TRI Pension Services/ What's New/ Current Developments in 2006

TRI Pension Services/ What's New/Current Developments in 2006

The following list tracks important guidance that was released in 2006. These items are summarized in detail, with appropriate commentary, in our quarterly newsletter, eRISA Update. For ordering information, Click here and follow the instructions to print out an order form.

Cross-references to sections of The ERISA Outline Book that are affected by significant current developments are available,organized by chapter. For ordering information for The ERISA Outline Book click here.

LIST OF CURRENT DEVELOPMENTS

Legislative Developments

The Pension Protection Act of 2006 was enacted on August 17, 2006. The bill is a massive undertaking, not only significantly reforming the pension funding rules, but making permanent the pension-related provisions in EGTRRA (e.g., higher contribution limits, catch-up contributions, Roth 401(k) contributions), providing new interest rate guidelines for lump sum distributions under IRC §417(e), clarifying of legal issues regarding cash balance plans, expanding the use of automatic enrollment arrangements in 401(k) plans, simplying certain reporting and taxation aspects of ADP/ACP refunds to highly compensated employees, introducing the use of a single plan to offer 401k and DB features (starting in 2010), expanding prohibited transaction exemptions with respect to the rendering of investment advice, clarifying fiduciary responsibility during a blackout period and the applicability of ERISA §404(c), expanding portability of benefits to include non-spouse death beneficiaries (limited to minimum distribution obligations) and the transfer of after-tax contributions (including Roth contributions, presumably) between qualified plans and 403(b) plans, requiring diversification for DC assets held in publicly-traded employer securities, expanding the PBGC's missing participant program to permit administrators of terminated DC plans to participate, and introducing some new disclosure obligations, particularly for DB plans.

PBGC flat premium rates increased effective January 1, 2006, to $30 per participant ($8 per participant, in the case of a multiemployer plan); premium surcharge for distress terminations applies for 3-year period in the amount of $1,250 per participant. [Citation: Deficit Reduction Act of 2005, P.L. 109-171 (February 13, 2006)]

Compensation earned by military servicemembers in combat zone is included in IRA compensation for post-2003 years [Citation: Heroes Earned Retirement Opportunities Act (HERO Act), H.R. 1499 (May 29, 2006)

Congress lifts income limit on Roth IRA conversions starting in 2010; 2-year income inclusion option for conversions in 2010 [Citation: Section 512 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222, May 17, 2006)]

New legislation eliminates cap on contribution amount linked to plan deductible, allows contributions from flex accounts and IRAs [Citation: P.L. 109-432, Tax Relief and Health Care Act of 2006 (December 20, 2006)]

Treasury Regulations

Final regulations provide guidance on certain plan design, administrative, and tax issues relating to Roth 401(k) contributions [Citation: Treas. Reg. §§1.401(k)-1(f), 1.401(k)-2(b)(1)(ii) and (b)(2)(vi)(B) and (C), 1.401(k)-6, 1.401(m)-2(b)(1)(vi)(C), 1.401(m)-2(b)(2)(vi)(B) and (C), and 1.401(m)-5, 71 F.R. 6 (January 3, 2006)]

Proposed regulations explain tax rules and reporting requirements applicable to the distribution of Roth 401(k) contributions [Citation: Prop. Treas. Reg. §§1.402A-1 and 1.402A-2, 71 F.R. 4320 (January 26, 2006)]

Proposed regulations would amend 402(g) regulations to add "gap period" earnings rule to corrective distributions of excess deferrals, add reference to SIMPLE-IRAs, incorporate IRC §402(g)(7), and address new indexing rules [Citation: Prop. Treas. Reg. §1.402(g)-1, 71 F.R. 4320 (January 26, 2006)]

Proposed regulations would amend 402(g) regulations to address designated Roth contributions under a 401(k) or 403(b) plan [Citation: Prop. Treas. Reg. §1.402(g)-1, 71 F.R. 4320 (January 26, 2006)]

Proposed regulations address coordination between designated Roth accounts and Roth IRAs [Citation: Prop. Treas. Reg. §1.408A-10, 71 F.R. 4320 (January 26, 2006)]

Proposed regulations address designated Roth contributions to section 403(b) plans [Citation: Prop. Treas. Reg. §§1.403(b)-2, 1.403(b)-3, 1.403(b)-5, and 1.403(b)-7A-1, 71 F.R. 4320 (January 26, 2006)]

"Relative value" regulations amended to incorporate modifications described in Announcement 2004-58 [Citation: Treas. Reg. §§1.401(a)-20, Q&A-16 and Q&A-36, and 1.417(a)(3)-1(c), (d) and (f), 71 F.R. 14798 (March 24, 2006)]

Regulations incorporate Congressional directive to make permanent the special coverage testing rule for employees of tax-exempt organizations who are covered by 403(b) plan [Citation: Treas. Reg. §1.410(b)-6(g), 71 F.R. 41357 (July 21, 2006)]

Regulations amend anti-cutback regulations to clarify the interaction between IRC §411(a) and IRC §411(d)(6), pursuant to the Central Laborers' opinion; add utilization test for the elimination of certain optional forms of benefit [Citation: Treas. Reg. §1.411(d)-3(a)(3) and (4), 1.411(d)-3(b)(4), 1.411(d)-3(c)(6), 1.411(d)-3(f), 1.411(d)-3(h), and 1.411(d)-3(j)(3), (4) and (5), 71 F.R. 45379 (August 9, 2006)]

Regulations disallow deduction for redemption of employer securities held by an ESOP [Citation: Treas. Reg. §§1.162(k)-1 and 1.404(k)-3, 71 F.R. 51471 (August 30, 2006)]

Regulations set uniform standards for using electronic media to provide notices to and obtain consents from participants and beneficiaries (including spousal consents); E-SIGN legislation incorporated [Citation: Treas. Reg. §1.401(a)-21, with conforming amendments in Treas. Reg. §§1.72(p)-1, Q&A-3(b), 1.402(f)-1, Q&A-5, 1.411(a)-11(f), 1.417(a)(3)-1(a)(3), 1.7476-2(c)(2), 35.3405-1, d-35, and 54.4980F-1, Q&A-13(c)(1)(ii), 71 F.R. 61877 (October 20, 2006)]

Final regulations on prohibited allocations under IRC §409(p) and determination of nonallocation years [Citation: Treas. Reg. §1.409(p)-1, 71 F.R. 76134 (December 20, 2006)]

IRS Guidance

Safe harbor method for determining value of annuity in Roth IRA conversion [Citation: Rev. Proc. 2006-13, 2006-3 I.R.B. (January 17, 2006) (advance release on December 27, 2005)]

Special valuation rule for stock rights issued before 2005 [Citation: Notice 2006-4, 2006-3 I.R.B. (January 17, 2006) (advance release on December 23, 2005)]

Annual update of user fee procedure makes significant increases to fee structure [Citation: Rev. Proc. 2006-8, 2006-1 I.R.B. (January 3, 2006)]

IRS reverses 2002 directive and now requires agents, as part of reviewing a determination letter application, to request clarification on eligibility exclusions (e.g., part-time, seasonal, temporary) that may result in the imposition of indirect age and service requirements [ Citation: EP Quality Assurance Bulletin FY-2006-3, February 14, 2006 (available at www.irs.gov)]

Annual update of determination letter procedure for 2006 [Citation: Rev. Proc. 2006-6, 2006-1 I.R.B. (January 3, 2006)]

Hurricane Katrina deadline further extended to August 28, 2006, for certain affected taxpayers [Citation: Notice 2006-20, 2006-10 I.R.B. (March 6, 2006) (advance release on February 17, 2006)]

IRS grants EGTRRA amendment relief for SIMPLE-IRA plans [Citation: Special Edition of Employee Plans News (March 10, 2006), available at www.irs.gov]

Transition relief to comply with IRC §409A(b) with respect to certain assets set aside, transferred or restricted by March 21, 2006 [Citation: Notice 2006-33, 2006-15 I.R.B. (April 10, 2006) (advance release on March 21, 2005)]

IRS releases sample amendment for plans that accept Roth 401(k) contributions [Citation: Notice 2006-44, 2006-20 I.R.B. (May 15, 2006; advance release on April 20, 2006)]

Update to EPCRS procedures expands relief provisions for participant loan violations, modifies correction method for excluding eligible employees from 401(k) arrangement, addresses failures to adopt required interim amendments on timely basis [Citation: Rev. Proc. 2006-27, 2006-22 I.R.B. (May 30, 2006) (advance release on May 5, 2006)]

IRS has update Rev. Rul. 2002-2, regarding QTIP elections with respect to IRAs or defined contribution plan interests [Citation: Rev. Rul. 2006-26, 2006-22 (May 30, 2006)]

Further extension is provided with respect to 2004 and 2005 individual income tax returns for Notice 2006-20 taxpayers affected by Katrina [Citation: Notice 2006-56, I.R. B. 2006-28 (July 10, 2006)];IR-2006-135 (August 25, 2006)]

IRS modifies weighted average interest rate permissible ranges to reflect Pension Protection Act of 2006 [Citation: Notice 2006-75, 2006-36 I.R.B. (September 5, 2006; advance release on August 21, 2006)]

IRS clarifies formal action that must be taken by governmental entity in order for employee contributions to be "picked up" under IRC §414(h)(2) [Citation: Rev. Rul. 2006-43, 2006-35 I.R.B. (August 28, 2006)]

Revised sample language for prototype plans provides more flexibility than the original proposal [Listing of Required Modifications (LRM) for Defined Contribution Plans, LRM #94 on cross-tested profit sharing plans, available at the IRS website (www.irs.gov/ep)]

Election of alternative funding schedule under PPA 2006 for certain airline businesses [Citation: Announcement 2006-70, 2006-40 I.R.B. (October 2, 2006; advance release on September 15, 2006)]

Interim guidance establishes good faith compliance for treatment of certain tribal government plans as governmental plans; provides transition period for separating out employees engaged in commercial activities [Citation: Notice 2006-89, I.R.B. 2006-43 (October 23, 2006)]

Extension of transition periods under IRC §409A and delay of final regulations to 2008 [Citation: Notice 2006-79, 2006-43 I.R.B. (October 23, 2006; advance release on October 4, 2006)]

Reporting and wage withholding requirements for calendar years 2005 and 2006 with respect to deferrals of compensation and amounts includible in gross income under IRC §409A [Citation: Notice 2006-100, 2006-51 I.R.B. (advance release on November 30, 2006)]

IRS provides interim guidance with respect to the requirements under IRC §401(a)(35) and ERISA §204(j) that give employees the right to diversify out of investments in publicly-traded employer securities held by a defined contribution plan. The guidance: (1) clarifies the treatment of employer securities held by a mutual fund, (2) explains how 3 years of service are calculated to determine whether an applicable individual has diversification rights with respect to employer securities attributable to employer contributions (other than elective deferrals), (3) prescribes standards for diversification election rights, (4) lists permitted restrictions on diversification rights, (5) allows certain restrictions to continue through March 30, 2007, (6) provides a transitional rule for 2007 that applies to certain grandfathered investments, and (7) includes a model notice to employees. [Citation: Notice 2006-107, 2006-51 I.R.B. (December 18, 2006) (advance release on November 30, 2006)]

IRS Private Letter Rulings

Pursuant to treaty, contributions and benefits accruals are excludable from income to extent parallel limitations in U.S. tax code are not exceeded [Citation: PLR 200602045 (published January 18, 2006; issued to taxpayer on October 18, 2005)]

Settlement and litigation proceeds with respect to terminated ESOP eligible for rollover; consent requirements waived [Citation: PLR 200604039 (published February 1, 2006; issued to taxpayer on October 31, 2005)]

Spinoff plan created for DB plan participants who were never eligible for DC plan is disregarded from overall deduction limit under IRC §404(a)(7) [Citation: PLR 200612018]

Transfers under IRC §457(e)(17) to purchase permissive service credits under a defined benefit plan must pertain to benefits calculated with respect to years of service not already credited under the plan [Citation: PLR 200617038, February 3, 2006, LTR Report Number 1522 (May 3, 2006)]

Ruling addresses 3 circumstances under which "balance to the credit" in a single taxable year is analyzed for purposes of qualifying NUA for income exclusion under IRC §402(e)(4) [Citation: PLR 200634059 (September 6, 2006)]

Overcontribution to terminated defined benefit plan to make the plan sufficient for standard termination procedures under Title IV of ERISA [Citation: PLR 200637036 (September 20, 2006)]

Excess profit sharing contribution allocated to equity partners due to incorrect earned income information could be returned to employer [Citation: PLR 200639003 (October 4, 2005)]

Use of funds to satisfy liability under another plan resulted in taxation to fiduciary-participant, but offsetting business deduction available [Citation: PLR 200640003 (October 11, 2006)]

DOL and PBGC Guidance

Final regulations provide guidance on annual funding notice required of multiemployer plans under ERISA §101(f) [Citation: DOL Reg. §2520.101-4, 71 F.R. 1904 (January 11, 2006)]

PBGC waives reporting under ERISA §4010 if filing wouldn't have been required under the PFEA rate for years ending on or before June 30, 2006 [Citation: PBGC Technical Update 06-1 (January 12, 2006)]

Form 5500 deadline extended to August 28, 2006, for certain plan administrators, employers, and other entities affected by Hurricane Katrina [Citation: DOL News Release Number 06-351-NAT (February 27, 2006)]

Amendments to PTE 75-1 recognize difficulties in complying with certain conditions of the exemption due to consolidation in the financial services industry; narrows scope of fiduciary relationship necessary to preclude reliance on the exemption [Citation: Amendment to PTE 75-1, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefits Plans and Certain Broker-Dealers, Reporting Dealers and Banks, 71 F.R. 5883 (February 3, 2006)]

Amendments to PTE 84-24 narrow definition of prohibited fiduciary role with respect to certain covered transactions [Citation: Amendments to PTE 84-24, Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, Investment Companies and Investment Company Principal Underwriters, 71 F.R. 5887 (February 3, 2006)]

3-day limit on interest-free loans for incidental purposes is eliminated by amendments to PTE 80-26; interest-free loans of 60 days or more must be in writing [Citation: Amendment to PTE 80-26 For Certain Interest Free Loans to Employee Benefit Plans, 71 F.R. 17917 (April 7, 2006)]

Revisions to VFC Program simplify Lost Earnings calculation, add correction options with respect to violations of the plan's participant loan limits, the disposition of illiquid assets held by the plan, and the impermissible payment by the plan of certain expenses [Citation: Updated Voluntary Fiduciary Correction Program, 71 F.R. 20262 (April 19, 2006)]

Amendments to PTE 2002-51 provide excise tax relief for sale of illiquid assets to a disqualified person and for the impermissible payments of certain expenses with plan assets, pursuant to the revised VFC Program [Citation: Amendment to PTE 2002-51 to Permit Certain Transactions Identified in the VFC Program, 71 F.R. 20135) (April 19, 2006)]

Fiduciary safe harbor provided for automatic rollovers made with respect to terminated defined contribution plans (including abandoned plans) [Citation: DOL Reg. §2550.404a-3, 71 F.R. 20820, 20828-20830, 20850-20853 (April 21, 2006)]

Regulations permit "qualified termination administrator" to terminate and liquidate abandoned or orphan plans; simplified final report filed [Citation: DOL Reg. §2578.1, Appendixes A through D to §2578.1, §2520.103-13, 71 F.R. 20820, 20828-20830, 20850-20853 (April 21, 2006)]

Exemption provides relief for services provided to the termination of abandoned defined contribution plans [Citation: PTE 2006-06, 71 F.R. 20856 (April 21, 2006)]

Form 5500 deadline extended to October 16, 2006, for certain plan administrators, employers, and other entities affected by Hurricane Katrina; Form 5558 filed by such date will provide additional 2½ months [Citation: DOL News Release Number 06-1536-ATL (August 30, 2006); DOL News Release Number 06-1796-ATL (October 12, 2006)]

DOL requires mandatory electronic filing of Form 5500 for plan years or reporting years that begin on or after January 1, 2008; supplemental revisions proposed in light of the PPA 2006 [Citation: DOL Reg. §§2520.104a-2, 2520.103-1(f), 2520.103-2(c), 2520.103-9(d) and 2520.103-12(f), 71 F.R. 41359 (July 21, 2006), and Proposed Revision of Annual Information Return/Reports, 71 F.R. 71562 (December 11, 2006)]

2006 Forms eliminate Schedule P, incorporates clarifications regarding the Schedule R [Citiation: Release of Advance Copies of 2006 Forms, available at www.dol/gov/ebsa]

PBGC announces revised variable premiums rates reflecting the Pension Protection Act of 2006 [PBGC Notice of Interest Rate Assumptions, 71 F.R. 50477 (August 25, 2006)]

2006 Participant Notice under ERISA §4011 issued with explanation of when notice is required and reflecting amendments made by the Pension Protection Act of 2006 [Citation: PBGC Technical Update 06-3 (available at www.pbgc.gov)]

Summary of effect of variable rate premium interest rate, as amended by the Pension Protection Act of 2006, on various Title IV reporting requirements [Citation: PBGC Technical Update 06-4 (August 30, 2006), available at www.pbgc.com]

Proposed regulations would implement the default investment directive under the PPA 2006 and provide fiduciary relief for investment of participant accounts in certain default investment alternatives [Citation: Prop. DOL Reg. §2550.404c-5, 71 F.R. 56806 (September 27, 2006)]

Revision and consolidation of class exemptions dealing with securities lending transactions [Citation: PTE 2006-16, Class Exemption to Permit Certain Loans of Securities by Employee Benefit Plans, 71 F.R. 63786 (October 31, 2006)]

Final regulations on assessment and relief from penalties on late payment or nonpayment of premiums [Citation: PBGC Reg. §4007.8, Appendix to Part 4007, 29 C.F.R. Part 4007, 71 F.R. 66867 (November 17, 2006)]

Missing participant annuity assumptions [Citation: PBGC Reg. §4050.2, 71 F.R. 75115 (December 14, 2006)]

EBSA Advisory Opinions and Field Assistance Bulletins

Person who provides investment advice or manages the investment of a participant's account in a participant-directed plan is a fiduciary [Citation: Advisory Opinion 2005-23A (December 7, 2005)]

Formation of LLC to lease property to company partially-owned by IRA owner, where IRA is an owner of the LLC, would result in a prohibited transaction [Citation: Advisory Opinion 2006-01A (January 6, 2006)]

Sale of second-to-die policy jointly to husband and wife, both of whom are plan participants, is eligible for exemptive relief under PTE 92-6 [Citation: Advisory Opinion 2006-03A (February 28, 2006)]

DOL provides guidance on allocation of mutual fund settlement proceeds paid through independent distribution consultant appointed by SEC [Citation: Field Assistance Bulletin 2006-01 (April 19, 2006), available at DOL website: www.dol.gov/ebsa]

PTE 77-3 does not preclude the receipt of 12b-1 fees by broker who is unrelated to the mutual funds, the principal underwrite/distributor, any investment advisers, or any affiliates thereof [Citation: DOL Advisory Opinion 2006-06A (July 26, 2006)]

Supplemental guidance on Title I issues affecting Health Savings Accounts [Citation: Field Assistance Bulletin 2006-02 (October 27, 2006)]

Good faith compliance standards with periodic benefit statement requirements enacted by the PPA 2006 [Citation: Field Assistance Bulletin 2006-03, available at the DOL website http://www.dol.gov/ebsa/Regs/fabmain.html)]

Purchase of corporate notes by IRA results in prohibited transaction where corporation is a disqualified person due to degree of ownership by IRA owner's family members [Citation: DOL Advisory Opinion 2006-09A (December 19, 2006)]

ERISA Litigation

QDRO may treat only a former spouse (not other alternate payees) as surviving spouse for QPSA; marital dissolution agreement requiring participant to name minor children as death beneficiaries did not satisfy the requirements of a QDRO [Citation: Hamilton v. Washington State Plumbing & Pipefitting Industry Pension Plan, 36 EBC 2025 (9th Cir. January 10, 2006)]

Plans suit to recover overpayment to participant was dismissed because remedy sought was not equitable relief within the meaning of ERISA §502(a)(3) [Citation: Verizon Employee Benefits Committee v. Adams, 36 EBC 2878 (N.D.Tex. January 11, 2006)]

District court has jurisdiction over lawsuit alleging ERISA violations surrounding Wal-Mart's adoption of union exclusion in its ERISA-covered retirement plans [Citation: Lupiani v. Wal-Mart Stores, Inc., 36 EBC 2089 (8th Cir. January 19, 2006)]

New York court rules city law requiring contractors to provide comparable benefits to domestic partners is preempted by ERISA [Citation: In the Matter of Council of the City of New York v. Bloomberg, 2006 N.Y. LEXIS 149 (February 14, 2006)]

Federal court recognizes anti-assignment exception for garnishment under federal Mandatory Victims Restitution Act of 1996 [Citation: U.S. v. Novak, 37 EBC 1172 (9th Cir. 2006)]

Insurer's motion of summary judgment denied in action seeking monetary damages and equitable relief relating to revenue-sharing arrangements in insurer's contractual arrangements with mutual funds or their affiliates [Citation: Haddock v. Nationwide Financial Services, Inc., 36 EBC 2953 (D.Conn. March 7, 2006)]

Only named plaintiff needs to exhaust administrative remedies in class action for benefits due to alleged partial termination [Citation: Matz v. Household International Tax Reduction Investment Plan, 36 EBC 2525 (N.D. Ill. 2005), affirmed, In re Household International Tax Reduction Plan, 37 EBC 1016 (7th Cir. March 20, 2006)]

Interim regulations raise deposit insurance for participant-directed defined contribution plans and IRAs, incorporate indexation of deposit insurance limit [Citation: 12 C.F.R. Part 330, FDIC Reg. §§330.1-330.16, 71 F.R. 14629 (March 23, 2006)]

Amendment to defined benefit plan to increase benefits prior to the plan sponsor's bankruptcy was a fraudulent transfer under Bankruptcy Code §548 [Citation: Pension Transfer Corp. v. Beneficiaries Under Third Amendment to Fruehauf Trailer Corp. Retirement Plan No. 003, 37 EBC 1796 (3rd Cir. April 12, 2006), affirming 34 EBC 1361 (D.Del. January 7, 2005)]

Summary judgment granted to employer with respect to claims for fiduciary breach regarding participant-directed investments where plan did not satisfy ERISA §404(c) requirements [Citation: Jenkins v. Yager, 37 EBC 1609 (7th Cir. April 14, 2006)]

SPD must notify participants of requirement to shoulder the burden of proving work credits eligible for plan benefit [Citation: Wilkins v. Mason Tenders District Council Pension Fund, 37 EBC 1769 (2nd Cir. April 21, 2006)]

Plan's choice of law provision was disregarded in determining which State law applied to identify the proper surviving spouse for a participant's benefits [Citation: DaimlerChrysler v. Durden, 37 EBC 2429 (6th Cir. May 26, 2006)]

Employees being paid benefits under group annuity purchased by terminated plan are entitled to demutualization proceeds from the insurer [Citation: Bank of New York v. Janowick, 470 F.3d 264 (6th Cir. 2006)]

Cash balance plan's definition of normal retirement age as earlier of age 65 or completion of 5 years of service violates ERISA; SPD was deficient because of failure to describe normal retirement age [Citation: Laurent v. PriceWaterhouseCoopers LLP, 39 EBC 1336 (2006 U.S. Dist. LEXIS 62624) (S.D.N.Y. September 5, 2006)]

Appellate court reverses age discrimination ruling on IBM cash balance plan, finding support in age discrimination statutes for analogizing cash balance plan to defined contributions [Citation: Cooper v. IBM Personal Pension Plan, 38 EBC 1801 (7th Cir. August 7, 2006), reversing, 274 F.Supp. (S.D.Ill. 2003)]

Miscellaneous Guidance

Interim regulations raise deposit insurance for participant-directed defined contribution plans and IRAs, incorporate indexation of deposit insurance limit [Citation: 12 C.F.R. Part 330, FDIC Reg. §§330.1-330.16, 71 F.R. 14629 (March 23, 2006)]

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Opdateret d. 13/1/08