"Critical Pension Changes from D.C. - What Do You
Need to Know?" Marcia Wagner, John Hancock Financial Services, June
16, 2014 (Salt Lake City, Utah)
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Pension Changes from D.C.- What Do You Need to Know?" Marcia Wagner, Strategic Pension
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Disclosures: Best Practices for Fiduciaries," Marcia Wagner, Journal
of Pension Benefits, Winter 2013-2014
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In this issue of the Wagner Law Group newsletter,
you'll find articles on recent topics of interest.
The IRS has issued additional
Notice 2014-19) regarding the impact that the U.S. Supreme Court's United States v. Windsor
decision will have on tax-qualified retirement plans.
will also find an article about the Society of Actuaries' release
of New Mortality Tables. The IRS mandates
the mortality tables that plan sponsors must use when calculating
lump sum distributions and minimum contributions obligations.
Additionally, the IRS has mandated new requirements to
report a change in the identity of a "responsible party"
for entities that have an employer identification number
("EIN"). The requirements necessitate the the filing of
an IRS Form 8822-B.
As always, if you have any questions or comments,
please call us or email a member of our team.
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and employee benefits updates.
IRS Issues New Guidance on Windsor's Application to Tax Qualified
The IRS has issued additional guidance (i.e., Notice
2014-19) regarding the impact that the U.S. Supreme Court's United States v. Windsor
decision will have on tax-qualified retirement plans. In Windsor, the
Court upheld a lower court's determination that Section 3 of the
Defense of Marriage Act ("DOMA") is
unconstitutional. Section 3 of DOMA defined
"marriage," for most federal purposes, as "a legal
union between one man and one woman as husband and
wife." It goes on to state that "the word 'spouse'
refers only to a person of the opposite sex who is a husband or a
Immediately following the Windsor decision, the IRS
released guidance that confirmed married same-sex couples would be
treated as married for federal tax purposes if the marriage took
place in a jurisdiction that legally recognizes same-sex marriages,
regardless of where the couple resides. (See Revenue
Ruling 2013-17.) Notice 2014-19 focuses on retirement plans
that are qualified under Section 401(a) of the Internal Revenue
Code (the "Code") and it provides guidance, in question
and answer format, on the effective date and timing of plan amendments
to implement Windsor.
Effective Date. As of June 26, 2013
the date of the Windsor
decision), qualified retirement plans must reflect the outcome of Windsor.
Between June 26, 2013 and September 16, 2013, qualified plan
sponsors may elect to recognize only the same-sex marriages of
those participants who reside in states where same-sex marriage is
recognized. Beginning September 16, 2013, qualified
retirement plans must recognize all participants' same-sex
marriages, regardless of whether the couple resides in a state that
recognizes same-sex marriage.
Qualified plan sponsors may elect to recognize
same-sex marriage before June 26, 2013, as long as all of the
Code's qualification requirements are met. The IRS has
acknowledged that qualified plan sponsors who choose to recognize
same-sex marriage before June 26, 2013 may unwittingly trigger
requirements that are difficult to implement and create unintended
Plan Amendments. Qualified
retirement plan documents that exclude same-sex spouses from the
definition of "spouse" must be amended. Where a
qualified plan's terms are not inconsistent with the outcome of Windsor, a
plan amendment is generally not required. A clarifying
amendment, however, may be useful for purposes of plan
administration. If no amendment is made to a qualified plan,
it nonetheless must be operated in a manner that reflects the
outcome of Windsor.
Deadline to Adopt Plan
Amendments. The deadline for qualified plan sponsors to adopt a
plan amendment to implement Windsor
is the later of (i) December 31, 2014, or (ii) the applicable
deadline under Section 5.05 of Rev. Proc. 2007-44. (Section
5.05 of Rev. Proc. 2007-44 provides that plan sponsors must
generally adopt plan amendments by the later of (i) the end of the
plan year in which the change is first effective , or (ii) the due
date of the employer's tax return for the tax year that includes
the date the change is first effective.)
Code Section 436(c) Rule.
In general, under Code Section 436(c), an amendment to
a single-employer defined benefit plan that increases plan
liabilities cannot take effect unless either the plan's adjusted
funding target attainment percentage is sufficient or the employer
makes additional contributions to the plan, as specified
under Section 436(c)(2). Notice 2014-19 provides the
following special rule for single-employer defined benefit pension
plans: a qualified plan amendment that serves to implement Windsor and
that takes effect on June 26, 2013 will not be treated as an
amendment to which Code Section 436(c) applies. In contrast,
Code Section 436(c) does apply to a qualified plan amendment that
serves to recognize same-sex marriage and that takes effect before
June 26, 2013.
Action Steps for Employers.
Employers are advised to review retirement
plan operations to ensure that their plans have been administered
consistently with Windsor
and correct any errors, if necessary. Corrections involving
the exclusion of same-sex spouses from rights under the plan should
be made consistent with the IRS's correction methodology in Rev.
Proc. 2013-12, and an IRS filing may be required, depending on the
size of the error.
Employers should also notify employees of the changes
to the rights of same-sex spouses to employer provided benefits
under all benefit plans, including qualified retirement
plans. This may include email or written notifications
requesting that same-sex spouses update their personnel records (to
include their spouse's information) and re-soliciting beneficiary
designations, as required. Employers should proactively
communicate to employees the changes that resulted from Windsor and
obtain appropriate documentation for all employees in same-sex
marriage as soon as possible.
Refresher: Fee Disclosure Deadlines
Effective as of July 2012, retirement plan service
providers must provide plan sponsors with a disclosure regarding
the compensation they receive for the services provided (i.e., the
ERISA 408(b)(2) disclosure). In addition, effective as of
August 2012, employers that sponsor retirement plans with
participant-directed accounts must disclose detailed
investment-related information to participants using a comparative
chart format (i.e.,
the ERISA 404(a)(5) disclosure).
Retirement plan sponsors and service providers are
advised to review the timing requirements for these mandatory
disclosures and determine whether any information requirements have
changed since the original disclosures. This article will
review the distribution deadlines for each disclosure and if
applicable, any transitional relief provided by the Department of
408(b)(2) Disclosures. The service
provider fee disclosure mandate under the DOL's 408(b)(2)
regulations became effective on July 1, 2012. Accordingly,
covered service providers must have provided such fee disclosures
to all existing plan sponsor clients by July 1, 2012. Service
providers must provide updated fee disclosures to plan sponsors
following a change in fee information as soon as practicable, but
in no event later than 60 days after the change.
Barring a change in fee information, service providers
need only furnish updated fee disclosures to plan sponsors when the
underlying service agreement is extended or renewed. Where a
service provider enters into a new service arrangement with a plan
sponsor, it must provide the mandatory fee disclosure "reasonably
in advance" of the commencement of services.
It should be noted that recordkeepers are subject to
additional 408(b)(2) disclosure rules. In addition to
providing a 408(b)(2) fee disclosure reasonably in advance of being
hired, recordkeepers must also provide fee and expense information
concerning the plan's investment options. Instead of the
60-day deadline for providing updated disclosures after a change in
fee information occurs, however, recordkeepers need only provide
updated disclosures on an annual basis.
404(a)(5) Disclosures. The DOL's 404(a)(5)
regulations require plan sponsors to distribute, on an annual
basis, a comparative chart to participants that summarizes the
plan's investment options as well as provide, on a quarterly basis,
certain fee disclosures to participants. Plan sponsors must
furnish the comparative charts on an annual basis, meaning at least
once in any 12-month period.
Plan sponsors of calendar year plans were required to
furnish the first comparative chart by August 30, 2012, and the
first quarterly fee disclosure by November 14, 2012. Thus, if
the 2012 Comparative Chart was provided to participants in August
2012, the next comparative chart (the "2013 Comparative
Chart") need not have been provided until August 2013.
DOL recently issued regulatory relief that affects the
timing of plan sponsors' 404(a)(5) disclosures. In Field
Assistance Bulletin 2013-02 ("FAB 2013-12"), DOL provided
plan sponsors with an additional six-month period for furnishing
the 2013 Comparative Chart. Accordingly, a plan sponsor that
provided the 2012 Comparative Chart in August 2012 had until
February 2014 to provide the 2013 Comparative Chart. Many
plan sponsors used this regulatory relief to "reset" the
annual timing for the Comparative Chart so as to align its
distribution with other participant disclosures and to also allow
the 2013 Comparative Chart to reflect performance data for the full
2013 calendar year.
Plan sponsors that, prior to the issuance of FAB
2013-02, had already taken steps or incurred administrative costs
to furnish the 2013 Comparative Chart by the original deadline (i.e., August
2013) were provided a similar six-month grace period for furnishing
the next comparative chart (the "2014 Comparative
Chart"). While plan sponsors must furnish comparative charts
to participants on at least an annual basis, there is no
restriction against plan sponsors distributing comparative charts
on a more frequent basis.
Re-Cap of Fee Disclosure
Deadlines. The 408(b)(2) regulations require covered service
providers to furnish disclosures to plan sponsors in the following
1. when the service provider is first hired,
2. when a service provider has changes or
corrections to its previous disclosures,
3. when a service provider's contract or
arrangement is extended or renewed, and
4. when the plan's record keeper has updated fee and
expense information for the plan's investment options (but only on
an annual basis).
With respect to the ERISA 404(a)(5) disclosures, the
DOL (pursuant to FAB 2013-02) provided plan sponsors with a
one-time additional six-month grace period for furnishing the
annual comparative charts so that distribution efforts could
be coordinated with other participant disclosures. Indeed,
many plans have already availed themselves of this six-month grace
period when distributing the 2013 Comparative Chart. Plan
sponsors that were in the process of furnishing the 2013
Comparative Chart when FAB 2013-12 was released have the
opportunity delay furnishing the 2014 Comparative Chart until as
late as February 2015.
Actuaries Releases New Mortality Tables
Defined benefit pension plan sponsors use mortality
tables for a variety of purposes, including calculating lump sum
distributions and minimum contribution requirements. The IRS
mandates the mortality tables that plan sponsors must use when
calculating lump sum distributions and minimum contributions
Currently, plan sponsors must use the RP-2000
mortality table to determine present value lump sum conversions and
minimum contributions. The Society of Actuaries (the
"SOA") published RP-2000, and it is based on data from
over 20 years ago. Given that the RP-2000 data is stale and
that the Pension Protection Act of 2006 mandated a review of
IRS-required mortality tables every ten years, the SOA, in 2009,
began a study to update underlying mortality assumptions.
In February 2014, the SOA released "exposure
drafts" of a new mortality table, RP-2014, and a new mortality
improvement scale. RP-2014 contained a new table for disabled
life mortality, and separate tables for white collar and blue collar
participants. As expected, RP-2014 reflects longer life
expectancies. The SOA has asked the actuarial community to
submit comments on RP-2014 on or before May 31, 2014. After
reviewing these comments, the SOA will issue a final report
containing the RP-2014 and the new mortality improvement
IRS Notice 2013-49 contains the mortality tables that
plan sponsors must use for the 2014 and 2015 valuation years.
These tables are predicated on RP-2000. IRS is expected to
require plan sponsors to begin using RP-2014 for the 2016 valuation
year. For accounting purposes, however, plan sponsors may
elect to adopt RP-2014 earlier to determine pension liabilities.
While the final content of RP-2014 is unknown, the
following is certain: in application, RP-2014, which reflects
longer life expectancies, will produce larger pension liabilities
and increase the cost of lump sum distributions and plan
contribution obligations. RP-2014 will also affect defined
contribution plans, as annuities purchased with account balances
will cost more and provide lower monthly benefits.
In view of the imminent release of RP-2014, plan
sponsors are advised to consult with their ERISA counsel and
actuaries to formulate strategies to manage the increased pension
plan liabilities and contribution obligations that will result.
8822-B: What is it and Who Needs to File it?
To maintain correct ownership details, curb abusive
tax schemes, and ensure that the correct individual is contacted
regarding tax matters, the IRS has mandated new requirements to
report a change in the identity of a "responsible party"
for entities that have an employer identification number
("EIN"). Effective as of January 1, 2014, an entity
a plan sponsor, plan administrator or plan trust) must report a
change in its "responsible party" by completing and
filing IRS Form 8822-B with the IRS within 60 days of the
Background. As a general rule,
every entity must obtain an EIN for tax filing and reporting
purposes. To obtain an EIN, the IRS requires an entity to
complete Form SS-4, "Application for Employer Identification
Number." Before January 2010, the name and identifying number
social security number) of the principal officer, general partner,
grantor, owner or settlor was reported on Form SS-4.
Effective January 2010, the IRS revised Form SS-4 to instead report
the name and social security number of the entity's
"responsible party." IRS, however, believed that,
in many circumstances, the individual originally reported on Form
SS-4 was either acting on behalf of the entity or no longer in that
Who is a "Responsible
Party"? Form 8822-B instructions define "responsible
party" as the "person who has a level of control over, or
entitlement to, the funds or assets in the entity that as a
practical matter, enables the individual, directly or indirectly,
to control, manage or direct the entity and the disposition of its
funds and assets."
In the context of retirement plans, the IRS has
published guidance as to whom is a "responsible
Issue 2013-8 of Employee Plans News.) According to the IRS, a
responsible party for retirement plans "is the person who has
a level of control, directly or indirectly, over the funds or
assets in the retirement plan."
For benefit plans where the entity that serves as the
plan administrator is not the plan sponsor, such entity will have
its own EIN. Consequently, in cases where the plan
administrator's "responsible party" has changed, a
separate Form 8822-B must be filed.
Penalty for Failing to File
Form 8822-B. Currently, there is no penalty for failing to file a
Form 8822-B. However, entities that fail to provide the IRS
with a current mailing address or the identity of its responsible
party run the risk of not receiving a notice of deficiency or a
notice of demand for tax, meaning that penalties and interest will
continue to accrue on any tax deficiency.
Action Steps. Going forward, plan
sponsors and plan administrators are advised to report changes
in their "responsible party" by filing Form 8822-B with
the IRS within 60 of such change. Currently, Form 8822-B
cannot be e-filed.