Chapter 2 (The Retirement Field)

What have been the post-ERISA legislative trends with regard to the following areas? - funding - simplification

*Funding* - Over the years, a number of law changes increased required employer contributions and PBGC insurance premiums to shore up the financial status of the PBGC. *Simplification* - After years of more and more complexity, in 1996 there was true pension simplification. Administration of 401(k) plans became easier after this law change. This simplification trend continued in 2001 with several rules that simplified administration of 401(k) plans.

Explain the three regulatory responsibilities of the IRS in regards to retirement plans.

*Initial Plan Qualification* Employers send in the plan and appropriate forms requesting IRS approval; the IRS checks the plan to see if it meets the guidelines and, if necessary, the IRS and the employer enter into negotiations over points at issue *Ongoing Auditing* The IRS monitors retirement plans after initial qualification through periodic planned IRS audits to make sure changes in facts or circumstances have not affected the plan qualifications and plans are used as retirement vehicles rather than as a tax shelter for the prohibited group. *Interpretation* One of the major responsibilities of the IRS is to issue numerous communications that further explain the existing laws of the Internal Revenue Code

What are the regulatory responsibilities of the Department of Labor?

*Reporting and Disclosure Rules* Ensure compliance with the reporting and disclosure rules. The most important disclosure requirement is that the plan provide summary plan descriptions (SPDs) to participants. Failure to comply with this or other reporting and disclosure requirements can result in fines and, in some egregious cases, imprisonment. *Prohibited Transactions* Oversee plan investments. Ensure that no self-dealing or conflict of interest in involved. ERISA provides that plans cannot have certain dealings with parties who have close relationships with the plan or the company. The goal of the rules is to keep the plan's interests separate from the sponsoring entity's interests, and to ensure that no persons benefit unduly because of their close relationship to the plan. *Fiduciaries* The DOL governs the actions of those in charge of running the retirement plans. The DOL may sue plan fiduciaries and require a restitution to the plan for any losses that result from beach of fiduciary duty. *Interpretation* The DOL issues numerous communications that create pension rules and explain existing laws. Issue final regulations, temporary regulation, and proposed regulations (same as IRS).

PBGC insurance coverage applies to most defined-benefit plans of private employers. However the coverage usually excludes what?

- plans maintained solely for substantial owners - professional service employers (doctors/lawyers) that have always had fewer than 26 active participants - church groups - federal, state, or local government

ERISA was passed in what year?

1974

What are the regulatory responsibilities of the PBGC.

Administer insurance program for defined-benefit plans Oversee termination of covered plans Interpret legislation

What is Title II of ERISA?

Amends the Internal Revenue Code to condition tax benefits on meeting certain minimum standards

What is Title I of ERISA?

Amends the labor law to ensure the employee's right to collect promised benefits requires employers to report plan information to the federal government and disclose information to participants, restricts unlimited employer discretion regarding vesting and plan participation, implements plan funding standards, and lists fiduciary responsibilities

How have IRAs changed post-ERISA?

At the time of ERISA, deductible IRA contributions were limited, then IRAs were opened up to virtually everyone, and then, once again, deductible contributions were limited to those who do not participate in an employer-sponsored retirement plan or have relatively low income. More recently, low changes have expanded the use of the IRA with the introduction of the Roth IRA, an increase in the maximum contribution limits, and an increase in the phaseout ranges.

How has taxation of pension benefits changed post-ERISA?

At the time of ERISA, pension benefits were subject to many significant income and estate tax benefits. Over the years, the special tax advantages has been repealed one by one.

How does ERISA encourage compliance under the Internal Revenue Code?

Both the plan sponsor and the plan participants enjoy special tax treatment in exchange for compliance with the law. Failure to comply can enable the IRS to remove the plan's tax-advantaged status.

How does the PBGC operate?

By collecting compulsory premiums, which are $57 (for plan years beginning in 2015) per participant per plan year

What is Title III of ERISA?

Creates a regulatory framework for ongoing implementation responsibilities are divided between the IRS and the DOL, with the IRS having primary jurisdiction for much of the initial and operational administration of pension plans.

What is Title IV of ERISA?

Establishes the Pension Benefit Guaranty Corporation to insure benefit payments from defined-benefit pension plans

T/F: Employers must secure a favorable advance-determination letter in order to take a deduction for contributions made to a qualified plan.

False Employers are not required to secure an advance-determination letter. They can take deductions and wait for an IRS audit to determine whether the plan is qualified, but because of the risk of disqualification, this is seldom attempted.

T/F: The PBGC guarantees all benefits.

False Guaranteed benefits are subject to a monthly ceiling which depends upon the age of the participant at the time benefits begin.

T/F: The defined-benefit plan of a professional-service employer with 15 employees must be covered by PBGC insurance.

False Most defined-benefit plans must be covered by the PBGC insurance. There is, however, an exception for professional-service employers with 25 or fewer active participants.

T/F: Only 401(k) plans with more than 25 plan participants need to be covered by the PBGC insurance program.

False Only defined-benefit plans (defined-benefit and cash-balance) are covered by the PBGC insurance program. No 401(k) or defined contribution plans are covered.

T/F: The IRS often enforces rules that disqualify plans from tax advantaged status because of compliance reasons.

False The IRS has the power to remove the tax-advantaged status; however, it is rarely enforced because this penalty can harm participants (who are not responsible for ensuring plan compliance) In lieu of this terminal policy, the IRS often negotiates a monetary policy (payable by the sponsor) and requires the employer fix any plan defects.

T/F: Regulations are the IRS's precedent-setting interpretations of the provisions of the Internal Revenue Code as they apply to factual situations facing clients.

False The item described in the question is a revenue ruling, not a regulation. Regulations (whether they are final, temporary, or proposed) explain and interpret the various sections of the Internal Revenue Code and deal with the finer points of the law. Regulations apply to all taxpayers.

T/F: Title IV of ERISA requires employers to report plan information to the federal government and disclose information to participants.

False Title IV of ERISA established the Pension Benefit Guaranty Corporation (PGGC) and deals with insuring plan benefits.

T/F: Individually designed plans are easier to install than master and prototype plans.

False. Master and prototype plans are easier to install than individually designed plans.

private letter rulings

IRS interpretations of the law in light of a specific set of circumstances that face a taxpayer; also, a method by which a taxpayer can inquire about the acceptability of a specific transaction in which he or she in engaged. Other taxpayers may not rely upon the findings in a private letter ruling.

What does the financial services professional need to do whenever there is new legislation in the retirement area?

Legislative changes require a lot of effort by the financial services professional. After studying the new law, clients have to be informed of the changes and notified of the effect of the now law on their particular plan design. Many law changes also require plan amendments. Even though new laws require a lot of work, they can also provide for new opportunities to help clients meet their particular needs.

Pension Protection Act (PPA) of 2006

Revised the minimum funding requirements and imposed increased accelerated funding for most plans. Created additional requirements and new consequences for seriously underfunded plans. Plan benefits become more portable by requiring more accelerated vesting for most plans. Defined contributions plans that invest in employer securities must give most participants the option to elect alternative investments in their accounts. Made many of the increased pension limits from previous laws permanent. Tries to improve the pension system by validating the cash balance design, encouraging the practice of allowing automatic enrollment in 401(k) plans, and providing a mechanism to allow participants to receive appropriate investment advice.

What are the various types of guidance issued by the IRS to help explain existing and proposed laws or regulations?

The IRS issues final regulations that help explain and interpret various code sections. These final regulations are similar to law and they bind both the IRS and the public. In addition, the IRS issues proposed regulations that do not always become finalized and enforceable. Furthermore, the IRS might release temporary regulations. The IRS also has revenue rulings which are similar to court cases that determine the law surrounding an IRS related issue. Lastly, the IRS can issue private letter rulings that are not only binding to one party and other explanatory documents that have no direct legal authority but to help provide additional explanations and examples.

What is the role of the Internal Revenue Service with regard to the retirement market?

The IRS plays the most prominent role of all the bureaucratic agencies: It (1) supervises the creation of new retirement plans (in pension parlance, initial plan qualification), (2) monitors ad audits the operation of existing plans, and (3) interprets federal legislation, especially with regard to the tax consequences of certain pension plan designs

What resources are available to assist the financial services professional with technical research and to help the financial services professional keep abreast of changes in the pension field?

The most important resources are the primary ones, that is, the IRC, ERISA, and other statutory law, as well as regulations and other regulatory guidance. Books and periodicals can shed light on the meaning of the rules and so can loose-leaf services that are updated regularly. Many commercial sources of information are also available on the Internet, and the primary sources have never been easier to access for free, as they are posted on governmental Web sites.

What are the types of organization involved in providing consulting and investment services to retirement plans?

The organizations that provide plan services include consulting houses, actuarial firms, insurance companies, administrative consultants, and software companies. In the financial market, there are trust companies, commercial banks, investment houses, asset-management groups, and insurance companies

What is the role of the Department of Labor in the pension process?

Through its office of Employee Benefit Security Administration (EBSA), the DOL (1) ensures that plan participants are adequately informed through enforcement of some of the reporting and disclosure rules, (2) policies the investment of plan assets, (3) monitors the actions of those in charge of the pension plans (fiduciaries), and (4) interprets legislation.

T/F: A recent legislative trend is to somewhat simplify the pension law and make it less complicated for the consumer.

True

T/F: An employer must notify the PBGC before terminating a defined-benefit plan that is covered by the PBGC insurance program.

True

T/F: At one time, pension benefits were not subject to estate taxes.

True

T/F: Congress has recognized that higher allowable maximum contribution limits could help increase the number of small employers establishing retirement plans.

True

T/F: Department of Treasury proposed regulations have no legal effect until further steps are taken to turn them into binding law.

True

T/F: Every plan has at least one named fiduciary who is responsible and accountable for operating the plan.

True

T/F: In 1981, the Economic Recovery Tax Act (ERTA) provided a new type of retirement plan vehicle with numerous special tax advantaged referred to as an ESOP.

True

T/F: In 2001, the top-heavy rules were simplified, and gave the owner of a small business the opportunity to accumulate more in a retirement plan.

True

T/F: One of the major objectives of ERISA was to improve benefit security by requiring plans to disclose more information to participants about their benefits and their rights under ERISA.

True

T/F: Plan disqualification can have negative tax implications for both the plan sponsor and the plan participants.

True

T/F: Roughly one-third of employees working for companies of 50 or fewer employees currently participate in an employer sponsored retirement plan.

True

T/F: Since ERISA, the law has been changed to provide for special rules for small top-heavy plans.

True

T/F: Software packages are available for client illustrations, pension administration, portfolio management, and form and document preparation.

True

T/F: The DOL can sue fiduciaries and require a restitution to the plan for any losses.

True

T/F: The DOL ensures compliance with the reporting and disclosure rules.

True

T/F: The DOL issues advisory opinions that are similar to the private letter rulings offered by the IRS.

True

T/F: The IRS audits plans in order to ensure that the qualified plan rules are followed on an ongoing basis.

True

T/F: The Pension Benefit Guaranty Corporation (PBGC) was established under Title IV of ERISA as a quasi-governmental corporation.

True

T/F: The administration of the qualified-plans system is carried out by the IRS.

True

T/F: The most reliable and important sources of information are primary sources, such as the texts of laws and the Internal Revenue Code.

True

T/F: Today, all pension assets that remain after the participants death are included in the taxable estate.

True

T/F: Under ERISA, to encourage compliance, errant plan officials can be held personally liable for losses to the plan, fined for certain errors, and in some cases even held criminally liable.

True

T/F: With a few minor exceptions, C corporations, S corporations, sole proprietorships, partnerships, and even limited liability companies are all on the same footing with regards to access to retirement plan vehicles.

True

T/F: In most cases, pension income is treated as ordinary income.

True Although some rules have been grandfathered

T/F: Under ERISA, plan participants, the DOL, and plan fiduciaries can sue to force the payment of appropriate benefits and to require plan representatives to fulfill their jobs.

True This is to enforce Title I of ERISA

International Foundation of Employee Benefit Plans

an organization for those involved with benefit consulting. Cosponsor of the Certified Employee Benefit Specialist (CEBS)

Pension Benefit Guaranty Corporation (PBGC)

an organization that oversees defined-benefits plans and provides insureds protection in case a defined-benefit plan cannot pay promised benefits to participants

blue book

books published after a tax law change by the joint committee on taxation that help to explain the legislative history behind the tax law. The blue book can be quite informative, but is not considered a primary source of law

fiduciary

in the retirement plan context, a fiduciary is a person or corporation that exercises any discretionary authority or control over the management of the plan or plan assets, renders investment advice for a fee, or has any discretionary authority or responsibility in the administration of the plan. Fiduciaries are held to a specific standard of care and can be personally liable for losses.

publications

include general reviews of retirement topics provided by the IRS. Using understandable terms, these publications cover a variety of topics.

What is the purpose of Code Sec 401(a)(9)?

introduced in 1986, requiring that distributions from all tax-sheltered plans begin at age 70.5 (or, in some cases, at actual retirement, if later) These minimum-distribution rules affect any retiree receiving qualified plan, 403(b), or IRA distributions.

American Society of Pension Professionals and Actuaries (ASPPA)

organization for those involved with the consulting, administrative, and design aspects of pension and employee benefit plans

third-party administrators (TPAs)

organizations that offer design consulting, record-keeping, legal, and actuarial services to either support plan administrators (the sponsors or employees of the sponsor) or stand in as the plan administrator

temporary regulations

regulations issued immediately after major legislation so practitioners can receive guidance on complex provisions of new laws. Temporary regulations have legal force and effect until withdrawn

proposed regulations

regulations often issued after major legislation so practitioners can receive guidance on complex provisions of new laws. Unlike final regulations, proposed regulations have no legal force or effect (unless specifically stated in the proposed regulations)

final regulations

regulations that explain and interpret the various sections of the Internal Revenue Code and other laws. Final regulations are legally enforceable, meaning that the IRS and other regulators are bound to follow them

National Tax-Sheltered Annuity Association (NTSAA)

relatively new organization representing the interests of those in the 403(b) tax-sheltered annuity marketplace

National Institute of Pension Administrators Educational Foundation, Inc. (NIPA)

sponsors the Accredited Pension Administration (APA) designation

master and prototype plans

standardized plans approved and qualified in concept by the Internal Revenue Service that insurance companies and other financial services firms make available for their advisors. The master and prototype plan offers an employer limited choices in plan design and may not need to be filed with the IRS to obtain an individual determination letter, thus, can be installed very easily

revenue rulings

the IRS's interpretations of the provisions of the Internal Revenue Code and regulations as they apply to factual situations presented by taxpayers. Revenue rulings may be used as precedents

Employee Retirement Income Security Act (ERISA)

the act that laid the foundation for modern pension law. ERISA established the nondiscrimination requirements, reporting and disclosure requirements, plan funding standards, vesting and participation requirements, and created the PBGC

primary sources

the actual text of statutory and regulatory law when discussing legal research texts of the laws, the IRC, the example-laden regulations

American Benefits Council

the business community's lobbying arm for pensions and employee benefit plans

Employee Benefits Research Institute (EBRI)

the research arm of the pension and employee benefit community