Author: jfortenberry@fortenberrylaw.com

After making my way through the newly-proposed and voluminous (100+ pages) 403(b) regulations (mentioned here in this previous post), one of the items that stands out overall is the plan document requirement. Proposed regulation section 1.403(b)-3(b)(3) provides:

A contract does not satisfy paragraph (a) of this section unless it is maintained pursuant to a plan. For this purpose, a plan is a written defined contribution plan, which, in both form and operation, satisfies the requirements of this section and sections 1.403(b)-4 through 1.403(b)-10. For purposes of this section and sections 4.1403(b)-4 through 1.403(b)-10, the plan must contain all the material terms and conditions for eligibility, benefits, applicable limitations, the contracts available under the plan, and the time and form under which benefits distributions would be made. . .

How will this new requirement impact whether or not a 403(b) plan ends up falling under the purview of ERISA? Although the IRS states in the regulations that having a plan document would not necessarily lead to the application of ERISA, it is expected that the DOL will provide guidance on this issue. Here is what the regulations have to say on the plan document requirement and the application of ERISA:

The Treasury Department and the IRS have consulted with the Department of Labor concerning the interaction between Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and section 403(b) of the Code. The Department of Labor has advised the Treasury Department and the IRS that Title I of ERISA generally applies to “any plan, fund, or program . . . established or maintained by an employer or by an employee organization, or by both, to the extent that . . . 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.” ERISA, section 3(2)(A). However, governmental plans and church plans are generally excluded from coverage under Title I of ERISA. See ERISA, section 4(b)(1) and (2). Therefore, section 403(b) contracts purchased or provided under a program that is either a “governmental plan” under section 3(32) of ERISA or a “church plan” under section 3(33) of ERISA are not generally covered under Title I. However, section 403(b) of the Code is also available with respect to contracts purchased or provided by employers for employees of a section 501(c)(3) organization, and many programs for the purchase of section 403(b) contracts offered by such employers are covered under Title I of ERISA as part of an “employee pension benefit plan” within the meaning of section 3(2)(A) of ERISA. The Department of Labor has promulgated a regulation, 29 CFR 2510.3-2(f), describing circumstances under which an employer’s program for the purchase of section 403(b) contracts for its employees, which is not otherwise excluded from coverage under Title I, will not be considered to constitute the establishment or maintenance of an “employee pension benefit plan” under Title I of ERISA.

These proposed regulations are generally limited to the requirements imposed under section 403(b). In this regard, the proposed regulations require that a section 403(b) program be maintained pursuant to a plan, which for this purpose is defined as a written defined contribution plan which, in both form and operation, satisfies the regulatory requirements of section 403(b) and contains all the material terms and conditions for benefits under the plan. The Department of Labor has advised the Treasury Department and the IRS that, although it does not appear that the proposed regulations would mandate the establishment or maintenance of an employee pension benefit plan in order to satisfy its requirements, it leaves open the possibility that an employer may undertake responsibilities that would constitute establishing and maintaining an ERISA-covered plan. The Department of Labor has further advised the Treasury Department and the IRS that whether the manner in which any particular employer decides to satisfy particular responsibilities under these proposed regulations will cause the employer to be considered to have established or to maintain a plan that is covered under Title I of ERISA must be analyzed on a case-by-case basis, applying the criteria set forth in 29 CFR 2510.3-2(f), including the employer’s involvement as contemplated by the plan documents and in operation.

To the extent that these proposed regulations may raise questions for employers concerning the scope and application of the regulation at 29 CFR 2510.3 -2(f), the Treasury Department and the IRS are requesting comments.

McDermott Will & Emery also comments on the issue in their article on the new regulations here. (From Benefitslink.com.)The article makes the point that the plan document requirement may “effectively supersede and control the main contractual document between the employer and the 403(b) vendor (such as a 403(b) group annuity contract issued by an insurer).”

By the way, in the recent “Extra Special Edition of the Employee Plans News” published by the IRS, Carol Gold, Director of EP, indicates that the IRS is not yet ready to begin implementation of a 403(b) determination letter program until the 403(b) regulations are finalized. She notes, however, that the proposed regulations do indeed “move the ‘403(b) plan’ closer to the concept of a ‘qualified plan’ and leaves the door open for the development of such a program for 403(b) plans in the near future. Here is most of what she had to say:

This week, proposed regulations under section 403(b) were published in the Federal Register. These regulations take the important step of requiring a 403(b) contract to be maintained pursuant to a plan in order for amounts contributed by employers for the purchase of annuity contracts to be excluded from the gross income of employees. For purposes of the regulation, a plan is a written defined contribution plan which must satisfy the applicable requirements of the regulation both in form and operation. Furthermore, the proposed regulation provides rules by which 403(b) plans may be terminated.

Clearly, the proposed regulations move the “403(b) plan” closer to the concept of a “qualified plan”. However, we anticipate it will be a while yet before the regulations are finalized. Nevertheless, we recognize that if 403(b) annuity contracts are treated as ”plans” under the regulations when finalized, there will be more of an impetus to create a program to review plans and plan amendments, and possibly to issue determination letters on those plans or amendments.

We would welcome the opportunity to work with the public on considering such a program. At this point, however, we feel it would be premature to actively develop such a program prior to the finalization of the regulation. Therefore, I would suggest that we continue to exchange ideas about what a program could look like while agreeing that substantive change will have to wait a little longer.

By way of reminder, please note that you can arrive at this website by using the web address “www.benefitsblog.com,” i.e. you do not need to type in the longer web address–“www.benefitscounsel.com/benefitsblog”–to reach Benefitsblog. You can also go to the website for my law practice at “www.benefitscounsel.com,” and there is a button to Benefitsblog there as well. The reason I say that is that I have noticed that many arrive here by “Googling” Benefitsblog and just wanted to let you know that there is a more direct route available for those who prefer it.

“WFTRA” is the acronym for the “Working Families Tax Relief Act of 2004.” When Congress provides a name for legislation, wouldn’t it be helpful if they would provide a pronunciation of the acronym as well? Because, depending upon where you are from, you hear a whole host of pronunciations. On this new acronym, my guess is that those in Pennsylvania would be inclined to call it “Wooftra” (“oo” sound of “wood”) since Pennsylvanians pronounce the word “water” as “wooder”. (No kidding, we really do.) However, those in the Midwest, might call it “Wahftra” (as in “watt”) since they pronounce “water” as “wahter.” Then there might be some who call it “Waftra” as in “raft” (likely Texans) or some who might call it “Wiftra” as in “whiff.” And then there are those who like to add a “ter-ra” to the end (regardless of how they pronounce the first syllable)–making the pronunciation of “WFTRA” three syllables–Wif-ter-ra.

If Congress won’t provide the answer, maybe the IRS could take it upon themselves to put us all out of our misery and issue some guidance on the proper pronunciation, so we won’t all be wondering: “How do you pronounce the acronym “WFTRA”?

An example of how not to handle a dispute with the Department of Labor: here. (From PlanSponsor.com)

The IRS has issued Notice 2004-79 clarifying some of the confusion over changes made to the definition of dependent by the Working Families Tax Relief Act of 2004 (“WFTRA”). WFTRA changed the definition of dependent under section 152 of the Code, but did not make conforming amendments to section 106 of the Code. (Congress apparently did not make conforming amendments to ? 106 in WFTRA because the reference to ?dependents? under ? 106 appears only in the regulations under that section and not in the statute itself.) The IRS has clarified the situation as follows:

Under current law, the exclusion under § 106(a) for employer-provided coverage under an accident or health plan parallels the exclusion under § 105(b) for employer-provided reimbursements of medical care expenses incurred by the employee and the employee’s spouse and dependents, as defined in § 152. However, as a result of the changes made by WFTRA, the definition of dependent in § 105(b) differs from the definition in the regulations under § 106(a). Accordingly, if the regulations under § 106(a) continued to be applied as currently written after the effective date of section 201 of WFTRA, the value of employer-provided coverage for an individual who is not a qualifying child and who does not meet the gross income limitation for a qualifying relative would have to be included in the employee’s gross income. Because the intent of Congress was not to change the definition of dependent for purposes of employer-provided health plans, regulations under § 106 should be revised to provide that the same definition of dependent applies to § 106 as applies to amended § 105(b).

The IRS states that they will revise the regulations at 26 C.F.R. 1.106-1 to provide that the term “dependent” for purposes of § 106 shall have the same meaning as in § 105(b), and that the the revised regulations will be effective for taxable years beginning after December 31, 2004.

(More here in this previous post.)

The DOL has announced that a federal district court in New York City has approved a final settlement of $79 million for the benefit of workers and retirees of the Global Crossing retirement plan. In addition to the restitution that was recovered in the private litigation, the settlement prohibits the company’s executives from acting as fiduciaries to ERISA-covered benefit plans for five years (unless the Department of Labor gives prior approval) and covers two former inside directors of Global Crossing as well as the three former members of the Employee Benefits Committee.

Those of you interested in the benefits implications of the recent insurance probes will want to read the complaint filed by New York State Attorney General Eliot Spitzer against Universal Life Resources, Inc. (“ULR”) (The press release is here and the complaint is here.) An excerpt from the complaint:

Federal law requires certain private employers to disclose all compensation paid to brokers in connection with those employers’ purchase of group insurance for their employees. This information must be reported on Form 5500 and be filed by the employer with the United States Department of Labor. The employer may not necessarily know the specific amounts and types of compensation (i.e., commission, consulting payment, override, communication fees) the insurer has paid to the broker. As a result, the insurer usually prepares a schedule for the Form 5500 (“Schedule A”) on behalf of the employer, which reports the amount of compensation the insurer has paid to the employer’s broker. In the absence of disclosure of such compensation elsewhere, Schedule A provides an opportunity for employers and employees to learn of the total compensation the broker has received from an insurer; if payments such as overrides or communication fees are not disclosed on Schedule A, the employer and employees may not learn of their existence.

For a summary of the controversy involving ULR, see this article from Workforce: “Spitzer Opens Benefits Front.” (from Benefitslink.com)

Also, yesterday the Subcommittee on Financial Management, the Budget, and International Security, of the U.S. Senate Committee on Governmental Affairs, held a hearing entitled “Oversight Hearing on Insurance Brokerage Practices, Including Potential Conflicts of Interest and the Adequacy of the Current Regulatory Framework.”

Excerpts from Statements and Testimony at the Hearing:

Senator Peter G. Fitzgerald:

“My study of this insurance brokerage controversy convinces me that there is a federal role — the time-honored federal role that guarantees competition and fights the mischief of undue market concentration. Contingent commission arrangements have been common and legal for decades. I believe it is no coincidence that the controversy of these compensation arrangements tracks the increasing consolidation of the brokerage market — especially the market for large corporate buyers.

I believe it is no coincidence that Attorney General Spitzer first sued the largest market player in insurance brokerage. And I believe it is no coincidence that when Attorney General Spitzer first investigated contingent commissions pursuant to his vast powers under New York’s Martin Act, he appears to have discovered anticompetitive — and even criminal — abuses orchestrated not by just any random insurance broker, but by an insurance broker that controlled 40% of its target market.

And I will be interested in hearing the views of the witnesses as to whether this brokerage controversy lends more, or less, support to the proposal developed by the leadership of the House Financial Services Committee — the State Modernization And Regulatory Transparency Act, or SMART Act — a draft of which has been circulated by Chairman Oxley and Capitals Markets Subcommittee Chairman Baker. The House Financial Services Committee has conducted 16 hearings on insurance reform since the Committee’s organization in January 2001, and I applaud the hard work of Chairman Oxley and Congressman Baker in this area.“

Senator Daniel K. Akaka:

“I also want to know whether the deceptive and questionable practices found in commercial property and casualty insurance are also found in other lines of insurance, such as health insurance, where premiums continue to rise. Employer-sponsored health insurance premiums increased an average of 11.2 percent in 2004 according to the Kaiser Family Foundation and Health Research and Educational Trust. For many working families, these increases have made it more difficult for them to make ends meet and to retain their health insurance coverage. If a portion of the increase in premiums for health insurance may be attributed to deceptive and opaque practices among insurance brokers, steps must be taken to make sure that families are not overpaying for their current coverage due to the questionable activities of some insurance brokers.”

Eliot Spitzer, Attorney General, Office of the New York State Attorney General:

“Not only do insurance brokers receive contingent commissions to steer business, but many brokers, with the assistance and collusion of insurance companies, engage in systematic fraud and market manipulation in order to ensure that profitable and high volume business goes to a few selected insurance companies. In other words, we found that favoritism, secrecy and conflicts rule this market, and not open competition.

This struck us as a very familiar pattern. Whether in investigating conflicts of interest between the research and investment banking arms of large wall street firms or our recent work in the mutual fund industry, we have found that the lack of transparency, combined with inadequate disclosure and regulatory oversight, often leads to market fraud and collusion. Many insurance lines, from employee benefits to property and casualty, essentially function as insiders clubs, where those with market clout and power pay for preferential treatment. Similar to the small investor on wall street or in mutual funds, the ordinary purchaser of insurance has no idea that the broker he selects is receiving hidden payments from insurance companies, that the advice he receives from the broker may be compromised, or that the market bids he sees may be illusory. This has led to a crisis of accountability. . .

Last Friday, my office filed a complaint against Universal Life Resources, Inc., a key consultant and broker in the employee benefits industry. ULR advises hundreds of employers in the selection of insurance and has placed insurance for four million U.S. workers. The complaint details how ULR is retained to help employers reduce costs and procure the most appropriate benefit plans for their employees, but instead engages in massive steering of this business to a small set of insurers that have been willing to enter into side-deals with lucrative payoffs for ULR. . . It is, of course, employees who pay for these hidden costs through higher life and other group premiums. . . .

The federal government should not preempt state insurance enforcement and regulation. Nonetheless, I do believe there is a role for the federal government, especially in the areas of off-shore capitalization and investment by insurance companies. At a minimum, federal involvement may be necessary to assure some basic standards of accountability on the part of insurance professionals.“

Richard Blumenthal, Attorney General, State of Connecticut :

“State law should establish a binding, enforceable code of ethics for both insurance brokers and agents. This code should prohibit an agent or a broker from basing an insurance recommendation on potential compensation from the insurer. It should also require an agent to disclose in writing that the agent works for the insurance company rather than the consumer. Both agents and brokers should disclose to the consumer any compensation from insurers relating to the consumer’s insurance purchases.

The code of ethics should impose a fiduciary duty on the broker to obtain the best deal for the consumer irrespective of broker self-interest.

Recognizing the potentially corrosive and coercive effect of either contingent or straight commissions on the insurance agent’s or broker’s recommendation to the consumer, state law should require full disclosure by the agent or broker of the various insurance options for the consumer. If the agent or broker recommends one insurance product over another, the agent or broker must articulate in writing the reasons for the recommendation. This information will guarantee the consumer is fully aware of the options and create a paper trail for regulators to ensure that the agent or broker is not making recommendations based solely on the agent’s or broker’s financial interest.“

John Garamendia, Insurance Commissioner, State of California :

“With respect to disclosure of the amount of commissions, brokers and agents will ask, “Why should we have to disclose the amount of our commissions? Most salesmen sell on commission, yet they are not required to disclose the source and amount of the compensation they receive.”

The answer is, as I have said before, that buying insurance is not like buying groceries. Securities brokers and real estate brokers are required to disclose the source and amount of their commissions, and so should insurance brokers and agents.“

More on the hearing from the Kaiser Family Foundation here.

A great cartoon here from the TaxGuru. Sounds a bit like the predicted plight of baby boomers if they don’t start doing a better job of saving for retirement. . .

Interesting article from the New York Times: “Teamsters Find Pensions at Risk.”