QUALIFIED PLANS

IRS Clarifies Eligibility for Pension Funding Relief

As explained in our July newsletter, President Obama signed the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 into law on June 25, 2010. Among other things, the Act allows sponsors of single-employer and multiple-employer defined benefit plans to elect alternative shortfall amortization schedules for certain years, and allows sponsors of multiemployer defined benefit plans to use special funding rules for certain years, as well. On July 31, the IRS released two notices, Notice 2010-55 and Notice 2010-56, clarifying that plan sponsors may elect to apply the alternative amortization schedules and special funding rules to a plan year even if they already have filed a Form 5500 for that plan year.

PBGC Proposed Regulations Create Withdrawal Liability Risk in Asset Sales

On August 10, the Pension Benefit Guaranty Corporation (PBGC) issued proposed regulations that would clarify – and generally expand – the circumstances in which section 4062(e) of ERISA will apply when significant numbers of participants in an underfunded plan terminate employment in connection with the closure or sale of a facility. Section 4062(e) provides that if a plan sponsor "ceases operations at a facility" and, as a result, more than 20% of the participants in the plan are "separated from employment" with the plan sponsor, the plan sponsor is treated as if it were a substantial employer withdrawing from a multiple-employer plan, the result being that it must notify the PBGC of the event and must provide a bond or fund an escrow for the portion of the plan's underfunding that is attributable to those participants. The bond or escrow is used to cover the plan's underfunding if the plan is terminated in a distress or involuntary termination within five years after the event. Often, the PBGC and the plan sponsor will negotiate some alternative form of security, such as additional contributions from the plan sponsor or a guarantee from a third party, in lieu of the bond or escrow.

Relevant points from the proposed regulations and preamble are as follows:

  • A 4062(e) event may occur in connection with a wide range of events, such as the cessation of an operation at one facility even if the employer continues or resumes the same operation at another facility or continues to maintain other operations at the same facility.
  • In the context of an M&A, section 4062(e) will apply to an employer's cessation of an operation at a facility even if the operation is continued or resumed by the buyer at the same or another facility. This position is contrary to several opinion letters that PBGC issued in the late 1970s and early 1980s. However, the proposed regulations provide that if a financially sound employer continues the affected operation, and the original employer's workers are employed by the new employer, the PBGC could consider the original employer's liability under 4062(e) to be satisfied through the new employer's adoption of the original employer's plan (or the portion of the plan covering the affected operation).
  • "Evaluation of risk" will not be relevant in deciding whether a 4062(e) event has occurred. If the numerical test for a 4062(e) event is satisfied, the plan administrator must self-report the event. The PBGC may take into consideration the level of risk to the plan in making arrangements for the satisfaction of liability arising from the 4062(e) event.

Once a 4062(e) event occurs, the plan sponsor has a 60-day period within which to notify the PBGC. The penalty for non-compliance is a fine of up to $1,100 per day under section 4071 of ERISA. In the preamble, the PBGC emphasized that the potential harm to plan participants from a failure to properly notify the PBGC of 4062(e) events may result in the PBGC assessing penalties up to the full amount of the $1,100 per day limit.

If these regulations become effective in their proposed form, employers that sponsor defined benefit pension plans will have to carefully evaluate their restructuring activities to ensure they do not inadvertently trigger a 4062(e) event.

FASB Proposes Balance Sheet Disclosure of Multiemployer Plan Liabilities

On July 20, the Financial Accounting Standards Board (FASB) issued a Proposed Accounting Standards Update  that would require employers contributing to multiemployer (union) pension plans to disclose information about the liability that would be incurred if the employer withdraws from the plan. This disclosure would be required even if the possibility of withdrawal is remote if that liability would severely impact the employer.

Should this proposal be adopted, it would be necessary for companies that contribute to multiemployer plans to obtain the potential withdrawal liability information from the trustees of the plan. Section 101(l) of ERISA requires that multiemployer plans furnish any contributing employer who has made a written request, the estimated amount of the withdrawal liability, along with an explanation of how that amount was determined. This request for a calculation of the withdrawal liability can be made annually.

Should the FASB proposal be adopted, it would mean that employers contributing to multiemployer plans will have to make this request annually unless the potential liabilities are not significant. In all events, employers should consider obtaining this information in order to better understand the potential exposure that may have to be faced some day.

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EXECUTIVE COMPENSATION

Compensation Paid to Executives in Merger Not Subject to Section 162(m) Limitation

In PLR 201033008 (released August 20), the IRS ruled that in a merger transaction, the executive officers of a public company are not "covered employees" subject to the $1 million limit on deductible compensation because the compensation paid to the individuals was not reportable to the SEC for the short tax year that ended with the merger. This is consistent with the position previously taken by the IRS in PLR 200945010 and PLR 200951006. Under Section 162(m) of the Internal Revenue Code, a corporation has no covered employees unless the corporation has officers whose compensation is reported in a "summary compensation table" under the SEC's compensation disclosure rules for the year of the transaction.

District Court Takes Broad View of Top-Hat Exemption

A recent U.S. District Court case, Callan v. Merrill Lynch & Co., Inc., (S.D. Cal., Aug. 27, 2010), provides additional guidance on the requirements for a plan to be classified as a top hat plan under ERISA.

Top hat plans must be only for a "select group of management or highly compensated employees" and are exempt from ERISA's vesting, funding, and fiduciary responsibility requirements that are typically imposed upon ERISA plans. One of the more frequently cited rationales behind this exemption is that the participants in top hat plans are able to affect or substantially influence the design of their top hat plan by virtue of their position or compensation level.

Callan affirmed the status of the Merrill Lynch WealthBuilder Plan as a top hat plan and thereby thwarted a legal action brought by several former financial advisers seeking to impose ERISA's minimum vesting standards to their benefit under this plan. In so doing it provided some contours on the four-part test used by other courts, in particular Bakri v. Venture Mfg. Co., 473 F.3d 677 (6th Cir. 2007), in determining a plan's top hat status. Bakri looked to the following four factors in assessing top hat plan status: (1) the percentage of the total workforce invited to join the plan; (2) the nature of their employment duties; (3) the compensation disparity between top hat plan members and non-members; and (4) the actual language of the plan.

Using the Bakri criteria, Callan observed that: (1) "plans that limit participation to 15% or less of the workforce have consistently been treated as top hat plans," and the WealthBuilder Plan satisfied this requirement; (2) while the plaintiffs had no ability to influence the design of the WealthBuilder Plan, none of the parties disputed that the plan was primarily for highly compensated employees; (3) the average compensation of the participants in the WealthBuilder Plan was more than double that of all Merrill Lynch employees and "courts have found that a 2:1 disparity is sufficient to satisfy this prong of the test"; and (4) the plan stated that it was intended to be unfunded and maintained primarily for the purpose of providing deferred compensation for the members of a select group of management or highly compensated employees (although Callan considered this language self-serving and did not rely on it in making its determination).

While not necessarily ground-breaking, Callan does provide useful guidance for future top hat plan sponsors by (1) giving bright-line treatment to plans that invite 15% or less of their workforce to participate as satisfying the percentage of total workforce factor, and (2) granting top hat status to the plan even though the nature of the employment duties of the participants were such that they could not have influenced the plan design (i.e., it being sufficient that the participants were highly compensated employees).

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HEALTH & WELFARE PLANS

Departments Issue Important New Guidance on Health Reform

As explained in our May newsletter, President Obama signed the Patient Protection and Affordable Care Act (PPACA) into law on March 23, 2010, and signed the Health Care and Education Reconciliation Act of 2010, which made significant substantive changes to PPACA, into law on March 30, 2010. We refer to both bills together as "PPACA." The Departments of Treasury, Labor (DOL), and Health and Human Services (HHS) have issued several important pieces of guidance on PPACA since the last issue of this newsletter.

Required Coverage of Preventive Care. PPACA requires any group health plan or health insurance issuer in the group or individual market to provide certain preventive care recommended by the Preventive Services Task Force and other groups, and prohibits it from imposing any cost-sharing requirements on that care. "Grandfathered" plans are not subject to this requirement. On July 19, the Departments published interim final rules interpreting this requirement. The interim rules.

  • Clarify how the cost-sharing requirements apply when a recommended preventive service is provided during an office visit (which turns on whether the service is billed as a separate charge or, if not, on the primary purpose of the office visit);
  • Provide that a plan or issuer does not have to provide coverage for recommended preventive services delivered by an out-of-network provider, and if it does may impose cost-sharing requirements on those services;
  • Clarify that a plan or issuer may continue to use reasonable medical management techniques to determine the frequency, method, treatment, or setting for a recommended preventive service (to the extent not specified in the recommendation or guideline;
  • Provide that, when a new recommendation or guideline is issued, a plan or issuer must provide coverage for plan years that begin on or after the date that is one year after the date the recommendation or guideline is issued; and
  • Clarify that a plan or issuer does not have to continue to provide coverage or waive cost-sharing requirements for services that no longer are recommended preventive services, but that other requirements, such as notice requirements, might apply if the coverage is eliminated or modified.

Early Retiree Health Reinsurance Program. PPACA also requires HHS to establish an Early Retiree Reinsurance Program (ERRP) to reimburse participating employment-based plans for a portion of the cost of providing health insurance coverage to early retirees and their spouses and dependents. Federal funding for the program is capped at $5 billion. On August 31, HHS posted a fact sheet to its web site that includes an interactive map displaying the employers that have been accepted into the ERRP. It also launched an ERRP secure web site for use by plan sponsors whose applications have been approved.

Over-the-Counter Medicines and Drugs. PPACA also provides that reimbursements from HSAs, Archer Medical Savings Accounts (Archer MSAs), health flexible spending accounts (health FSAs) and health reimbursement accounts (HRAs) for medicines and drugs are excludable from income only if they are prescribed drugs or insulin. Since 2003, the IRS had taken the position that such reimbursements are excludable from income as long as they otherwise qualify as expenses for medical care. The change is effective in 2011. For FSAs and HRAs it applies to expenses incurred during the first 2½ months of 2011 even if they are reimbursed from funds contributed in 2010, as permitted by Notice 2005-42. Just before Labor Day the IRS issued a notice providing important guidance on this requirement. Notice 2010-59:

  • Confirms that a drug will qualify as a "prescribed drug" even if it is available over-the-counter as long as it is, in fact, prescribed. It explains that, for this purpose, a "prescription" is any written or electronic order that meets the legal requirements of a prescription in the applicable state and is issued by an individual who is legally authorized to issue a prescription in that state.
  • Confirms that things like crutches, bandages, and blood sugar test kits are not medicines or drugs for this purpose and therefore are not subject to the new rule.
  • Provides that health FSA and HRA debit cards generally may not be used to purchase over-the-counter medicines or drugs after January 15, 2011, because current debit card systems are not able to track whether a drug is prescribed. However, the notice allows them to be used to purchase over-the-counter medicines or drugs at a store if 90% of the store's gross receipts during the prior taxable year consists of items that qualify as expenses for medical care, as long as the required prescription is separately submitted.

The notice also allows cafeteria plans to be amended retroactively (if necessary) to reflect the new requirements as long as the amendment is made by June 30, 2011.

Internal Claims and Appeals and External Review Processes. On July 23, the Departments issued interim final regulations regarding the internal claims and appeals and external review processes under PPACA. On August 23, the DOL provided additional guidance on the external review process in Technical Release 2010-01. With respect to group health plans, which include self-insured plans, the provisions of the regulations are effective for plan years beginning on or after September 23, 2010. However, these regulations apply only to non-grandfathered plans.

With respect to the internal claims and appeal process, the regulations build on existing DOL claims and appeal requirements for ERISA-covered health plans. The regulations also provide plan participants with additional substantive coverage rights during the appeal process. With respect to the external review process, the regulation takes a first step toward establishing a framework for the process which must be provided by group health plans and issuers under group health plans as an additional level of review, and delineates the extent to which plans will be subject to the state-based review process or the federal review process. The DOL's August release provides guidelines for plans to implement the federal review process.

1. Internal Claims and Appeal Processes. Because the interim final regulations defer to the DOL claims regulations, those regulations now apply to health insurance insurers providing coverage under a group health plan to the same extent as they apply to the employer maintaining the plan. The regulations also go beyond the DOL's existing claims regulations and do the following:

  • They expand the scope of what constitutes an adverse benefit determination to include a rescission of coverage, i.e., a cancellation or discontinuance of coverage applied retroactively. Already, under the DOL's existing claims regulations, an adverse benefit determination includes a denial, reduction, termination or failure to provide coverage based on determinations regarding eligibility, covered benefits, a pre-existing condition exclusion, source of injury exclusion, network exclusion or a determination that a benefit is experimental, investigational or not medically necessary or appropriate.
  • They reduce the response time for urgent care determinations from 72 hours to 24 hours.
  • They require the plan to share evidence used in making an adverse benefit determination with the claimant free of charge and to provide the claimant a reasonable opportunity to respond to the newly provided information.
  • They establish a requirement that claims and appeals be adjudicated in a manner designed to ensure the independence and impartiality of the persons involved in making the decision.
  • They provide that notices to plan enrollees must be provided "in a culturally and linguistically appropriate manner." Under this standard certain employers will be required to produce and distribute non-English language notices, namely, those employer who rely on a workforce that may include significant numbers of workers literate only in the same non-English language.
  • They emphasize that, with respect to notices of adverse benefits determinations the DOL claims regulations must be adhered to, and, accordingly, the notice must have sufficient information to identify the claim involved and must also include a description of the standard used in denying the claim (for example, that the claim was determined not to be medically necessary). The regulations also state that the final adverse determination upon appeal must include a discussion of the decision. Sample notices already have been issued by the DOL and may be found on the DOL's web site.
  • They provide that the claimant is deemed to have exhausted the internal claims and appeal process, and may pursue external review or judicial review in any case in which the plan fails strictly to adhere to the requirement of the internal claims and appeals process with respect to a claim. Under the current rules, generally only systematic deviations from the required procedures cause this result. Furthermore, the claim is deemed to have been denied without the exercise of discretion by an appropriate fiduciary, meaning that it might not be entitled to the "arbitrary and capricious" standard of review.

Pending the outcome of the internal appeals process, the group health plan and the issuer are required to continue coverage. Moreover, in urgent care situations, the regulations provide an opportunity the claimant to obtain an expedited external review while the internal appeals process is ongoing. In addition, neither a group health plan nor any issuer under a group health plan is permitted to reduce or terminate an ongoing course of treatment without advance notice and an opportunity for an advanced review of the course of treatment.

2. External Review Process. The objective of the external review process is to provide an expeditious, independent and procedurally fair additional layer of review to group health plan claimants at no cost. The review must be conducted by an independent review organization satisfying the accreditation standard of URAC or a similarly nationally recognized accreditation organization.

Under the regulations, in the case of an insured group health plan, the issuer will be primarily responsible for providing this added layer of review. Issuers must use the state's external review process in cases in which the process satisfies the minimum requirements of the regulations, and, for plan years beginning prior to July 1, 2011, existing state review processes are treated as satisfying the minimum regulatory standards. States are encouraged to establish the external review mechanism where no applicable process exists and to supplement existing processes where necessary to satisfy the minimum federal requirements. As a general matter, the minimum standard adopted in the regulations for purposes of the external review are the standards set forth in the National Association of Insurance Commissioners (NAIC) Uniform Model Act.

The federal external review process will apply to self-insured plans, and otherwise to situations where there is no applicable state external review process which meets the minimum standards set forth in the regulation. The DOL's August release gives guidance on the requirements for the federal external review process. In the case of a self-insured plan, it is the plan's responsibility to establish such an external review process. Issuers subject to the federal review process are primarily responsible for implementation.

Under the federal review process outlined in the DOL's August release, there are two tracks of external review, i.e., the standard external review and the expedited external review. A claimant has four months from the date of receipt of a notice of adverse determination or a final internal adverse benefit determination to seek a standard external review. Expedited review is available after a claimant receives an adverse benefit determination if the determination involves a condition under which the timing of the internal appeal process would jeopardize the life or health of the claimant or his or her ability to regain maximum function, provided the claimant files a request for an expedited internal appeal. The expedited external review process also is available after a participant receives a final internal adverse benefit determination if the claimant is receiving emergency services and has not yet been discharged or if the time frame for completing the standard external review would serious jeopardize the life or health of the claimant or his or her ability to regain maximum function.

It is worth noting that the issue whether a group health plan participant or beneficiary meets the eligibility requirements of the plan (for example, if in a covered classification of employees) is not within the scope of the federal external review process. As a result, in cases in which the federal review process applies, this issue is left to internal claims and appeal process.

It was recently reported that, under a Mercer survey of employer group health plans, only 53% of the employer respondents believe their plans will have grandfathered status in 2011. The report did not further sort the reply by insured versus self-insured plans. However, with such a large number of employers expecting their plans to be considered non-grandfathered, it would seem that quite a significant number of self-insured plans will have to face the job of ensuring that their providers will have a compliant federal review process in place by the new year. There is similar work to be done by insured plan sponsors who expect not to be grandfathered in 2011. These sponsor will want to have a guarantee from their insurer that the external review is in place, and will want to understand where there the process will involve an existing state process.

Relief from Annual Limits for Mini-Med Plans. On September 3, HHS issued sub-regulatory guidance announcing the procedures that a group health plan or health insurance issuer must use to request a waiver of the PPACA restrictions on annual limits for essential health benefits. Interim final regulations published on June 28, 2010, allow HHS, for plan years beginning before January 1, 2014, to waive the annual limit restrictions for plans such as "mini-med" plans if the annual limits permitted under those rules for those years would result in a significant decrease in access to benefits or significant increase in premiums. The procedures require waiver applications to describe the terms of the plan or policy, the number of covered individuals, the annual limits and premium rates under the plan or policy, and "why compliance with the interim final regulations would result in a significant decrease in access to benefits for those currently covered by such plans or policies, or significant increase in premiums paid by those covered by such plans or policies, along with any supporting documentation." They also require waiver applications to include an attestation, signed by the plan administrator (in the case of a group health plan) or CEO of the insurance issuer (in the case of a health insurance policy) certifying that that the plan or policy was in force before September 23, 2010, and that "the application of restricted annual limits to such plans or policies would result in a significant decrease in access to benefits for those currently covered by such plans or policies, or a significant increase in premiums paid by those covered by such plans or policies." If granted, a waiver will apply to the plan year (in the case of a group health plan) or policy year (in the case of an individual health insurance policy) beginning between September 23, 2010 and September 23, 2011. New waiver applications will be required for subsequent plan years and policy years during the transition period. Waiver applications must be filed at least 30 days before the beginning of the plan year or policy year (10 days in the case of a plan year or policy year that begins before November 2, 2010).

University's Tuition Reduction Arrangement Limited to Faculty and Senior Administrators Found to be Non-Discriminatory

In a recent private letter ruling, PLR 201029003 (released July 23), the Internal Revenue Service approved a university's tuition reduction plan which consisted of an arrangement ("Plan A") pursuant to which spouses, children and other dependents of all university employees were eligible for 100% tuition reduction at the university, if admitted, and an arrangement ("Plan B") that was limited to spouses, children and other dependents of tenured faculty, associate professors, assistant professors, members of the university administrative council, other administrative officers and certain upper-level management employees and other employees who would qualify for a tuition benefit if they attended other colleges and universities equal to 50% of tuition charged at any other higher-educational institution.

Under Section 117(d)(3) of the Internal Revenue Code, a qualified tuition reduction is excludible from the gross income of a highly compensated employee only if the reduction is made available on a nondiscriminatory basis. To be nondiscriminatory, the benefit must be made available on substantially the same terms to each member of a group of employees that has been defined under a reasonable classification which does not discriminate in favor of highly compensated employees. The ratio of non-highly compensated employees to highly compensated employees at the university which obtained the private letter ruling that were eligible to participate in Plan B was below the "unsafe harbor percentage" applied for tax-qualified retirement plan purposes. Nonetheless, the IRS rules that Plan B was not discriminatory because it was part of an overall tuition reduction arrangement pursuant to which Plan A was available to a broad cross section of employees (although providing no benefit for attendance at other colleges and universities) and that the classification applied for eligibility for Plan B appeared to be grounded in bona fide business and educational considerations not related to compensation. There was no identification of these bona fide business and educational considerations.

This private letter ruling appears to differ in analysis and conclusions from PLR 9041085 in which the university in question had three tuition reduction plans. The first two plans were limited to officers, faculty and senior administrative staff and the third plan was available to all employees. Participation of non-highly compensated employees in the first two plans was well below the "unsafe harbor percentage" applied for tax-qualified retirement plan purposes, and the IRS ruled that both plans were discriminatory without consideration or comment on the fact that there was another tuition reduction plan for which all employees were eligible. The classification of employees eligible to participate in the two discriminatory plans (officers, faculty and senior administrative staff) appears to be very similar to the classification of employees (tenured faculty, associate professors, assistant professors, members of the university administrative council, other administrative officers and certain upper-level management employees and other employees) eligible to participate in Plan B in

Mental Health and Substance Abuse Parity Regulations Going into Effect

The Treasury Department, Department of Labor, CMS and HHS published interim final regulations under the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 on February 2, 2010. The regulations apply to plan years beginning on or after July 1, 2010 – meaning January 1, 2011, for calendar year plans. As explained in our November 11, 2008 Update, the Act extended the parity requirements for mental health benefits to include substance abuse benefits, and to require parity not only with respect to annual and lifetime limits but also "financial requirements" (including deductibles, copayments, coinsurance, and out-of-pocket expenses) and treatment limits (frequency of treatment, number of visits, days of coverage, or other similar limits on the scope or duration of treatment). The regulations interpret these requirements broadly and will require many companies to make significant changes to their health plans and record-keeping systems. Companies that are not already reviewing their plans for compliance with the new requirements should consider doing so in order to make any required changes by the deadline.

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PLAN ADMINISTRATION

Interim Final Regulations Will Require More Fee Disclosure by Investment Funds and Service-Providers

Interim final regulations published by the Department of Labor on July 16, 2010, will require entities that provide services, such as investment advice, to retirement plans subject to ERISA (other than simplified employee pensions, simple retirement accounts, and IRAs) to disclose more information about the compensation they receive for the services beginning July 16, 2011. The new regulations implement section 408(b)(2) of ERISA, which generally prohibits plans from entering into service arrangements that are not "reasonable." Failing to comply with section 408(b)(2) can subject the service provider to excise taxes and the plan fiduciary that approved the arrangement to other sanctions under ERISA. They replace previous regulations that were caught up in the regulatory review that followed President Obama's inauguration and never were finalized. Under the new regulations:

  • Entities that act as fiduciaries or U.S. registered investment advisers directly for an ERISA plan, or act as fiduciaries for an investment fund or contract in which ERISA plans invest that is deemed to hold ERISA plan assets (generally because ERISA plan investors exceed 25%), will have to (1) provide a description of the services and a statement that the services will be provided as a fiduciary or registered investment adviser (as applicable), and (2) describe, in writing, any compensation they or any affiliates or subcontractors will (i) receive from the ERISA plan or ERISA fund, (ii) receive from other, unrelated parties in connection with the services, (iii) pay among themselves in connection with the services that either are paid on a "transactional" basis (e.g., commissions, soft dollars and finder's fees) or are charged directly against an investment by the ERISA plan (e.g., Rule 12b-1 fees paid to the investment adviser), or (iv) receive in connection with termination of the service contract. If the entity acts as a fiduciary for an investment fund or contract in which a plan invests directly (i.e., not sub-funds) and that holds ERISA plan assets, the information also must include information about the fees charged in connection with investments in the fund (e.g., sales loads and redemption fees); annual operating expenses (only if the fund's return is not "fixed"), and other ongoing expenses of the fund (e.g., wrap fees, mortality and expense fees).
  • Entities that act as recordkeepers or brokers to an ERISA plan, and make designated investment alternatives available to participants under the plan (i.e., not just open-ended "brokerage windows"), will have to disclose the same kinds of information that fiduciaries and investment advisers to the plan must disclose, as described in the preceding paragraph. In addition, with respect to the mutual funds or other investment alternatives they make available, they will have to disclose the same kinds of information about the fees charged by each investment alternative that fiduciaries of funds that hold ERISA plan assets must disclose (e.g., sales loads, redemption fees, and annual operating expenses). If the investment alternative is provided by an unrelated third party, this requirement generally can be satisfied by using any disclosure materials that are "regulated by a state or federal agency." Also, if recordkeeping services are provided in addition to other services, they will have to make separate disclosures concerning the compensation received for the recordkeeping services. Finally, if the services will be provided, in whole or in part, without explicit compensation or if compensation for recordkeeping services will be offset against other compensation, they must provide "a reasonable and good faith estimate" of the cost to the plan of the services.
  • Entities that provide certain listed services, including accounting, appraisal, brokerage, custodial, and recordkeeping services, directly to an ERISA plan, and receive any compensation from other, unrelated parties in connection with those services, will have to disclose the same kinds of information that fiduciaries and investment advisers to the plan must disclose, as described above.

The regulations will go into effect July 16, 2011, but will apply to all service arrangements in effect at that time, i.e., existing arrangements are not grandfathered and must come into compliance at the same time.

The disclosures required by the new regulations substantially overlap the disclosures now required on Schedule C of the Form 5500, but, unlike those disclosures, are required at the outset of the arrangement rather than after the end of each plan year. The new regulations specifically require service providers to provide, upon request, any information needed by the plan administrator to fill out Schedule C.

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LITIGATION

Seventh Circuit Applies Scrivener's Error Doctrine

On August 10, the Seventh Circuit allowed Verizon Communications to correct a drafting error in a tax-qualified plan that could have cost it over $1 billion. Young v. Verizon's Bell Atlantic Cash Balance Plan, 2010 WL 3122795 (7th Cir., Aug. 10, 2010). The court relied on the "scrivener's error" doctrine, which had already been endorsed by the Third and Eighth Circuits and a number of lower courts. Like those other courts, the Seventh Circuit held that the scrivener's error doctrine could be used to reform a plan only if (1) the error's existence is established by clear and convincing evidence and (2) there is no reasonable reliance on the drafting error on the part of the plan's participants. The IRS still does not recognize the scrivener's error doctrine, although it often will allow retroactive corrections of drafting errors in similar circumstances under the Employee Plans Compliance Resolution System (EPCRS).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.