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Client Alert from the Employee Benefits & Executive Compensation Practice

April 21, 2009


IRS:  Layoff With Recall Rights Can Be “Involuntary Termination” for Purposes of COBRA Subsidy

The American Recovery and Reinvestment Act of 2009 (ARRA) offers a 9-month, 65% COBRA premium subsidy to workers who suffer an involuntary termination of employment at any time from September 1, 2008 to December 31, 2009.  After the United Steelworkers expressed concern that layoff with seniority and recall rights might not be considered “involuntary termination,” and that thousands of laid-off steelworkers would therefore be ineligible for assistance with their COBRA premiums, the Internal Revenue Service hastened to issue further guidance on the ARRA subsidy.  IRS Notice 2009-27, Q&A-2, states clearly that any “involuntary reduction to zero hours, such as a lay-off” that results in loss of health coverage is an “involuntary termination” for purposes of ARRA’s COBRA premium subsidy.

To view a copy of Notice 2009-27, please click here.

Truth-In-Lending Act Changes for Plan Loans

Qualified plans that make loans to participants will, effective July 1, 2010, no longer be required to make detailed disclosures under the Truth-in-Lending Act. In providing an exemption from governing Regulation Z, the Federal Reserve System has acknowledged the inherent differences between commercial loans and plan loans, in which payments of interest and principal are reinvested in the participant’s account and the loan is not subject to finance charges imposed by a third party.

The Board of Governors of the Federal Reserve System, incident to a sweeping revision of Regulation Z, provides an exemption, effective July 1, 2010, from the truth-in-lending disclosures for loans from employer-sponsored retirement plans. Under new Federal Reserve Reg. Sec. 226.3(g), an extension of credit to a participant in a Code section 401(a) tax-qualified plan, 403(b) plan, or 457(b) plan will be exempt from Regulation Z if: (1) the loan is comprised of fully vested funds from the participant’s account and (2) complies with Code section 72 and other requirements under the Internal Revenue Code.

The final regulation is available here. The plan loan exemption is discussed starting at page 5262, and the actual exemption appears at page 5399 as ยง226.3(g).

Court Sides With Plan Sponsor Against Charges of Excessive 401(k) Fees and Hidden Revenue Sharing Charges

In Taylor v. United Tech. Corp., 2009 WL 535779 (D. Conn. Mar. 3, 2009), a decisive victory for 401(k) plan sponsors,  a district court rejected the plaintiffs’ eight claims relating to 401(k) fees, and reaffirmed the fundamental tenets of a plan sponsor’s fiduciary obligation relating to plan investments: when making investment decisions, plan trustees must conduct a careful and prudent investigation; a fiduciary’s conduct cannot be measured with hindsight; fiduciary prudence is concerned with procedural prudence, not results; and fiduciary prudence does not require that a fiduciary take any particular action, even if another is preferable.

Relying solely on expert testimony, plaintiffs challenged the plan sponsor’s decision to use actively managed mutual funds instead of passive index funds on the theory that actively managed funds “generally” underperform passive index funds, and are “generally” more expensive.  Rejecting this claim, the court held that the plaintiffs failed to prove the imprudence of the plan sponsor’s selection of any particular actively managed fund, and that the plan sponsor’s  decision-making process in selecting the funds was procedurally prudent. 

Plaintiffs also complained that the plan sponsor failed to disclose information relating to sub-transfer agent fees and other investment fund fees.  But the court held that this information was either not “material” because the fees had no impact on fund performance, or were otherwise adequately disclosed in the plan’s summary plan description and the funds’ prospectuses.

The court also rejected the plaintiffs’ claim that the plan sponsor breached a fiduciary duty because the plan sponsor received a discount on its recordkeeping fees by using the recordkeeper’s mutual funds.  The court held that such an “incidental” benefit to the plan sponsor did not amount to a breach of fiduciary duty.

While this case represents a resounding victory for 401(k) plan sponsors, it must be noted that the plan sponsor in this case had documented evidence of its consistent and methodical procedural prudence in (1) the selection and monitoring of its investment vehicles and (2) the management of the plan’s assets, and had fully disclosed plan fees.  Plan sponsors who are similarly prudent should also be able to rebuff participant claims of fiduciary imprudence. 

New COBRA Subsidy Rules: DOL and IRS Answer Frequently Asked Questions

Both the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) have issued additional guidance for complying with the new COBRA rules under the American Recovery and Reinvestment Act of 2009.  Even though the April 18, 2009 deadline for distributing the new “Notice in Connection with Extended Election Periods” has passed, other compliance issues still remain.  The guidance linked below highlights some of the ongoing issues and provides employers with answers to some of the more common questions:

You can view a copy of the DOL guidance here and you can view the IRS guidance here.

PBGC Issues Final Rule Addressing Reporting Requirements

On March 16, 2009, the Pension Benefit Guaranty Corporation (PBGC) published a final rule that amends Part 4010 of its regulations addressing Financial and Actuarial Information Reporting.  ERISA section 4010 generally requires annual reporting to the PBGC whenever a controlled group’s total unfunded vested benefits exceed $50 million. The final rule implements the Pension Protection Act of 2006 changes to ERISA section 4010 and modifies and clarifies the reporting requirements.  Of particular note, the final rule provides guidance on how to determine whether reporting is required based on a plan’s funding target attainment percentage. It also makes changes affecting the reporting obligation triggered by the imposition of certain liens or on the granting of minimum funding waivers.

To view the final rule, please click here.