Clients and Friends:
ERISA Law Alert addresses two recent regulatory developments
concerning the administration of retirement plans.
First, the IRS has issued guidance that updates the
rules applicable to determining a defined benefit plan's minimum
funding status. As a result of the updated guidance, defined benefit
plans' minimum funding requirements will increase, and plan sponsors
will be required to adopt plan amendments to implement these changes.
Second, the DOL has released updated guidance to
clarify how the Employee Retirement Income Security Act of 1974
("ERISA") impacts plan fiduciaries' decisions on the voting
of proxies on securities held by employee benefit plans and other
exercises of shareholder rights.
always, please feel free to contact one of the staff attorneys at The
Wagner Law Group for further information or assistance on these
Proposes Update to Mortality Tables for Defined Benefit Pension Plans
has issued proposed regulations updating the mortality tables used by
most defined benefit plan sponsors to determine minimum funding
requirements. The proposed regulations also update the rules a plan
sponsor must satisfy to obtain IRS approval to use plan-specific
substitute mortality tables instead of the generally applicable
mortality tables for minimum funding purposes.
Background. Internal Revenue Code (the "Code")
Section 430 specifies the minimum funding requirements that generally
apply to single-employer defined benefit pension plans. Code Section
430 defines a plan's minimum required contribution by reference to
its funding target for the plan year. A plan's funding target for a
plan year generally is the present value of all benefits accrued
under the plan as of the first day of that plan year.
Section 430 requires that the IRS issue regulations prescribing the
mortality tables for plan sponsors to use to determine any present
value, or make any computation, in connection with the determination
of a plan's minimum funding requirements.
NOTE: Mortality tables indicate the probability of
survival year-by-year for an individual based on gender, age and
purposes of determining a defined benefit pension plan's minimum
funding requirements, mortality tables are used in tandem with other actuarial
assumptions to calculate the present value of a stream of future
Section 430 requires the IRS to base its mortality tables on the
actual mortality experience of plan participants and projected trends
in that experience. Accordingly, the IRS must revise the mortality
tables at least once every ten years to reflect the actual mortality
experience of pension plan participants and projected trends in that
experience. The IRS last issued regulations to update its mortality
tables and the rules for using substitute mortality tables in July of
Regulations. The proposed
regulations explain the methodology the IRS used to update the
general applicability mortality tables and confirm that the IRS's
methodology follows the Code-based requirement that the mortality
tables reflect the actual mortality of pension plan participants. As
with the 2008 regulations, the IRS's methodology involves a separate
determination of base tables, and the projection of longer life expectancies.
The proposed base mortality tables are available at Prop. Reg §
proposed regulations also update the rules for plan sponsors using
plan-specific mortality tables and include several changes to
existing regulations on the methodology for developing these
substitute mortality tables. In particular, the proposed regulations
require a substitute mortality table to be developed by multiplying
the mortality rates from a projected version of the general
applicability mortality table by a ratio of the actual deaths for the
plan population to expected deaths determined using the standard
mortality tables for that population. In sum, the method provided
under the proposed regulations is more streamlined than the 2008
method and allows for the use of substitute mortality tables by plans
with smaller populations.
Sponsor Takeaway. The proposed
regulations are to become effective for plan years beginning in 2018,
meaning that plan sponsors may no longer use substitute mortality
tables after this date unless the IRS has approved such tables.
benefit plan sponsors must be cognizant of the fact that a practical
effect of the updated mortality tables, which reflect longer life
expectancies, will be increased minimum funding requirements.
Moreover, defined benefit plan sponsors must be sure to amend their
plans to reflect the updated mortality tables.
Click here to view the proposed regulations.
Releases Updated Guidance on Proxy Voting
Department of Labor ("DOL") has issued Interpretive
Bulletin 2016-01 ("IB 16-01") , which provides guidance on
the legal standards imposed under ERISA with respect to voting of
proxies on securities held by employee benefit plans and the exercise
of other shareholder rights. In issuing IB 16-01, DOL has withdrawn
the proxy voting guidance provided in Interpretive Bulletin 2008-02
("IB 08-02") and reinstated the guidance it provided in
Interpretive Bulletin 1994-02 ("IB 94-02"), with certain
modifications. Plan fiduciaries and investment managers must now
review IB 2016-01 to determine how they are impacted by the revised
Background. The DOL first provided guidance in IB 94-02 on
how ERISA impacts plan fiduciaries' decisions on proxy votes and
other exercises of shareholder rights. IB 94-02 confirmed that a plan
fiduciary's duty to manage plan assets prudently extends to proxy
voting. In sum, IB 94-02 explained that plan fiduciaries may engage
in shareholder activities intended to influence corporate management
if there is a reasonable expectation that such activities are likely
to enhance the value of the plan's investment in consideration of the
costs for taking such action.
DOL issued IB 08-02 to replace IB 94-02. Specifically, IB 08-02
explained that plan fiduciaries should only vote proxies if they
determined that voting was more likely than not to increase the
plan's investment, in view of the costs for voting. Many stakeholders
concluded that IB 08-02 prohibited plan fiduciaries from proxy voting
unless the plan had performed a cost-benefit analysis and concluded
that doing so would increase the economic value of the plan's
concluding that IB 08-02 created confusion among plan fiduciaries and
likely discouraged many from voting proxies, DOL issued IB 16-01 to
help fiduciaries better understand their obligations under ERISA with
respect to proxy voting.
2016-01. IB 16-01 reiterates
that a plan fiduciary's duty to manage plan assets prudently extends
to proxy voting, and that proxies should be voted as part of the
process of managing the plan's investments, unless the fiduciary
determines that the cost and time involved in voting proxies is not
in the plan's best interest. Accordingly, a plan trustee has the duty
to vote proxies except where: