October 24, 2014
- IRS/DOL Guidance Permits Use of Annuities Inside TDFs Used as QDIAs
- Society of Actuaries Responds to Council Letter on Mortality Tables
- Council Continues to Urge Legislative Fix to Pension Plan 'Shutdown' Procedures under 4062(e)
- Submission Form for Transitional Reinsurance Program Annual Enrollment Count Now Available
- PBGC Publishes Premium Rates for 2015
IRS/DOL Guidance Permits Use of Annuities Inside TDFs Used as QDIAs
The Internal Revenue Service (IRS) released guidance on October 24 expanding the use of target-date fund (TDF) series in defined contribution plans as qualified default investment alternatives (QDIAs), following a letter on QDIA and annuity selection issues from the U.S. Department of Labor (DOL) Employee Benefit Security Administration (EBSA).
IRS Notice 2014-66 provides a special rule that “enables qualified defined contribution plans to provide lifetime income by offering, as investment options, a series of target date funds (TDFs) that include deferred annuities among their assets, even if some of the TDFs within the series are available only to older participants.” Specifically, the IRS guidance sets forth the conditions under which the provision of TDFs as a QDIA will not be considered as violating the benefits, rights and features test under Section 401(a)(4) of the Internal Revenue Code, which prohibits discrimination in favor of highly compensated employees.
Additional guidance is provided in EBSA’s letter to the U.S. Treasury Department on October 23, which stated that the use of unallocated deferred annuity contracts as fixed income investments would not cause the TDFs to fail to meet the prevailing QDIA requirements. The letter also indicated that the annuity selection safe harbor criteria (for meeting fiduciary obligations in the selection of annuities) can be met by the investment manager selected by the plan fiduciary. Of course, the plan fiduciary must prudently select and monitor the investment manager.
Most notably among the conditions that a series of TDFs must meet to satisfy the nondiscrimination requirements, each TDF in the series must be “treated in the same manner with respect to rights or features other than the mix of assets.” The fees and administrative expenses for each TDF – whether the target retirement date is 2020 or 2040, for example – must be determined in a consistent manner, and the extent towhich those fees and expenses are paid from plan assets (rather than by the employer) must be the same.
For more information, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.
Society of Actuaries Responds to Council Letter on Mortality Tables
The Society of Actuaries (SOA) sought to reassure the Council in an October 23 letter that its Retirement Plans Experience Committee (RPEC) has taken the public comment process very seriously in preparing its forthcoming final mortality table reports.
In February, the SOA RPEC released an exposure draft of the Mortality Improvement Scale MP-2014 and an exposure draft of the RP-2014 mortality tables. These documents, which SOA isexpected to finalize by October 31, would establish a new basis for mortality assumptions for retirement programs in the United States. With respect to pension funding, benefit restrictions, insurance premiums and other related purposes, SOA’s assumptions are usually taken into account by the government in formulating updated mortality assumptions, though those updates may not take effect until at least 2016.
The Council sent a letter to the SOA on October 17, urging the RPEC not to rush the release of its final mortality table reports without a full review of comments received from the public. These documents would have a substantial impact on defined benefit pension plans. (The October 17 letter followed a May 30 letter generally expressing support for a cooperative and collaborative review of important mortality table standards.)
With regard to the Council’s concern about the RPEC’s decisions about data utilized in the study, the SOA letter described its methodology and independent review process. “RPEC worked very diligently to ensure that all relevant and reliable data that was received could be utilized,” the letter said.
With regard to the Council’s suggestion that RPEC may have rejected data that was “surprising” or outside the 95 percent confident level, the SOA notes that such data was not simply dismissed. “In fact, this data was subjected to further review and analysis. … although it was necessary to exclude certain data from the analysis, sufficient data was used to ensure a credible mortality table.”
For more information, contact Lynn Dudley, senior vice president, global retirement and compensation policy, at (202) 289-6700.
Council Continues to Urge Legislative Fix to Pension Plan 'Shutdown' Procedures under 4062(e)
As part of a coordinated effort on Capitol Hill on October 23, the Council continued to urge lawmakers to clarify the definition of “substantial cessation of operations” of a defined benefit pension plan sponsor under ERISA Section 4062(e).
Under current law, if an employer with a pension plan shuts down operations at a facility – and, as a result of that shutdown, more than 20 percent of the workers who were plan participants are separated from employment – the employer is required to provide the Pension Benefit Guaranty Corporation (PBGC) with short-term financial guarantees in the form of a bond or escrow amount based on the plan's unfunded termination liability. In the past few years, PBGC has enforced this provision in a manner that goes beyond the original Congressional intent. This has given rise to significant compliance challenges and large unexpected liabilities for many companies that engage in normal business transactions (such as the sale of a very small business unit or the consolidation of small operations at different facilities).Many companies report concern about Section 4062( e) whenever business transactions are considered because of its potential impact on the transaction and the company. On July 8, the PBGC posted anews release announcing a moratorium on the enforcement of ERISA Section 4062(e) through the end of 2014.
Council staff and company representatives met with key staff for members of the House of Representatives committees on Ways and Means and Education and the Workforce, specifically requesting their support for the Senate-passed measure S. 2511, described below.
S. 2511, which the Senate approved by unanimous consent on September 16, would:
- Ensure that there is no 4062(e) event unless there is a substantial shutdown of operations at a facility relative to the size of the entire employer.
- Ensure (subject to certain exceptions) that there is no 4062(e) event unless employees lose their jobs, as opposed to going to work for another employer.
- Significantly reduce the scope of an employer’s liability if there is a 4062(e) event.
A brief summary and talking points document is now available on the Council website. On October 10, the Council sent letters to key members of Congress in support of S. 2511, urging the House to act on the measure before the end of the year. If the legislation does not get passed by Congress before the end of the session, any legislation would have to be reintroduced in the next congressional session.
The Council has been extremely concerned that PBGC's enforcement represents a misinterpretation of ERISA and Council staff have met numerous times with PBGC officials on the matter and submitted comments, including a recent letter to the PBGC Board of Directors.
A summary memorandum, prepared by Davis & Harman LLP, is available on the Council website, providing a more detailed description of the issue and the key provisions of S. 2511 as introduced. The Council hosted a Benefits Briefing webinar on April 24 to discuss the current enforcement challenges. (Click here for a digital playback of the session.)
Submission Form for Transitional Reinsurance Program Annual Enrollment Count Now Available
On October 24, the U.S. Department of Health and Human Services (HHS) Centers for Medicare and Medicaid Services (CMS) formally released the form for submitting the Transitional Reinsurance Program (TRP) annual enrollment count. The deadline for the 2014 benefit year’s annual enrollment count submission is November 15, 2014.
For additional information on the reinsurance contributions submission process, see the Council’s October 21 Benefits Byte story or log on to the Registration for Technical Assistance Portal (REGTAP) and visit the Reinsurance-Contributions Library. For more information on the TRP generally, contact Kathryn Wilber, senior counsel, health policy, at (202) 289-6700.
PBGC Publishes Premium Rates for 2015
On October 24, the Pension Benefit Guaranty Corporation (PBGC) posted flat-rate and variable-rate premium amounts for the 2015 plan year on its Premium Rates page.
The per-participant flat premium rate for plan years beginning in 2015 is $57 for single-employer plans (up from a 2014 rate of $49) and $13 for multiemployer plans (up from a 2014 rate of $12).
For plan years beginning in 2015, the variable-rate premium (VRP) for single-employer plans is $24 per $1,000 of unfunded vested benefits (UVBs) (up from a 2014 rate of $14). For 2015, the VRP is capped at $418 times the number of participants (up from a 2014 cap of $412). Plans sponsored by small employers (generally fewer than 25 employees) may be subject to an even lower cap.
For information about future rates, see the PBGC’s Scheduled Increases for years after 2015.