12. Regulatory Considerations

Question 1

Government Retirement Rules Timeline

Answer 1

• 1920s: The Revenue Acts of 1921 and 1926 made pension funds tax exempt. In addition, the Revenue Act of 1928 made employer contributions to plan funds currently deductible even though benefits were not paid until later.

-1930s: The adoption of the Social Security system occurred.

-1940s: Private pension plans have seen enormous growth. Assets in these plans now amount to more than three trillion dollars or 10% of nation’s capital growth.

-1970s: The passage of ERISA creates the fundamental rules for qualified plans.

-2006: The Pension Protection Act of 2006 adds and clarifies many rules.

Question 2

Government regulation order

Answer 2

1- statutory law: passed by Congress
2- law as expressed in court cases: interpretations
3- Regulations of government agencies
4- Rulings and other information issued by government agencies

Question 3

Internal Revenue Code (IRC)- deductibility and taxation of pension and employee benefit programs

Answer 3

tax laws are controlling, found in Code Sections 401-424, with important provisions also in Sections 72, 83 and others.

Question 4

ERISA- Employee Retirement Income Security Act of 1974

Answer 4

governs the non-tax aspects of federal regulation:
-requirements
-notice to participants
-reporting to Federal government
-rules safeguarding funds set aside to pay future benefits

Question 5

Pension Benefit Guaranty Corporation (PBGC)

Answer 5

government corporation set up under ERISA in 1974:
- regulates and provides termination insurance for participants in qualified defined benefit plans up to certain limits and imposes reporting requirements on covered plans that are in financial difficult

-will pay up to $6,750/month to 65 year old participant in a DB plan that has terminated/in financial difficulty

Question 6

PBGC may terminate a pension plan if

Answer 6

-has not met minimum funding requirements
-cannot pay current benefits when due
-lump-sum payment made to participant who is a substantial owner of the sponsoring company
-loss to PBGC is expected to increase unreasonably if the plan is not terminated

PBGC must terminate a plan if assets are unavailable to pay benefits currently due.

Question 7

Securities laws

Answer 7

designed to protect investors

Question 8

Civil Rights Laws and The Age Discrimination in Employment Act of 1978

Answer 8

As part of an employer’s compensation policies, plans are subject to the Civil Rights Act of 1964 and actual amount of payment made or cost incurred on behalf of an older worker is no less than that made or incurred on behalf of a younger worker

Question 9

The Americans with Disabilities Act of 1990

Answer 9

prohibits an employer from discriminating against a person on the basis of the person’s disability in the areas of employment, public services and transportation, public accommodations and telecommunication services

Question 10

State legislation areas that may not be covered by ERISA

Answer 10

If ERISA does not deal with a particular issue, however, there may be room for state legislation, eg: types of group-term life insurance contracts that can be offered as part of an employer plan/ creditors’ rights to pension fund assets

Question 11

Contesting tax assessment

Answer 11

• Federal District Court in the taxpayer’s district,
• United States Tax Court (decides most cases since taxpayer can bring case without paying disputed tax)
• United States Court of Federal Claims.

Decisions of Federal District Court and US Tax Court are appealed to the Federal Circuit Court of Appeals

Question 12

Regulations

Answer 12

Interpretations of statutory law that are published by a government agency in the benefits area, notably by the Treasury Department, the parent body of the IRS, the Labor Department and the PBGC.

structured as abstract rules like statutory law

Question 13

Rulings and Other Information

Answer 13

Study of rulings can give indication of probably approach the Service will take in a particular area/insights into IRS:
IRS rulings: The Revenue Rulings (RR- guidance to all taxpayers published in IRS bulletins) and The Private Letter Rulings (PLR-addressed to specific taxpayers who requested rulings, not published) ,
General Counsel Memorandum (GCM),
Field Service Advice (FSA), and
Other Rulings.

Question 14

General Counsel Memorandum (GCM)

Answer 14

internal IRS document prepared by the General Counsel of the Service for its own staff’s guidance in administering the Code

Question 15

Field Service Advice (FSA)

Answer 15

IRS document prepared for internal use within the IRS, after 1985 released to public. not binding, but provide insight into IRS thinking at time written

Question 16

How to find answer to employee benefit tax questions

Answer 16

-Investigate secondary sources, choose several that are helpful, and keep them handy.
-When a tax or other benefit issue arises, review the secondary sources to get a general idea of the law in that area and where additional information can be found.
-Review the statutory provisions and regulations (if any) relating to the issue; particularly the Internal Revenue Code and ERISA and the related regulations.
-Review court cases and rulings dealing with the issue and compare their factual situations with the one you are dealing with.

Question 17

Consequences for not following law

Answer 17

Civil and criminal penalties can apply if taking too much deduction or under-reporting income:
-Failure to file return/pay tax- 5% underpayment/month, up to 25%
- Substantial understatement of income tax (>$5,000/10% of tax)- 20% of understatement
-Negligence to comply with tax law- 20% of underpayment
-Fraud- 75% of underpayment
-Substantial valuation overstatement (eg of liabilities to inflate deductions)- 20-40% of underpayment

Question 18

Legal Opinion Letters

Answer 18

-need to be read carefully
- make sure legal opinion applies to the taxpayer and transaction in question
- if transaction involves tax shelter, the substantial underpayment penalty can be avoided only if the taxpayer reasonably believes that his tax treatment was more likely than not the proper treatment .opinion letter should provide a basis for the more likely treatment, than not standard treatment, in these cases.

Question 19

Plans Exempt from ERISA

Answer 19

-state, federal, or local governments or governmental organizations,
-churches, synagogues, or related organizations. These can choose to be covered under ERISA,
- maintained outside the United States for nonresident aliens,
-Unfunded excess benefit plans which are a type of nonqualified deferred compensation plan, and
- maintained solely to comply with workers’ compensation, unemployment compensation, or disability insurance laws.

Question 20

Pension plans under ERISA

Answer 20

Any employee benefit plan that involves deferral of an employee’s compensation to the retirement date or later.

plan/ fund/ or program established/ maintained by an employer/employee organization such as a labor union/ by both, to the extent that by its express terms or as a result of surrounding circumstances, such plan, fund, or program provides retirement income to employees, or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond

Includes all qualified pension, profit sharing, stock bonus and similar qualified plans and some nonqualified deferred compensation plans

Question 21

Regulatory exemptions under pension plans

Answer 21

• Severance pay plan not treated as pension plan if:
  -payments do not depend directly/indirectly on employee’s retiring
  -total payments do not exceed >2x employee’s annual compensation during year immediately preceding separation
  -all payments completed within 24 months
  Must meet welfare plan requirements eg file annual report (Form 5500 series if benefits are fully insured/paid by employer out of general assets

-Supplemental payment plans that counteract inflation are exempt from numerous ERISA requirements under DOL regulations.

Employer-facilitated IRAs, simplified employee pensions (SEPs), SIMPLEs, and Section 403(b) Tax Deferred Annuity (TDA) plans are, in some cases, either exempt from ERISA’s reporting and disclosure requirements or subject to reduced ERISA reporting and disclosure requirements. Since 2009, 403(b) plans funded solely through elective deferrals have been subject to more ERISA-like requirements.

Question 22

Pension plan Reporting and Disclosure

Answer 22

Summary Plan Description (SPD)- major provisions of plan in simple language, within 120 days after plan is established, or 90 days after a new participant enters existing plan
Annual Report (Form 5500)- must be filed by 7th month after plan year ends with DOL (actuary’s report /Schedule B must be included if DB plan. Insurance contracts -Schedule A)
Summary Annual Report- brief summary of financial information from the Annual Report, must be provided within 9 months of end of plan year
Individual Accrued Benefit Statement- can be requested by a plan participant under the plan, must be provided within 30 days

Question 23

Title IV Reporting and Disclosure

Answer 23

plan termination insurance provisions, amended in the Uruguay Round Agreements Act of 1994/ General Agreement on Trade Tariff (GATT) legislation.

Question 24

Welfare plans under ERISA

Answer 24

providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services.

Question 25

Regulatory Exemptions - Welfare Plans

Answer 25

-Overtime pay, shift pay, holiday premiums, and similar compensation paid for work done other than under normal circumstances,
-Compensation for absence from work due to sickness, vacation, holidays, military duty, jury duty, or sabbatical leave or training programs, if paid out of the general assets of the employer that is not funded in advance,
-Recreational or dining facilities or first aid centers on the employer’s premises,
-Holiday gifts,
-Group insurance programs offered to employees by an insurer under which no contribution is made by the employer, participation is voluntary, and the program is not actively sponsored by the employer, and
-Unfunded tuition reimbursement or scholarship programs, other than Section 127 educational assistance plans, that are paid out of the employer’s general assets.

Question 26

Welfare Plans Reporting & Disclosure

Answer 26

<100 participants don’t need to file annual report (Form 5500 series) or a SPD

However Section 79 group-term life insurance plans, Section 105/106 medical plans, Section 125 cafeteria plans and Section 129 dependent care plans are subject to a reporting requirement under Section 6039D of the Internal Revenue Code to maintain filing these reports even though exempt- IRS is currently postponing this, and may be modifying/repealing Section 6039D

Question 27

Which plans are either exempt from/subject to reduced ERISA’s reporting and disclosure requirements

Answer 27

Employer-facilitated IRAs, simplified employee pensions (SEPs), SIMPLEs, and Section 403(b) TDA plans

Question 28

How does DOL foster and promote the welfare of the job seekers, wage earners, and retirees

Answer 28

-Improve working conditions
-Advance opportunities for profitable employment
-Protect retirement and health care benefits
-help employers find workers, strengthen free collective bargaining and tracking changes in employment, prices and other national economic measurements

-Administers Federal labor laws that guarantee:
- worker’s rights to safe/healthy working conditions
-min hourly wage/overtime
-freedom from employment discrimination
-unemployment insurance
-other income support

Question 29

Fiduciary liability issues

Answer 29

Plan fiduciaries include, plan trustees, plan administrators, and members of a plan’s investment committee, primary responsibility is to run a plan solely in the interests of participants and beneficiaries and provide benefits/pay plan expenses
Fiduciaries who do not follow principles of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of plan assets.

Question 30

Prohibited transactions

Answer 30

transactions between employee benefit plans and parties of interest- under Section 406 of ERISA. Section 4975 of the Code also prohibits most of these transactions on which it imposes an excise tax. The Secretary of Labor is authorized by ERISA to grant administrative exemptions from Section 406 and 407(a).

Question 31

Regarding qualified retirement plans, which entity administers the taxation of contributions and benefits and enforces funding, participation, and vesting standards?

Answer 31

The IRS administers the taxation of contributions and benefits and enforces funding, participation, and vesting standards.

Question 32

Who is authorized by ERISA to grant administrative exemptions from Section 406 and 407(a)?

Answer 32

The Secretary of Labor is authorized by ERISA to grant administrative exemptions from Section 406 and 407(a).

Question 33

Qualified plan fiduciaries typically include

Answer 33

plan trustees, plan administrators, and members of a plan’s investment committee.

Question 34

In a qualified plan, such as a Section 401(k) plan, under which a participant has investment allocation control over the assets in their account, what is the minimum number of investment alternatives that must be offered according to ERISA regulations?

Question 35

Which of the following is a summary of financial information from Form 5500 that must be provided to plan participants each year within nine months of the end of the plan year?

Answer 35

The Summary Annual Report is a summary of financial information from the Annual Report (Form 5500 series) that must be provided to plan participants each year within nine months of the end of the plan year.