discounted version of the death benefit (DLS Equivalent) upon retirement as part of the lump-sum payment of their retirement benefits. The plan sponsor amended the plan to eliminate the death benefit, including the DLS Equivalent, for employees retiring after the effective date of the amendment. The plaintiff-employees argued that the DLS Equivalent was protected by the anti-cutback rule because it was either a retirement-type subsidy or an early-retirement benefit. The court disagreed.
First, the court explained that ERISA’s legislative history provides that the phrase “retirement-type subsidy” refers to benefits that continue after retirement. As such, it could not include the DLS Equivalent — a lump sum payable in full to an employee upon retirement. Second, the court explained that applicable regulations provide that the phrase “early retirement benefit” includes only “retirement-type benefits.” The court held that the DLS Equivalent was not a retirement-type benefit because it was not an accrued benefit under ERISA as it did not “accrue in any fashion with an employee’s years of service.”
The deadline for Form TD F 90-22.1, the Report of Foreign Bank and Financial Accounts (FBAR) to be filed with the United States Department of the Treasury was extended to June 30, 2010 for certain persons. 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 (with a possible grace period until September 23, 2009).
As discussed in the June newsletter (http://www.foley.com/publications/pub_detail.aspx?pubid=6161), investment in offshore hedge funds triggers this reporting obligation. In Notice 2009-62, the IRS has extended the deadline to file an FBAR for the 2008 and earlier calendar years with respect to foreign financial accounts for (i) persons with signature authority over, but no financial interest in, a foreign financial account and (ii) persons with a financial interest in, or signature authority over, a foreign commingled fund. Retirement plan trustees and fiduciaries often have signature authority over, but no financial interest in, a foreign financial account held by the retirement plan. In addition, hedge funds are a form of commingled funds. Accordingly, the extension will likely apply to many retirement plans and related persons. Plan administrators, employers, and trustees of plans that invest in offshore funds should carefully consider the extent of the FBAR filing requirements.
The DOL has reported statistics regarding COBRA-subsidy appeals. The American Recovery and Reinvestment Act of 2009, enacted on February 17, 2009, provides that an individual entitled to elect COBRA-continuation coverage (whether under federal COBRA law or similar state insurance law) as a result of an involuntary termination of employment that occurs between September 1, 2008 and December 31, 2009 is eligible for premium assistance. If an employer denies the premium assistance to an employee, the employee may apply to the DOL to review the denial. As of mid-July 2009, the DOL reported that it had received 5,831 applications for reviews of denial. Seventy percent of the 4,922 applications that have been reviewed so far resulted in favorable decisions for employees.
The United States Court of Appeals for the Seventh Circuit ruled that a plan provided an insufficient explanation in its denial of disability benefits. In Love v. National City Corp. Welfare Benefits Plan, No. 08-1722, the court ruled that a disability plan administrator acted arbitrarily when it did not sufficiently explain its basis for denying benefits. The plan administrator’s denial notice did not explain why it ignored the near-unanimous opinions of treating physicians. The court acknowledged that the opinions of treating physicians are not legally entitled to any special deference, but held that a plan administrator must explain its basis for why it does not agree with such opinions.
The SEC has proposed expanded disclosure requirements. (Release No. 33-9052) The SEC published proposed amendments to the proxy rules that would require additional disclosures regarding executive compensation. Additional disclosure would be required with respect to the relationship of a company’s overall compensation practices to risk management and compensation consultants, including the nature of services provided by, fees paid to, and the independence of such consultants. If the proposed amendments are adopted, the SEC expects them to be effective for the 2010 proxy season.
The U.S. House of Representatives has passed a “Say-on-Pay” bill (H.R. 3269) in a 237 to 185, near party-line vote. The House bill would require that any proxy for an annual meeting of a public company include a non-binding shareholder vote to approve the compensation of certain executives. The bill also directed the SEC to promulgate new rules regarding the independence of and relationship between the compensation committee of a public company’s board of directors and compensation consultants. It is unclear when the Senate will consider Say-on-Pay.
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
Greg W. Renz
Leigh C. Riley
Michael H. Woolever