05/13/2013 Pension & Benefits Week Alertstatic.store.tax.thomsonreuters.com/static/sample... · Annual contribution limitation for 2014. For cal-endar year 2014, the limitation on

05/13/2013

Pension &AlertBenefits Week

n Highlights n

EBSA Seeks to Require DC Plan Benefit Statements to Include ‘‘Lifetime Income’’ Calculations and Illustra-tions. In an advance notice of proposed rulemaking, EBSA has set out to-be proposed regs that would requiredefined contribution plans to include estimated values of benefits payable as a lifetime income stream ofpayments, in addition to presenting the benefits as an account balance.

EBSA Issues Guidance and Model Employee Notices of Health Care Coverage; Model COBRA NoticeUpdated. Under EBSA’s guidance, beginning October 1, 2013, employers must provide employees with awritten notice detailing certain specified information about the existence of the private Health InsuranceMarketplace that begins in 2014, and an employee’s eligibility for coverage in that Marketplace. EBSA also issuedmodel notices for employers to use, and has updated the model COBRA notice to let employees know about theupcoming availability of these insurance alternatives.

IRS Releases 2014 Inflation Adjustment Figures for Health Savings Accounts. IRS has provided the annualinflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2014 for health savings ac-counts.

Moench Presumption Clarified. In an employer stock drop case involving an employee stock ownership plan,the plan’s fiduciaries who continued to allow investment in employer stock despite a significant decline in thestock’s value, didn’t violate their duty to act prudently, the Seventh Circuit held. Under Moench, the test forprudence is that no reasonable fiduciary would have continued to allow employer stock to be offered as aninvestment option.

‘‘Advances’’ to Induce Physicians to Work at Clinic Were Compensation. A district court has granted thegovernment summary judgment that ‘‘advances’’ paid by a medical clinic to newly hired physicians in exchangefor their promise to work there for five years were in fact compensation for services. Thus, the clinic, which hadinitially treated the advances as loans, wasn’t entitled to a refund of the withholding and FICA taxes paid.

2012-2013 Priority Guidance Plan. IRS has updated its 2012-2013 Priority Guidance Plan, noting the originalprojects that have since been published.

Comments Sought on Summary Plan Description Requirements. DOL is submitting to OMB, for review andapproval for continued use, the EBSA-sponsored information collection request regarding summary plandescription requirements under ERISA, and is requesting public comments.

Pension & Benefits Week (USPS 014-206) is published weekly by Thomson Reuters/RIA, 195 Broadway, New York, NY 10007. Volume 19, No. 19. Subscriptionrate: $290 per year. Periodicals postage paid at New York, NY, and additional mailing offices. 2013 Thomson Reuters/RIA. All rights reserved. Copyright is notclaimed in any material secured from official U.S. Government sources. Postmaster: Send address changes to Pension & Benefits Week, Thomson ReutersCustomer Service, 117 East Stevens Avenue, Valhalla, NY 10595-1264.The opinions expressed in the column, Practitioner to Practitioner, are those of the authors and may not necessarily represent those of Thomson Reuters/RIA.ARTICLE SUBMISSIONS: Pension & Benefits Week welcomes articles from pension and benefits professionals that will offer practical information strategies andideas of use to other practitioners. Please direct article ideas to Elizabeth McLeod, Thomson Reuters/RIA, 195 Broadway, New York, NY 10007.

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Thomson Reuters/RIA05/13/2013

PBGC Booklet Updated. PBGC has updated its booklet, ‘‘Finding a Lost Pension,’’ which is designed as a guidefor people who think they have a pension, but who cannot find their pension plan or former employer to beginreceiving their benefits.IRS Interest Rates. IRS has updated the weighted average interest rate, yield curve, and segment rates.

Pension & Benefits Week

Linda Scheffel, LL.M. (NY Bar) Dennis P. McMahon, LL.M. (NY, MA Bars)Vice President/Publisher Managing Editor

Elizabeth McLeod, J.D. (NY Bar) David Freid, J.D. (NY Bar)Executive Editor Senior Editor

Richard H. O’Donnell, LL.M. Roger M. Ross, LL.M. Gary Bronstein, LL.M.(NJ Bar) (NY Bar) (CA, MA Bars)Editor Editor Editor

Michael J. McGoffin, LL.B. Wendy Bicovny, C.P.A., LL.M. Ralph M. Silberman, J.D. Benjamin Sears, LL.M.(FL Bar) (CA, DC, NY Bars) (VA, DC Bars) (TN Bar)Editor Editor Editor Consulting Editor

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Editorial Office Editorial Questions Department Customer Service Department195 Broadway Phone: 1-800-742-3348 117 East Stevens Avenue

New York, NY 10007 Fax: 1-800-826-7828 Valhalla, NY 105951-212-645-4800 1-800-431-9025

Pension & Benefits Week (USPS 014-206) is published weekly by Thomson Reuters/RIA, 195 Broadway, New York, NY 10007. Volume 19, No. 19.Subscription rate: $290 per year. Periodicals postage paid at New York, NY and additional mailing offices. 2013 Thomson Reuters/RIA. All rightsreserved. Copyright is not claimed in any material secured from official U.S. Government sources.

The opinions expressed in the column, Practitioner to Practitioner, are those of the authors and may not necessarily represent those of ThomsonReuters/RIA.

ARTICLE SUBMISSIONS: Pension & Benefits Week welcomes articles from pension and benefits professionals that will offer practical informationstrategies and ideas of use to other practitioners. Please direct article ideas to Elizabeth McLeod, Thomson Reuters/RIA, 195 Broadway, New York,NY 10007.

2

Thomson Reuters/RIA 05/13/2013

IRS News

IRS Releases 2014 Inflation AdjustmentFigures for Health Savings Accounts

IRS has provided the annual inflation-adjusted con-tribution, deductible, and out-of-pocket expense limitsfor 2014 for health savings accounts (HSAs). (RevProc 2013-25, 2013-21 IRB)

HSA basics. Eligible individuals may, subject tostatutory limits, make deductible contributions to anHSA. Employers as well as other persons (e.g., familymembers) also may contribute on behalf of an eligibleindividual. Employer contributions generally aretreated as employer-provided coverage for medicalexpenses under an accident or health plan and areexcludable from income. In general, a person is an‘‘eligible individual’’ if he is covered under a high de-ductible health plan (HDHP) and is not covered underany other health plan that is not a high deductibleplan, unless the other coverage is permitted insur-ance (e.g., for worker’s compensation, a specifieddisease or illness, or providing a fixed payment forhospitalization). General purpose health flexiblespending accounts (FSAs) and health reimbursementarrangements (HRAs) constitute ‘‘other coverage’’that will generally preclude HSA eligibility. However,exceptions apply for, among other things, limited pur-pose FSAs and HRAs (those providing only certainbenefits, e.g., dental and vision) and FSAs and HRAsimposing high annual deductibles.

HSA distributions not used to pay for qualifyingmedical expenses generally are included in incomeand subject to a 10% penalty tax.

Annual contribution limitation for 2014. For cal-endar year 2014, the limitation on deductions underCode Sec. 223(b)(2)(A) for an individual with self-onlycoverage under an HDHP is $3,300 (up from $3,250for 2013). For calendar year 2014, the limitation ondeductions under Code Sec. 223(b)(2)(B) for an indi-vidual with family coverage under a HDHP is $6,550(up from $6,450 for 2013).

High deductible health plan for 2014. For calen-dar year 2014, an HDHP is defined under Code Sec.223(c)(2)(A) as a health plan with an annual deducti-ble that is not less than $1,250 for self-only coverage(the same as for 2013), or $2,500 for family coverage(the same as for 2013), and the annual out-of-pocketexpenses (deductibles, co-payments, and otheramounts, but not premiums) do not exceed $6,350 for

self-only coverage (up from $6,250 for 2013), or$12,700 for family coverage (up from $12,500 for2013).

IRS Updates 2012-2013 Priority GuidancePlan

IRS has updated its ‘‘2012-2013 Priority GuidancePlan.’’ Highlights of the revised version that relate toretirement and health benefits are below. (2012-2013IRS Priority Guidance Plan Update, 5/2013)

The 2012-2013 Priority Guidance Plan, released inDecember 2012, listed 317 projects for the plan yearbeginning July 2012 and ending June 2013 (see Pen-sion & Benefits Week at ¶ 3). That list included 69pension and benefits projects. This update notes thatthree of the original projects have been published,and that two of the previously added items have beenpublished.

Retirement benefits. Of the original 39 GuidancePlan projects affecting retirement benefits, IRS hasnow reported two as having been published (i.e.,items 10 and 27, below).

(10) Revenue procedure on Code Sec. 403(b)plans—Published as Rev Proc 2013-22, 2013-18IRB (see Pension & Benefits Week at ¶ 1).

(27) Guidance on funding rules in the HighwayInvestment, Job Creation, and Economic Growth Actof 2012 (Division D of MAP-21)—Published as No-tice 2013-11, 2013-11 IRB (see Pension & BenefitsWeek at ¶ 1) (also previously published as Notice2012-55, 2012-36 IRB and Notice 2012-61, 2012-42IRB (see Pension & Benefits Week at ¶ 1 and Pension& Benefits Week at ¶ 1, respectively).

Executive compensation, health care, and otherbenefits. IRS reported one of the original 30projects affecting executive compensation and healthplan benefits as published (i.e., item 23 below), andthat two of the projects added in the previous updatehave been published (i.e., items 35 and 36, below).

(23) Regs under Code Sec. 3504 designating cer-tain parties who file employment tax returns undertheir EINs for their clients’ workers as persons re-quired to perform acts of employers—Published asREG-102966-10 (NPRM).

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(35) Guidance on the application of the retroactiveincrease in excludable transit benefits as a result ofenactment of the American Taxpayer Relief Act of2012 (Taxpayer Relief Act of 2012, PL 112-240, 01/02/2013)—Published as Notice 2013-8, 2013-7 IRB(see Pension & Benefits Week at ¶ 1).

(36) Guidance on the extension of the Work Op-portunity Tax Credit as a result of enactment of theTaxpayer Relief Act of 2012—Published as Notice2013-14, 201313 IRB.

IRS Updates Weighted Average InterestRates, Yield Curves, Segment Rates, andAdjusted Segment Rates

IRS has provided guidance on (1) the corporatebond monthly yield curve (and the corresponding spotsegment rates), the 24-month average segmentrates, the adjusted 24-month average segment ratesusing 25-year interest rate smoothing, and the fund-ing transitional segment rates under Code Sec.430(h)(2), (2) the interest rate on 30-year Treasurysecurities under Code Sec. 417(e)(3)(A)(ii)(II), as ineffect for plan years beginning before 2008, and (3)the minimum present value segment rates underCode Sec. 417(e)(3)(D), as in effect for plan yearsbeginning after 2007. These rates reflect certainchanges implemented by the Moving Ahead for Pro-gress in the 21st Century Act (MAP-21, PL 112-141;see Pension & Benefits Week at ¶ 5). MAP-21 pro-vides that for purposes of Code Sec. 430(h)(2), thesegment rates are limited by the applicable maximumpercentage or the applicable minimum percentagebased on the average of segment rates over a25-year period. (Notice 2013-32, 2013-22 IRB)

Corporate bond weighted average interestrate. IRS will no longer publish the corporate bondweighted average interest rate and the composite

corporate bond rate in the monthly minimum fundingstandards—full-funding limitation notice. IRS deter-mined that there is no further use for these rates underthe Code, as the transition period during which plansused a blended rate that was comprised of both theyield curve rates and the corporate bond weightedaverage rates is over.

In Notice 2011-93, IRS had requested commentson whether the corporate bond weighted averageinterest rate and the composite corporate bond rateshould be dropped from these monthly interest ratenotices, but received no comments from the public.

These rates will, however, continue to be posted onthe IRS website at http://www.irs.gov/Retire-ment-Plans/Composite-Corporate-Bond-Rate-Table.

Yield curve and segment rates. For plan yearsbeginning after 2007 (except for delayed effectivedates for certain plans under PPA § § 104, 105, and106), Code Sec. 430 specifies the minimum fundingrequirements that apply to single employer plansunder Code Sec. 412. Code Sec. 430(h)(2) specifiesthe interest rates that must be used to determine aplan’s target normal cost and funding target. Underthis provision, present value is generally determinedusing three 24-month average interest rates (‘‘seg-ment rates’’), each of which applies to cash flowsduring specified periods. However, an election maybe made under Code Sec. 430(h)(2)(D)(ii) to use themonthly yield curve in place of the segment rates.

The spot first, second, and third segment rates forApril 2013 are, respectively, 0.93, 3.61, and 4.88. The24-month average corporate bond segment rates ap-plicable for March [sic, May] 2013 without adjustment,and the adjusted 24-month average segment ratestaking into account the applicable percentages of cor-responding the 25-year average segment rates, areas follows:

MAP-21 Adjusted 24-Month Average Segment Rates

----------------------------------------------------------------------------------------

For Plan : : : Adjusted 24-Month Average

Years : : : Segment Rates, Based on

Beginning : : 24-Month Average Segment : Applicable Percentage of 25-

In : : Rates not Adjusted : Year Average Rates

-----------:----------------:---------------------------:-------------------------------

: : :

: Applicable : First Second Third : First Second Third

: Month : Segment Segment Segment : Segment Segment Segment

-----------:----------------:---------------------------:-------------------------------

2012 : May 2013 : 1.46 4.15 5.20 : 5.54 6.85 7.52

2013 : May 2013 : 1.46 4.15 5.20 : 4.94 6.15 6.76

---------------------------------------------------------------------------------------

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30-year Treasury securities interest rate. Code Sec. 417(e)(3)(A)(ii)(II) defines the applicable interest rate,which must be used for purposes of determining the minimum present value of a participant’s benefit under CodeSec. 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the dateof distribution or such other time as IRS may by regulations prescribe.

The rate of interest on 30-year Treasury securities for April 2013 is 2.93%, IRS said.Minimum present value segment rates. Generally, the applicable interest rates under Code Sec.

417(e)(3)(D) are segment rates computed without regard to a 24-month average. The minimum present valuetransitional segment rates determined for April 2013 are as follows:

First Second Third

Segment Segment Segment

0.93% 3.61% 4.88%

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DOL Developments

EBSA Seeks to Require DC Plan BenefitStatements to Include ‘ ‘Lifetime Income’ ’Calculations and Illustrations

In an advance notice of proposed rulemaking(ANPRM), EBSA has set out to-be-proposed regs thatwould require defined contribution plans to includeestimated values of benefits payable as a lifetimeincome stream of payments (i.e., as a monthly annu-ity), in addition to presenting the benefits as an ac-count balance. (EBSA Advance Notice of ProposedRulemaking (5/08/2013); EBSA Fact Sheet, (05/07/2013))

In 2010, IRS and DOL issued a Request for Infor-mation (RFI; see Pension & Benefits Week at ¶ 2) toexplore whether, and how, to improve the retirementsecurity of participants in employer-sponsored retire-ment plans and IRAs. This was to be done by easingaccess to, and facilitating use of, lifetime income orother arrangements designed to provide a lifetimestream of income after retirement (i.e., retirementannuities). The RFI sought input on this subject fromplan participants, employers and other plan sponsors,plan service providers, and members of the financialcommunity, as well as the general public.

In its Semiannual Regulatory Agenda (see Pension& Benefits Week at ¶ 5), EBSA stated that it had‘‘pre-rule’’ guidance on whether, and how, the individ-ual benefit statements required under ERISA § 101could present a participant’s accrued benefits in adefined contribution plan (i.e., the individual’s accountbalance) as a lifetime income stream of payments, inaddition to presenting the benefits as an accountbalance.

Based on the more than 700 responses received inresponse to the RFI, plus information provided at ajoint IRS-DOL hearing on lifetime income options,EBSA has released a to-be-proposed rule that wouldrequire a defined contribution plan participant’s ac-crued benefits to be provided as an estimated lifetimestream of payments, in addition to being presented ashis current account balance, as required under pre-sent rules. Also, EBSA is considering a rule that wouldrequire a participant’s accrued benefits to be pro-jected to his retirement date, and then converted to,and expressed as, an estimated lifetime stream ofpayments. (EBSA Advance Notice of ProposedRulemaking (5/08/2013))

According to EBSA, the switch from defined benefitplans to defined contribution plans makes it moredifficult for employees to determine how much of amonthly income benefit can be generated from theirdefined contribution plan account balances. Further,says EBSA, alerting an employee with a $100,000account balance to the fact that this will purchase justa $700 monthly lifetime benefit may cause the em-ployee to begin saving more aggressively for retire-ment. To remedy this situation, EBSA would add newProposed Labor Reg § 2520.105-1, under which:

• A participant’s pension benefit statement wouldshow the current account balance and an estimatedlifetime income stream of payments based on thatbalance. The lifetime income illustration would as-sume the participant had reached normal retirementage as of the date of the benefit statement, even if theparticipant is much younger. (EBSA Advance Noticeof Proposed Rulemaking (5/08/2013); Proposed La-bor Reg § 2520.105-1(c)(2)(vi))

• For participants who have not yet reached normalretirement age, their pension benefit statements alsowould show a projected account balance and theestimated lifetime income stream based on that bal-ance. A participant’s current account balance wouldbe projected to normal retirement age based on as-sumed future contributions and investment returns.The projected account balance would be converted toan estimated lifetime income stream of payments,assuming that the person retires at normal retirementage. This account balance and the related lifetimeincome payment would be expressed in current dol-lars. (EBSA Advance Notice of Proposed Rulemaking( 5 / 0 8 / 2 0 1 3 ) ; P r o p o s e d L a b o r R e g§ 2520.105-1(d)(1))

• Both lifetime income streams (i.e., the one basedon the current account balance and the one based onthe projected account balance) would be presentedas estimated monthly payments based on the ex-pected mortality of the participant. (EBSA AdvanceNotice of Proposed Rulemaking (5/08/2013); Pro-posed Labor Reg § 2520.105-1(c)(2)(vi) and Pro-posed Labor Reg § 2520.105-1(c)(2)(vii)) In addition,if the participant has a spouse, the lifetime incomestreams would be based on the joint lives of theparticipant and spouse. (EBSA Advance Notice of

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Proposed Rulemaking (5/08/2013); Proposed LaborReg § 2520.105-1(e)(1)(ii))

• Pension benefit statements would contain an un-derstandable explanation of the assumptions behindthe lifetime income stream illustrations. Pension ben-efit statements also would contain a statement thatprojections and lifetime income stream illustrationsare estimates and not guarantees. (EBSA AdvanceNotice of Proposed Rulemaking (5/08/2013); Pro-posed Labor Reg § 2520.105-1(c)(6)(i) through Pro-posed Labor Reg § 2520.105-1(c)(6)(iii) )

Assumptions and safe harbors. To provide thelifetime income illustrations set out in the ANPRM,certain assumptions would be used. For example,contribution and investment return assumptionswould be required to project a plan participant’s ac-count balance to his retirement age, and mortality andinterest rate assumptions would be needed to convertan account balance (either current or projected) into alifetime income stream. The ANPRM would requirethat plan administrators use only ‘‘reasonable as-sumptions’’ taking into account certain professionalstandards when creating lifetime income illustrations.The ANPRM, however, includes two safe harborsunder which certain interest and mortality assump-tions would be deemed reasonable.

Projection safe harbor. When projecting ac-count balances, the ANPRM provides that it would bereasonable for a plan administrator to assume:

• that contributions continue to normal retirement ageat the current annual dollar amount, increased at arate of 3% per year. (EBSA Advance Notice of Pro-posed Rulemaking (5/08/2013); Proposed Labor Reg§ 2520.105-1(d)(2)(i))

• that investment returns are 7% per year (nominal).(EBSA Advance Notice of Proposed Rulemaking (5/0 8 / 2 0 1 3 ) ; P r o p o s e d L a b o r R e g§ 2520.105-1(d)(2)(iii))

• a discount rate of 3% per year, in order to show theprojected account balance in today’s dollars. (EBSAAdvance Notice of Proposed Rulemaking (5/08/2013); Proposed Labor Reg § 2520.105-1(d)(2)(iii))

Conversion safe harbor. The ANPRM alsowould provide safe harbor interest and mortality as-sumptions for a plan administrator to use when con-verting current and projected account balances intolifetime income streams. Thus, the ANPRM statesthat it would be reasonable for a plan administrator toassume:

• an interest rate equal to the rate on 10-year con-stant maturity Treasury securities. (EBSA Advance

Notice of Proposed Rulemaking (5/08/2013); Pro-posed Labor Reg § 2520.105-1(e)(2)(ii)(A))

• mortality as reflected in the Code Sec. 417(e)(3)applicable mortality table. (EBSA Advance Notice ofProposed Rulemaking (5/08/2013); Proposed LaborReg § 2520.105-1(e)(2)(ii)(B))

• that if married, the participant’s spouse is the sameage as the participant. (EBSA Advance Notice ofProposed Rulemaking (5/08/2013); Proposed LaborReg § 2520.105-1(e)(1)(ii))

• that payments commence immediately, and thatthe participant is normal retirement age, even if actu-ally younger than normal retirement age. (EBSA Ad-vance Notice of Proposed Rulemaking (5/08/2013);Proposed Labor Reg § 2520.105-1(e)(4))

Lifetime income example & calculator. Appen-dix A to the ANPRM contains a Lifetime Income Illus-tration that shows how the safe harbors (see above)would operate when determining lifetime incomestreams based on current and projected account bal-ances. EBSA states that the example is not intendedas a model format or to provide model content forpension benefit statements, including the explanationfor participants and beneficiaries required by Pro-posed Labor Reg § 2520.105-1(c)(6).

In conjunction with the publication of the ANPRM,EBSA has also provided an interactive calculator thatwould compute lifetime income streams in accor-dance with the proposed regulatory framework. Thiscalculator is available at EBSA’s website:www.dol.gov/ebsa/regs/l i fet imeincomecalcu-lator.html.

Public comments. EBSA is seeking public com-ments from interested persons on a number of topicsregarding the ANPRM. Comments are due no laterthan July 8, 2013. Public comments can be submittedelectronically by email to [email protected] or by usingt h e F e d e r a l e R u l e m a k i n g p o r t a l a twww.regulations.gov. (EBSA Fact Sheet, (05/07/2013))

All comments will be available to the public online atwww.regulations.gov and www.dol.gov/ebsa , as wellas in the EBSA Public Disclosure Room.

EBSA Issues Guidance and ModelEmployee Notices of Health CareCoverage; Model COBRA Notice Updated

Under guidance issued by EBSA, beginning Octo-ber 1, 2013, employers must provide employees witha written notice detailing certain specified information

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about the existence of the private Health InsuranceMarketplace that begins in 2014, and an employee’seligibility for coverage in that Marketplace. In addition,EBSA has issued model notices for employers to use,and has also updated the model COBRA notice to letemployees know about the upcoming availability ofthese insurance alternatives. (EBSA Technical Re-lease No. 2013-02)

Notices to inform employees of coverage op-tions. Under Fair Labor Standards Act (FLSA)§ 18B (29 USC § 218B), as added by PPACA, anFLSA-covered employer must provide to each em-ployee at the time of hiring (or for current employees,not later than March 1, 2013), a written notice detail-ing certain specified information about the existenceof the Health Insurance Marketplace, ‘‘Exchange’’ asreferred to in the statute, and an employee’s eligibilityfor coverage by a qualified health plan (QHP) offeredin the Marketplace.

Previously, EBSA concluded that, until regulationswere issued under, and became applicable under,FLSA § 18B, employers would not have to complywith FLSA § 18B. In addition, EBSA stated that it wasconsidering providing model, generic language thatcould be used to satisfy the notice requirement. (SeePension & Benefits Week at ¶ 6.)

In its Technical Release, EBSA has provided tem-porary guidance on what EBSA will consider as com-pliance with § 18B. The temporary guidance will re-main in effect until EBSA issues regs or otherguidance. Accordingly, EBSA has decided that em-ployers must start providing the required notices toeach new employee at the time of hiring, beginningOctober 1, 2013. With respect to employees who arecurrent employees before October 1, 2013, employ-ers must provide the notice no later than October 1,2013 (even though § 18B required compliance byMarch 13, 2013)

EBSA’s guidance addresses:

• Who must provide notices. Notices must be pro-vided by any employers to which the FLSA applies.Generally, this means an employer that employs oneor more employees who is engaged in, or producesgoods for, interstate commerce. For most firms, a testof not less than $500,000 in annual dollar volume ofbusiness also applies. The FLSA also specificallycovers hospitals; institutions primarily engaged in thecare of the sick, the aged, mentally ill, or disabled whoreside on the premises; schools for children who arementally or physically disabled or gifted; preschools,elementary, and secondary schools, and institutions

of higher education; and federal, state, and local gov-ernment agencies.

• To whom must notices be provided. Employersmust provide a notice to each employee, regardless ofplan enrollment status (if applicable), or of part-time orfull-time status. Employers do not have to provide aseparate notice to dependents or other individualswho are, or may become, eligible for coverage underany available plan but who are not employees.

• Form and content of notice. A notice must includeinformation regarding the existence of a new Market-place, as well as contact information and a descriptionof the services provided by a Marketplace. In addition,a notice must (1) inform the employee that the em-ployee may be eligible for a premium tax credit underCode Sec. 36B (see Pension & Benefits Week at ¶ 1),if the employee purchases a QHP through the Market-place, and (2) include a statement informing the em-ployee that if the employee purchases a QHP, theemployee may lose the employer contribution (if any)to any health benefits plan offered by the employer,and that all or a portion of such contribution may beexcludable from income for federal income tax pur-poses. A notice must be provided in writing in amanner calculated to be understood by the averageemployee.

• Delivery of notice. A notice may be provided eitherby first-class mail, or electronically if it meets therequirements of EBSA’s electronic disclosure safeharbor (Labor Reg § 2520.104b-1(c); see Pension &Benefits Week at ¶ 2).

To satisfy the content requirements describedabove, EBSA has posted model language at http://www.dol.gov/ebsa/healthreform. There is one modelfor employers who do not offer a health plan, andanother model for employers who offer a health planto some or all employees. Employers may use one ofthese models, as applicable, or a modified version,provided the notice meets the content requirements.

Updated model COBRA election notice.ERISA § 606 requires a plan administrator to notifyeach qualified beneficiary entitled to elect continua-tion coverage of the beneficiary’s COBRA rights, andmandates that this notice be made within 14 daysafter the plan administrator is notified of a qualifyingevent. In addition, EBSA has issued regs with detailedcontent requirements for this notice, and has pub-lished a model election notice to assist plan adminis-trators in fulfilling the notice requirements, althoughuse of the model election notice is not mandatory (seePension & Benefits Week at ¶ 3).

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EBSA said that it has decided to update the modelnotice, because some qualified beneficiaries maywant to consider and compare health coverage alter-natives to COBRA continuation coverage that areavailable through the Marketplace, and qualified ben-eficiaries may also be eligible for a premium tax creditto help pay for some or all of the cost of coverage inplans offered through the Marketplace. Accordingly,the model notice is being revised to help make quali-fied beneficiaries aware of other coverage optionsavailable in the Marketplace. As with the earliermodel, in order to use this model election noticeproperly, the plan administrator must complete it byfilling in the blanks with the appropriate plan informa-tion. Use of the model election notice, appropriatelycompleted, will be considered to be good faith compli-ance with the election notice content requirements ofCOBRA.

EBSA has posted the model election notice as amodifiable, electronic form at http://www.dol.gov/ebsa/cobra.html.

rcaution: The model notice discusses the Mar-ketplace and related issues prospectively. For exam-ple, it states: ‘‘When key parts of the health care lawtake effect, you’ll be able to buy coverage through theHealth Insurance Marketplace.’’ Thus, this model isavailable for immediate use. On the other hand, it willhave to be updated again for use in 2014, since theMarketplace will then be in place. EBSA does notmention this in its guidance, nor does it state when itmight provide further updates to make such languageaccommodations.

DOL Requests Comments on Summary PlanDescription Requirements

DOL is submitting to the Office of Management andBudget (OMB), for review and approval for continueduse, the EBSA-sponsored information collection re-quest (ICR) regarding summary plan description re-quirements under ERISA. DOL also is seeking publiccomments on the ICR. (DOL Notice, 78 Fed. Reg.25768, 5/2/2013)

The ICR is to maintain Paperwork Reduction Actauthorization for regs that provide guidance on thecontent, frequency, and manner of certain disclosuresthat ERISA requires employee benefit plans periodi-cally to furnish to plan participants and specified ben-eficiaries, said DOL. Plans use summary plan de-scriptions, summaries of material modifications, andsummaries of material reductions to make the disclo-sures.

OMB is particularly interested in comments that:evaluate whether the proposed collection of informa-tion is necessary for the proper performance of thefunctions of the agency, including whether the infor-mation will have practical utility; evaluate the accu-racy of the agency’s estimate of the burden of theproposed collection of information, including the valid-ity of the methodology and assumptions used; ad-dress how to enhance the quality, utility, and clarity ofthe information to be collected; and address how tominimize the burden of the collection of information onthose who are to respond, including through the useof appropriate automated, electronic, mechanical, orother technological collection techniques or otherforms of information technology, e.g., permitting elec-tronic submission of responses.

Comments should be submitted on or before June3, 2013 to the Office of Information and RegulatoryAffairs, Attn: OMB Desk Officer for DOL-EBSA, Officeof Management and Budget, Room 10235, 725 17thStreet NW., Washington, DC 20503 (fax:2 0 2 - 3 9 5 - 6 8 8 1 , e m a i l :[email protected]). Commentsshould mention OMB Control Number 1210-0039. Forfurther information, contact Michel Smyth by tele-phone at 202-693-4129, or by email [email protected]. A copy of the ICR withapplicable supporting documentation, including adescription of the likely respondents, proposed fre-quency of response, and estimated total burden maybe obtained from http://www.reginfo.gov/public/do/PRAMain, or by contacting Mr. Smyth.

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PBGC news

PBGC Updates its Booklet, ‘ ‘Finding a LostPension’ ’

PBGC has updated its booklet, ‘‘Finding a LostPension,’’ which is designed as a guide for peoplewho think they have a pension, but who cannot findtheir pension plan or former employer to begin receiv-ing their benefits. (PBGC News Release, 4/23/2013)

An employer or pension plan may be hard to find,especially if the plan have been merged into anotherplan, or the employer may have gone out of business,PBGC said. The booklet contains search tips fromprofessional pension counselors, as well as re-sources that a searcher can turn to for more extensivehelp.

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The Courts

Seventh Circuit Reaffirms Use of MoenchPresumption in Employer Stock Drop Case

In an employer stock drop case involving an em-ployee stock ownership plan (ESOP), the plan’s fidu-ciaries who continued to allow investment in employerstock despite a significant decline in the stock’s value,didn’t violate their duty to act prudently, the SeventhCircuit held. Under Moench, said the court, the test forprudence isn’t whether a prudent fiduciary actingunder similar circumstances would have made a dif-ferent investment decision, but that no reasonablefiduciary would have continued to allow employerstock to be offered as an investment option. (While v.Marshall & Ilsley Corp. (2013, CA7) 2013 WL1688918)

Marshall & Ilsley Corp. (M&I) offered its employeesa 401(k) plan that allowed participants to direct theircontributions to more than 20 investment funds withdifferent risk/reward profiles. Further, the plan allowedparticipants to shift both new contributions and ex-isting investments to different investment options atany time. Under the plan, participants could contributeup to 50% of their salaries to their individual invest-ment accounts, with M&I making matching contribu-tions of up to of 6% of a participant’s compensation.

The plan’s governing document specifically re-quired that one particular investment be includedamong the plan’s investment funds—the M&I StockFund (stock fund), which was an ESOP. As an ESOP,the stock fund consisted entirely of M&I Bank com-mon stock, with the exception of a small amount ofcash or money market funds to meet the stock fund’simmediate cash needs.

M&I’s matching contributions were automaticallyinvested in the stock fund, while participants were notpermitted to invest any more than 30% of their planassets in the stock fund.

In addition, the plan’s governing document requiredthat the stock fund be offered in the plan and that itinvest in M&I stock at all times, regardless of any‘‘reversals of fortune’’ that M&I Bank might encounter.Indeed, the governing document went so far as toprovide that:

…it is possible that M&I’s business and the value ofthe M&I Fund could decline significantly (even tothe point where Marshall & Ilsley Corporation’songoing viability comes into question). Neverthe-

less, Marshall & Ilsley Corporation, as the settlor ofthe Plan and Trust, intends and declares thatneither the Committee nor any other Plan fiduciaryshall have any authority or ability to cause the M&IFund to be invested in anything but M&I stock.

This determination to keep the stock fund investedin M&I stock was tested in the housing and stockmarket collapses in 2008 and 2009, which saw M&I’sstock price drop by approximately 54%, along with thevalue of participants’ investments in the stock fund.

In 2010, Linda White and Charlene Roundtree, planparticipants, filed a putative class action alleging thatthe plan’s fiduciaries had violated their duty of pru-dence under ERISA § 404 by continuing to offer thestock fund as an investment option despite the sharpdecline in value of M&I stock. The district courtgranted the fiduciaries’ motion to dismiss the caseunder Federal Rule of Civil Procedure 12(b)(6) forfailure to state a claim for relief, after determining thatthe participants’ claims could not overcome the pre-sumption that the plan fiduciaries had acted pru-dently. The participants then appealed.

Duty to diversify. The Seventh Circuit began itsreview by noting the conflict between the fiduciary’sduties to invest prudently, to comply with plan docu-ments, and to diversify investments, as set out inERISA § 404(a)(1)(B) through ERISA § 404(a)(1)(D).Also at issue was the purpose of ESOPs, which bytheir nature limit investment to a single employerstock.

To encourage the formation of ESOPs, said theSeventh Circuit, Congress had exempted ESOP fidu-ciaries from the duty to diversify, and limited the dutyof prudence so as not to require diversification forsuch plans. However, the remaining ERISA§ 404(a)(1) duties—to manage retirement plans pru-dently and to follow plan documents—still apply toESOP fiduciaries.

Typically, said the Seventh Circuit, the documentsgoverning ESOPs direct the plan fiduciaries to investprimarily in employer stock, thus creating a duty underERISA § 404(a)(1)(D) to follow the plan documents,and to maintain that investment or investment optionin employer stock. But if the company’s viability is injeopardy, the employer’s stock may no longer be aprudent investment. In such cases, plan participantsmight argue that the statutory duty of prudence re-

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quires a fiduciary to remove the employer stock fundas an investment option for employees or to redirectthat fund to other stocks.

Moench presumption. In Moench v. Robertson(1995, CA3) 62 F.3d 553 (see Pension & BenefitsWeek at ¶ 7), the Third Circuit addressed the tensionbetween a fiduciary’s duty to diversify plan assets andthe duty to follow the plan’s language. The courtdetermined that where the plan language directed theplan’s fiduciaries to offer employer stock, an ESOPfiduciary’s decision to continue offering employerstock was presumed to be prudent unless the planparticipants could show that, despite the instructionsin the plan, the circumstances were so compelling thatno reasonable fiduciary would have continued to offerthe stock as directed in the plan.

This general approach, said the Seventh Circuit,called ‘‘Moench presumption,’’ has been widelyadopted by other circuits in cases alleging impru-dence by either investing in an ESOP or allowingemployees to choose to do so. A significant decline instock price is not enough to overcome this presump-tion, said the court, unless the decline is combinedwith other evidence of impending collapse, misman-agement, etc.

Further, the Moench presumption of prudence isnot an evidentiary standard but a ‘‘substantive legalstandard of liability and conduct.’’ Thus, said the court,a claim against ESOP fiduciaries alleging a violationof the duty of prudence can be dismissed at thepleading stage if the plaintiffs do not make allegationssufficient to overcome the presumption of prudence.

In determining the standard to be used in overcom-ing the presumption of prudence, the Seventh Circuitrejected the standard urged here by the plan partici-pants and DOL (in an amicus brief)—that plan partici-pants can overcome the presumption by showing that‘‘a prudent fiduciary acting under similar circum-stances would have made a different investment deci-sion.’’ This was the same standard adopted by theSixth Circuit in Pfeil v. State Street Bank & Trust Co.(2012, CA6) 671 F3d 585 (see Pension & BenefitsWeek at ¶ 7), said the Seventh Circuit. Under thisstandard, the presumption of prudence could be over-come by plaintiffs presenting a finance expert at trialwho could claim, with the benefit of hindsight, that shewould have made different investment decisions, orchosen different investment options, than did theESOP fiduciaries. If the Moench presumption werethat easy to rebut, said the court, it would serve littlepurpose. Instead, plaintiffs must show that no reason-able fiduciaries would have thought they were obli-

gated to continue offering company stock as an in-vestment option.

Given the clear direction from the plan’s governingdocuments that the stock fund had to be offered as aninvestment option no matter how dire the circum-stances M&I faced, the Seventh Circuit could not seehow any of the participants’ claims about M&I’s de-cline would have led the fiduciaries to remove thestock fund as an investment option. Nor did ERISArequire the fiduciaries to violate the plan’s terms by sodoing, the court added.

First, said the court, the participants had failed tomake any allegation indicating that M&I’s circum-stances were either dire or that the company wasnearing collapse. Although the value of the partici-pants’ investments in M&I stock did drop, it did soalong with the rest of the stock market, and the drop invalue was not so drastic as to be considered direcircumstances.

Second, the court noted that the plan providedsufficient flexibility so that continuing to offer the stockfund did not impose an undue risk on participants. Atall times, participants could choose from among 22funds and could transfer money between funds at anytime. If participants wanted to avoid the risk of holdingor buying more M&I stock, said the court, it wouldhave been easy for them to change investments atany time.

Although stating that the availability of other invest-ment options did not excuse offering an imprudentinvestment, said the court, when considering specificinvestment alternatives, including whether to removeemployer stock as an investment option, the availabil-ity of other options was a relevant factor.

Further, even if the availability of other investmentoptions did not itself excuse a decision to continueoffering employer stock, the court stated that theavailability of the other options was relevant in deter-mining how much investment risk a fiduciary imposedon participants.

Finally, the court noted that the risk to participantswas further mitigated by the fact that the plan limitedparticipant investment in the stock fund to 30% of theirtotal contributions (though participants could latermove additional assets to the stock fund on request),and so this was not a situation where the plan fiducia-ries had imposed excessive risk on the participants bynot removing the stock fund as an investment option.

What the court didn’t hold. While not statingthat it would be impossible to make a successfulimprudence claim against ESOP fiduciaries, or that a

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company’s near demise or excessive risk were theonly circumstances under which a fiduciary would beobligated to abandon a plan’s investment directions,the Seventh Circuit said it would be difficult for a planparticipant to meet the Moench standard. Here, thefacts alleged by the participants simply did not indi-cate that it could have been imprudent for the fiducia-ries to continue to follow the plan’s directions to main-tain the stock fund as an investment option.

The Seventh Circuit also recognized, as had thedistrict court, that the strong language in the plan’sdocuments requiring that fiduciaries continue to offerthe stock fund ‘‘no matter how dire’’ the circum-stances, might seem to have insulated the fiduciariesfrom claims of imprudence under any circumstances.However, because the 54% drop in stock price wasnot enough for the participants to overcome the pre-sumption of prudence regardless of the strength of theplan documents’ direction to offer the stock fund as aninvestment option, the court did not rest its decisionon that plan language given the ERISA requirementthat fiduciaries follow plan documents only to theextent that the documents are ‘‘consistent’’ withERISA.

Result. Thus, the Seventh Circuit affirmed thedistrict court’s dismissal of the participants’ claims,holding that the fiduciaries had not violated ERISA byfollowing the plan’s terms by continuing to offer thestock fund as an investment option during a periodwhen M&I’s stock declined 54% in value.

‘‘Advances’ ’ to Induce Physicians to Work atClinic for Five Years Were Compensation,Not Loans

A district court has granted the government sum-mary judgment that ‘‘advances’’ paid by a medicalclinic to newly hired physicians in exchange for theirpromise to work there for five years were in factcompensation for services. Thus, the clinic, which hadinitially treated the advances as loans, wasn’t entitledto a refund of the withholding and FICA taxes paid.(The Vancouver Clinic, Inc., (2013, DC WA) 111AFTR 2d ¶ 2013-621)

Background. Employers must withhold the appro-priate employment and income taxes from employ-ees’ wages, and the payments must be reported tothe employee on a Form W-2 (Wage and Tax State-ment). ‘‘Wages’’ are defined under Code Sec. 3401 as‘‘all remuneration for services performed by an em-ployee for his employer.’’

However, if a payment from an employer to anemployee is a loan, then the payments aren’t reportedas income to the employee. For a transaction to con-stitute a bona fide loan, there must be an uncondi-tional promise to repay at the time the funds areadvanced.

The factors considered by the Ninth Circuit (towhich an appeal of this case would lie) in determiningwhether a payment is a true loan are:

(1) whether the promise to repay is evidenced by anote or other instrument;

(2) whether interest was charged;

(3) whether a fixed schedule for repayments wasestablished;

(4) whether collateral was given to secure pay-ment;

(5) whether repayments were made;

(6) whether the borrower had a reasonable pros-pect of repaying the loan and whether the lender hadsufficient funds to advance the loan; and

(7) whether the parties conducted themselves as ifthe transaction were a loan. (Welch v. Comm., (2000,CA9) 85 AFTR 2d 2000-1064)

Facts. The Vancouver Clinic, Inc. (Clinic) is a pro-fessional service corporation that provides medicaltreatment in a variety of specialties at locations insouthwest Washington. During 2007, 2008, and 2009,Clinic entered into ‘‘Associate Physician Loan Agree-ments’’ (agreements) with newly hired physicians tofacilitate Clinic’s physician recruitment and retention.

Each agreement requires the physician to work forClinic for five years in exchange for two advances,ranging from $12,000 to $15,000, during the first andsecond years of employment. The physicians onlyhave to repay the advances if they break their con-tractual promise to remain employed by Clinic for fiveyears. The advances accrue interest at the prime rateover the agreement’s five-year term, but the physi-cians aren’t required to pay any interest.

Clinic advanced aggregate sums of $663,500,$482,000, and $441,674 to physicians in 2007, 2008,and 2009, respectively. Clinic anticipates that by theend of 2013, it will have forgiven 74% of the fundsadvanced in 2007, 83% of the 2008 advances, and97% of the 2009 advances. Clinic didn’t withholdincome or payroll tax on the advances or report themon a Form W-2, but rather reported the income to thephysician on a Form 1099 (Miscellaneous Income) atthe time of ‘‘forgiveness’’ under the agreement.

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On or about January 10, 2011, IRS assessedagainst Clinic withholding and FICA taxes, togetherwith interest, of $626,745. Clinic paid the assessment,then filed a refund claim for $593,398, which IRSdisallowed on November 16, 2011.

Advances were compensation. The district courteasily concluded that the ‘‘advances’’ in this case werein fact compensation for services. The facts of thecase showed that the parties did not actually intendpayment. Rather, the expectation was that the physi-cians would fulfill their promise to work at Clinic for fiveyears and the advances would be forgiven. Theagreement allowed Clinic to ‘‘reap the benefits of theproductive years of the physician’s tenure’’ (i.e., the

later portion of the five-year term), while ‘‘giving thephysicians much-needed funds in the early years ofemployment.’’

The court found it significant that there was no fixedschedule for repayment at the time that the agree-ments were signed, and that most of the ‘‘borrowers’’(i.e., physicians) didn’t have a reasonable prospect ofrepaying.

Accordingly, since the advances were in fact wagesfor services, Clinic was required to withhold the appro-priate employment and income taxes from them, andreport them on Forms W-2 in the tax period in whichthey were made.

In BriefHere are this week’s pension andbenefits private letter rulings, inCode Section order.

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Code Sec. 401

IRAs—inherited sub-IRAs—minimum required dis-tributions.Each beneficiary’s 1/4 interest in decedent’s IRA may be

segregated and held in separate inherited sub-IRA forpurposes of determining minimum required distribution

under Code Sec. 401(a)(9), and each sub-IRA createdby means of trustee-to-trustee transfer constituted inher-ited IRA under Code Sec. 408(d)(3). (IRS Letter Ruling201318033)

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Code Sec. 402

IRAs—waiver of rollover requirement—error byfinancial institution.Pursuant to Code Sec. 402(c)(3)(B), IRS waived 60-day

rollover requirement where taxpayer’s failure to timelyroll over funds was due to financial institution’s failure tofollow taxpayer’s instructions. So, taxpayer was granted

60-day extension from date this letter was issued tocontribute stated amount into IRA, which would be con-sidered valid rollover contribution if all other require-ments of Code Sec. 402(c)(3)were met. (IRS Letter Rul-ing 201318031)

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Code Sec. 408

IRAs—waiver of rollover requirement—error bycustodian representative.Pursuant to Code Sec. 408(d)(3)(I), IRS waived 60-day

rollover requirement where taxpayer’s failure to timelyroll over funds was due to custodian representativeopening non-IRA savings account rather than savingsaccount within IRA as taxpayer intended. So, contribu-tion was considered valid rollover contribution if all otherrequirements of Code Sec. 408(d)(3) were met. (IRSLetter Ruling 201318029)

IRAs—waiver of rollover requirement—error byinvestment advisor.Pursuant to Code Sec. 408(d)(3)(I), IRS waived 60-day

rollover requirement where taxpayer’s failure to timely

roll over funds was due to his reliance on investmentadvisor’s misleading and incorrect information regardingdistribution from IRA, which resulted in taxpayer’s failureto complete rollover within 60-day rollover period. So,taxpayer was granted 60-day extension from date thisletter was issued to contribute stated amount into roll-over IRA, which would be considered valid rollover con-tribution, and other contribution was considered validrollover contribution, if all other requirements of CodeSec. 408(d)(3) were met. (IRS Letter Ruling 201318032)

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Code Sec. 414

Employee benefit plans—qualification as churchplan.Defined benefit plans established by taxpayer/

non-profit corp. constitute church plans under Code Sec.414(e) where taxpayer qualified as church or assn. ofchurches for church plan rules, all entities whose em-

ployees participated in plans shared common bonds andconvictions of church, and taxpayer was nonprofit CodeSec. 501(c)(3) exempt org. organized exclusively forcharitable and religious purposes. (IRS Letter Ruling201318030)

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Documents

05/13/2013 Pension & Benefits Week Alertstatic.store.tax.thomsonreuters.com/static/sample... · Annual contribution limitation for 2014. For cal-endar year 2014, the limitation on